Debt Collection 101: What is a Chargeback?

What is a Chargeback

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Every business comes with obstacles. A high risk operation like a debt collection agency is full of especially unique team management and compliance challenges. Collection agency owners and managers must comply with Regulation E and understand PCI compliance rules. And you have to maintain your compliance management system as a whole.

While balancing these responsibilities, agencies must also maintain a strong merchant account to continue credit card payment processing. This means managing your company’s chargeback ratio. What is a chargeback exactly? And how can your collection agency reduce them?

Chargeback Definition

The definition of a chargeback is “when a charge is reversed, returning credit to a credit card customer from a merchant.” The reasons consumers dispute charges with their credit card companies can vary. The different types of chargebacks can be broken into three groups.

Chargeback Reasons

Merchant Error

Merchant errors occur in every business. These can be due to unwanted recurring transactions, poor customer service or reprocessing transactions after processing errors.

Criminal Fraud

Criminal fraud is just what it sounds like. It takes place when someone makes purchases using a cardholder’s information without permission. Once the consumer’s notices unauthorized items on their statement, they dispute the fraudulent transactions with their credit card company.

Friendly Fraud

A friendly fraud chargeback can occur when the consumer initiated payment, but claims the payment should be refunded. This is often due to dissatisfaction with a product or service. These chargebacks also take place when a consumer doesn’t recognize a company description on their statement after the fact.

Friendly Fraud Chargebacks in Accounts Receivable Management

“In our experience the chargebacks come from consumers who forget they authorized or initiated the charge when they don’t recognize “CCOC” on their bank statement,” says Matt Logan, CEO of Collection Consultants of California. “Since we are a third party collection agency, they are not used to dealing with us directly.”

This issue is not uncommon among agencies. Allan Michell (President of Lou Harris Co) and John Turnage (Southern Credit Adjusters Inc.) and other industry veterans have reported this as the main cause of their chargebacks too.

Even if they don’t occur frequently, these chargebacks are a hassle, and impact an agency’s bottom line. How to prevent them?  

How to Prevent Chargeback Fraud

The best way to protect your collection practice from chargebacks is through prevention. This can be done with an in-depth, up-to-date Compliance Management System. The components your CMS should include:

  • Make sure the debtor knows your company’s name and how it will appear on their bank statement
  • Repeat the credit card number back to the card holder
  • Ask how their name appears on the card (Ex: middle initials, Jr/Sr)
  • Ask what bank the card is drawn upon and note within your system
  • Ask for the cvv code on the back of the card
  • If the payee and the person owing the money are different, your office may require a signature. Another option is to refer consumers to a secure online payment portal to initiate their own transaction
  • Communicate the details of the transaction that would prove the debtor authorized the transaction in question
  • Verify all debtors by date of birth or last four digits of their social security number. Do so before discussing an account or accepting payment
  • Verify addresses in your records are the same as the address associated with their card
  • Always ask if you have the consumer’s authorization to put the amount in question on their card
  • Send the debtor an electronic receipt at the time of the transaction whenever possible

If your agency is not following these practices, you may want to update your policies and procedures. If you are still experiencing a high number of chargebacks, conduct a root cause analysis. Find out where procedures are missing or outdated and should be improved.

Visa Chargeback Rules – When a Chargeback Can’t Be Prevented

When your agency has done everything possible to prevent them, chargebacks can still occur. Make sure you’re prepared for the credit card chargeback process in this event.

In April 2018, Visa implemented their new Visa Claims Resolution (VCR) process. The intention was enhanced consumer protection and a streamlined dispute process for businesses. A few changes include new reason codes and categories intended to speed up resolution.

The more proof of the approval you have, the better off you will be in defending against a chargeback claim. David Llamas of Southland Acquisitions, Inc. takes several precautions in his agency that set him up for a strong defense later.

“Before a payment is processed we have the consumer sign a letter stating the terms both parties agreed on, as well as authorize on a voice recording giving us permission to process the payment. On rare occasions, we do ask the consumer to provide their ID to verify the address we are using is correct. We usually use this step when the amount is more than $2,500.”

A written authorization of payment is one of the strongest ways to defend a contested transaction. Many accounts receivable professionals prefer to use esignature services that allow for an authorization, payment, and ability to send a receipt all in one workflow.

To hear how one company, Bayview Solutions, used PDCflow’s Flow + Payments product to reduce chargebacks, see the Bayview Solutions case study: