What is a Credit Card Chargeback?

What is a Credit Card Chargeback

Every business comes with obstacles. A high risk operation like a debt collection agency is full of especially unique team management and compliance challenges. Along with industry-specific rules, collection agency owners and managers must also comply with Regulation E, understand PCI compliance rules and maintain a compliance management system as a whole.

While balancing these responsibilities, agencies need to keep a strong merchant account to continue credit card payment processing. This means managing chargeback ratios. So what is a chargeback and how can your collection agency reduce them?

Credit Card Chargeback Definition

Chargeback Definition

What is a chargeback? The definition of a chargeback is “when a charge is reversed, returning credit to a credit card customer from a merchant.”

For some charges, your business may agree with the consumer and the charge will be refunded. For many others, your business may need to dispute the claim. To successfully defend a charge to your consumer’s credit card, you will need to provide:

  • A copy of the invoice in question

  • Proof of the signed authorization by the cardholder

  • Proof of a valid address verification service response (AVS)

  • Proof of a positive match on the card verification value (CVV)

  • Proof that terms and conditions were agreed upon or evidence that a credit was issued

In certain cases, other documents may be required by the Card Issuing Institution. When that is the case, your Merchant Service Provider will forward these requirements to your company’s point of contact

How To Calculate a Chargeback Ratio

Common Credit Card Chargeback Reasons

The reasons consumers dispute charges with their credit card companies can vary. They can range from a simple misunderstanding to genuine credit card chargeback fraud. The different types of chargebacks can be broken into three groups.

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

A friendly fraud chargeback can occur when the consumer initiates 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

“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, Lou Harris Co, 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 can impact an agency’s bottom line. How to prevent them?

Bayview Solutions Testimonial Quote for Chargeback Mitigation

How to Protect Your Business from Credit Card Chargebacks

The best way to protect your business from chargebacks is through prevention. This can be done with an in-depth, up-to-date Compliance Management System. What is a chargeback prevention plan and what components should your CMS 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

  • 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.

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

In April 2018, Visa implemented its 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.

Flow Technology for Chargeback Protection

Many PDCflow clients use our patented Flow Technology to protect their businesses from chargebacks. With Flow Technology, you can obtain an esignature authorization on payments. This is especially useful for high-dollar accounts.

With Flow Technology, you can send your payment portal to your consumer, instead of waiting for them to come to you. They can give an esignature consent and enter their own payment data, reducing your PCI compliance scope.

Is your business struggling to keep your chargeback ratios low? For a comprehensive guide to merchant chargeback prevention, download the Merchant Chargeback Prevention Guide.

Download Merchant Chargeback Prevention Guide:

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Hannah Huerta - PDCflow Marketing Specialist
Hannah Huerta, Marketing Specialist

Hannah Huerta is a Marketing Specialist at PDCflow. She creates content for the accounts receivable and payment industry.

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