Smaller merchants with big-ticket items can be wiped out with just a few fraudulent orders; sometimes it only has to happen once. I wrote an ebook, “Protect Your Merchant Account from Fraud & Chargebacks” that goes into great detail on this subject. I will highlight some of it here.

Chargebacks happen when a cardholder disputes a credit card purchase. There are a variety of reasons a cardholder may dispute a charge. Some examples of these are:

* Never receiving the item ordered
* Not getting what they thought they were buying
* Their credit card was stolen and they did not authorize the charge
* They could just be a thief and use the chargeback clause to their advantage

In the event of a chargeback, the card-issuing banks will initiate a chargeback against the merchant. The funds for that sale are pulled from the merchant’s bank account and the merchant may or may not be notified of the chargeback and be given the opportunity to dispute the chargeback. I was told by one really big acquiring bank that they were not obligated to notify the merchant of a chargeback. Anyhow, the merchant and merchant bank knows nothing of the chargeback until it is over and done with. Keep in mind, the customer’s card issuing bank is the one who initiates chargebacks.

The most important part in accepting a credit card is to do your best to verify the cardholder is actually placing the charge. On the Internet, this can be done with AVS (Address Verification System). Not a 100% guarantee, but it is the best available right now. AVS will attempt to match a portion of the customer’s credit card statement billing address against the billing address the customer placed during the order. If you get an address and zip code match, well chances are the actual cardholder or someone authorized to use the card placed the order. If you get a match of one or the other, then it is your call if you want to accept the credit card. I have a merchant who does between 13,000 and 15,000 online transactions per month and will accept a partial match, but rejects all that come back with no match. His chargeback rate is pretty low and this seems to work for him. If you do not get any match, then you need to sit on the order, jump up and down on it, and chew on it for a while and try your best to get in touch with the customer. If you cannot, then it is in your best interest to reject the order. Now the limitation of the AVS system is that it only works in America with American orders. There is no system in place, as of yet, for accepting International orders. As the attorney I interviewed in my ebook says, “You accept International credit card orders at your own risk.”

There are a few hotspot countries you would be best to avoid unless you have an established relationship with your client. Let me preface this by saying, I draw this conclusion from my own personal experience and the feedback I get from my merchants, so take it for what it is worth. This is not gospel! The countries are; any country that was part of the former Soviet Union, and Malaysia. They seem to have a larger than average amount of fraudulent orders placed from there.

Now for my most controversial comment, never accept an order placed with a FREE email address! I have been laughed at and scoffed at over this comment simply because there are so many honest people who use free email and this means losing orders. Simply put, you are correct. You will lose orders and sales and maybe even money if you follow this rule. However, I don’t think you will lose as much as you would if you accepted orders from free email addresses though. I know one merchant doing $45,000+ in credit card orders per month from the Internet that was following this rule. Then one day, he decided to throw the rule out and increase sales, as a result he almost lost his merchant account due to excessive chargebacks. Take it for what it is worth. Statistics show that more then 50% of orders placed from a free email address will be fraudulent. For more facts about this, I suggest you visit http://www.antifraud.com

There is more to a chargeback than meets the eye. Not only does a merchant lose the actual inventory and the purchase price, but there are also chargeback fees assessed to the merchant each and every time. These fees add up because they are anywhere from $15 to $50 a pop. Consult your merchant account provider if you do not know what fees you can be hit with. That is not all. Merchants who have excessive chargebacks, this is again defined by the provider, range from ½% to 2 ½%; a merchant can lose their merchant account. That is, get terminated without warning and could end up on the MasterCard Match List, a.k.a. Terminated Merchant File, which is looked at by other providers and if you show up on it, this means you will not get a merchant account. You can expect to stay on the list for 5 years too. There are new rules and regulations that have cropped up with the card associations. Visa has an International Fine for excessive International chargebacks and MasterCard has a fine for excessive chargebacks for high volume merchants. These fines are in the several $1,000’s to over $100,000. I am in the process of updating my ebook to reflect this along with an interview with T.J. Walker of http://www.antifraud.com and hope to have it ready within a few weeks.

Keep an eye on those transactions, use some common sense and good judgement and things will be well with your Internet business and merchant account.

My ebook, “Protect Your Merchant Account from Fraud & Chargebacks,” is free to download. To obtain a copy visit us at http://www.merchant-solution.com/

Todd Sumrall
http://www.merchant-solution.com/

Chargeback, the word that Internet merchants fear. A chargeback is what it’s called when a transaction is reversed. In other words, rather than adding money to your account it is deducted. Chargebacks can occur for a wide variety of reasons, such as double-charging, credit card expiration, bank error and customer disputes. If you get too many chargebacks against you, there is a possibility that you will lose your merchant account. Once you’ve lost your merchant account you are placed on the Visa/MasterCard Terminated Merchant File (TMF/MATCH list) for several years which all Merchant Account Providers have access to, and if they find you on the list they won’t reissue a merchant account to you. If you are one of those merchants who have lost their merchant account, there is still hope. Bank Card Law specializes in helping companies who’ve lost their merchant account because of excessive chargebacks.

Here are some ways you can greatly reduce the instances of chargebacks and fraud, even potentially eliminate the risk altogether:

#10 If the customer is present examine the card carefully

One common sense method to fight chargebacks is to examine the customer’s card. Look at the expiration date and the signature panel for good measure. If the card does not have a signature you are free to check the customer’s ID. You may also request that the customer signs the card and if the customer refuses, you may decline to accept the customer’s credit card.

#9 Verify CVC2 and CVV2 Verification Numbers

This tactic alone can not only reduce instances of chargebacks by 26%, according to Visa, but also reduce any pass-through fees that may be charged when a credit card order is conducted. On the back of MasterCard, most Visa and Discover credit cards is a 3-digit security code located right after your credit card number. Requiring customers to give the 3-digit code acts as an additional verification measure. American Express cards also have a similar security code that is located on the front of the card right above the cardholder’s account number and is usually 4-digits long. Most online payment processors support entering the security codes when processing credit card orders. Check with your payment gateway provider (i.e. Verisign, Authorize.Net, ECHO Inc., etc) for details.

#8 Use Address Verification System (AVS)

AVS checks to ensure the address entered on the order form matches the address to where the cardholder’s billing statements are mailed to. People ordering products and/or services using a stolen card number will never use the real cardholder’s billing address, so this is your chance to stop the order before it’s too late. AVS only works with orders conducted in the US. Failure to use AVS when processing credit card transactions will always result in paying higher credit card processing fees.

#7 Scrutinize orders from developing foreign countries

A large percentage of fraudulent Internet purchases are made from Indonesia, Russia, and other eastern block or developing countries. Accept orders from such countries at your own risk until a worldwide AVS system is developed.

#6 Let customers know what name will appear on statements

Many merchants who use 3rd Party Processing companies have run into problems because the company name that appears on cardholder’s monthly statements is usually the name of the 3rd party processing company and not the company name of the site the cardholder made their purchase from. This isn’t always the case, but in many cases it is. If you use a 3rd party processor, and even if you don’t, make sure the customer knows what name will appear on their credit card statement at the end of the month. This will help to reduce any confusion that might would otherwise occur.

#5 Handle suspicious orders accordingly

If an order seems suspicious the best way to handle the situation is to either call or e-mail the customer and attempt to verify that they placed the order. As a rule of thumb, if in doubt, check things out. It may be a good idea that if a customer makes an unusually large volume purchase from your site to follow-up with a verification call. This is where a system like VoiceStamps, previously mentioned above, can come in very handy.

#4 Watch out for orders using free e-mail addresses

Be wary of accepting orders from people who used a free e-mail address when ordering (i.e. Hotmail, Yahoo, etc.). Tracking people who used a free e-mail address is almost impossible, it’s much easier for them to get away then if they used their Internet Service Provider (ISP) or their own company web site e-mail address. To check whether an e-mail address is a freebie or not just take the part of the address after the “@” symbol, add “www” to the front of it and see what website it brings up (i.e. joe@yahoo.com = www.yahoo.com).

#3 Signatures on delivery

If your business delivers products use a carrier that requires a signature on delivery, and allows you to have a copy of the signature. Retain these for your records.

