The Fair Credit Billing Act of 1974 established the chargeback process as a protective consumer measure against unethical merchants. This was designed to be a safety net against fraudulent charges or stalemate disputes with merchants. Through a chargeback, a cardholder is able to bypass a merchant unwilling to work with the consumer and address the bank directly to receive a refund. The bank then voids the initial transaction on the card and retrieves the funds that had already been deposited to the merchant.
In some cases, the bank also issues a fee against the merchant for the chargeback. However, chargebacks have become synonymous with credit card fraud and headaches for merchants. In fact, high risk merchants are those who have an alarmingly high chargeback ratio.
In reality, a chargeback should be a last resort. The consumer should move through the merchant’s defined channels for a refund or resolution. However, the relative simplicity of a consumer filing a chargeback has many skipping the refund process altogether and going straight for the funds. Not only does this allow a consumer to get their money back, but it also gives them the benefit of keeping the product that was purchased. When unwarranted and chosen over a traditional refund process, chargebacks turn into a form of cyber shoplifting or stealing.
The Need for Chargeback Protection
Abuse of the chargeback process is a weapon that many consumers are wielding against merchants, whether through e-commerce transactions or in-person retail shopping. Though it was originally designed as a form of consumer protection, the exploitation of the process now has merchants as being the most vulnerable and in need of protection. Industry regulations haven’t taken a protective position against this form of fraud, so it is important for the merchant to take full responsibility in establishing protective measures. There are serious consequences that a merchant faces when a chargeback occurs.
- The merchant must pay a fee and administrative charges per chargeback transaction which could range from $20 to $100.
- The merchant loses both revenue and future profit when a consumer keeps the merchandise after filing a chargeback.
- A merchant with a high chargeback ratio enters the high risk merchant account category.
- The merchant may be hit with excessive fines (ranging in the thousands) if the rate of chargebacks exceeds predetermined limits.
- The merchant could lose its merchant account if chargeback rates continually exceed the threshold, freezing or revoking any accepted credit card payments.
- The merchant who has lost their merchant account is black-balled from obtaining a new account at a different processor for a minimum of five years.
As you can see, the ramifications of fraud can devastate a business. Unfortunately, credit card processing fraud is expected to increase to around $25 billion by the next year.
The Tools for Chargeback Protection
There are a number of features that some payment processors will provide to reduce your company’s liability with chargebacks. These fraud protection tools are designed to identify possible fraudulent transactions while making it harder for fraud to occur during credit card processing. Working with Instabill as a payment processor gives you peace of mind with your transactions, as the company provides the best in chargeback protection.
- Use basic detection: When a card isn’t physically presented for payment, it opens the risk of fraud. As a merchant, you assume that the cardholder is authorizing the transaction with each card-not-present sale. In order to limit unauthorized purchases, always ask for the complete billing address of the consumer. This address should match the contact information that is current with the cardholder’s bank records. Check the billing address with the intended shipping address. If different, follow up with the cardholder to verify the charge. Always validate the three-digit card verification value or the four-digit card identification number.
- Use IP filters: Those on the dark web do business all around the world, and there are some countries that are known hot spots for credit card fraud. With an advanced payment processing partner, you can have IP filters set up for a specific country to either accept or block transactions. One form is GEO-IP tracking. You can also set card issuing filters for specific countries. You may limit your merchant account to only accept purchases from credit cards that have been issued within the U.S. or Canada.
- Use advanced detection features: You may need to have more advanced features in place to reduce your risk. Using negative database security you can analyze each transaction against a master list of high-risk card numbers and corresponding contact information. You can also limit the dollar amount on transactions that take place. By setting a threshold of according to the average consumer purchase total, you are easily able to identify transactions that seem suspicious. Unusual buying patterns are another element to keep watch on, and adding time period transaction limits can flag recurring purchases from the same IP address.
Protecting your company’s merchant account is just one reason to pay more attention to chargebacks. At the deepest level, your company’s financials are on the line. Partnering with Instabill can alleviate much of the worry, as the services work to protect you from fraud and excessive chargebacks. We work hard to provide solutions that high-risk merchant accounts often need, and we feel confident that once you have tried our services, you will become a long-term customer. Contact us for more information.