#2 Request fax copies of ID and credit card

You may want to request your customer to fax a copy of both sides of their credit card and driver’s license. This tactic usually works best in a B-to-B (business to business) sales environment. While this is not a defense under Visa or MasterCard rules, it is yet another way to deter fraud.

#1 Posting a warning message

Taking the time to post a warning message on your order page to those who may attempt to make a fraudulent order will greatly deter the number of instances of fraud. Be sure to mention that IP (Internet Protocol) addresses are being logged. IP addresses can come in handy when locating people about fraudulent orders.

Taking measures to deter and eliminate fraud and chargebacks from occurring are a necessity in order to operate a successful online business. Each day companies dedicated to risk management are developing solutions to provide merchants, like yourself, with extra protection because of the financial burdens chargebacks and fraud can bestow if ignored.

Jim Conley
CEO,Merchantseek

Either way, the result isn’t great and so the intelligent business owner constantly looks for ways to reduce refunds and chargebacks.

Here then are eight very real ways in which you can reduce chargebacks in your own business.

1) Offer Post-Sale Bonuses

Rather than providing everything straight after purchase, some smart marketers have recently been setting up a whole host of additional free bonuses, which their customers get one at a time over a period of several weeks.

This is an ideal technique as it means that your customers have a very good reason not to ask for a refund – after all they’ve got plenty more to gain over the coming weeks haven’t they?

This is easy to set up in terms of an autoresponder to which customers are automatically subscribed to, which sends out messages at regular intervals providing a link to the next bonus.

2) Be Open If You Use A Third Party Account

If you use a third party processing account such as Clickbank, 2CheckOut or CCNow then make it crystal clear that you do.

After all, one of the drawbacks of using a third party account is that your company name never appears on the customer’s credit card statement. So let them know that they’ll see a charge for $x from your processor.

That way it won’t be a surprise when their bill turns up, which leads to them initiating a chargeback because they’ve never heard of the company that’s charged them.

3) Be Available

Whenever anyone buys anything from you, provide your email address incase of any problems.

Better that a customer emails requesting a refund than initiates a chargeback because they can’t work out how to get hold of you.

4) Over Deliver On Your Promises

If your sales letter extols all sorts of lofty promises that simply aren’t matched by your product not only will you receive lots of refund requests, but you’re also actually breaking the law and could be taken to court for it.

So whilst I appreciate that your sales letter needs to create a feeling of “want” in your customers, you also need to be fair and honest.

In fact, providing additional, unannounced bonuses is a great way to over deliver. It’s happened to me a few times, and I still go “Wow!” when I actually end up getting more than I was expecting. And a customer that feels like this very rarely asks for a refund.

5) Offer A Lifetime Bonus

Imagine if there is some part of your product that customers will use for months or even years to come. One perfect example would be an online tool inside a membership site or a members-only discussion forum.

By requesting a refund they know they won’t *just* lose your ebook, they’ll also lose access to your special discussion forum, or online software, or article database etc. That way it’s a lot more painful to request a refund.

6) Keep Records

Keep records of customers and when they bought, the card they used etc. Then, if you *do* get any chargebacks at least you have some evidence.

7) Use Advanced Authorisation Processes

Some card processors just ask for a name, credit card number and expiry date.

However, some will ask for additional information such as the security numbers off the back of the signature strip, your address, the name printed on the card etc.

All this additional information, which is checked against the registered user of the card, will reduce fraudulent sales and so lessen your chances of chargebacks.

Be Likeable

It sounds simple, but if you’re likeable and helpful you’ll save yourself a lot of hassle. I bought a product not so long ago and it didn’t live up to the sales letter.

I emailed to request a refund and got a blunt reply telling me that there was nothing wrong with their sales letter or product and therefore there was no legitimate reason for me to have a refund.

Well, as there was, and I didn’t like being treated like a criminal, I just initiated a chargeback. I wonder if that company ever wondered why?

Be nice, be approachable. Be willing to help out if your customers have questions after purchase. And be willing to happily give a refund to any customer not 100% satisfied. Because it’s lots less trouble than dealing with chargebacks.

Richard Adams
MerchantAccountForum.com