The consumer protection provisions of the Truth in Lending Act and the Electronic Funds Transfer Act permit purchasers to dispute credit card charges. Credit card chargebacks can be expensive for businesses, though, not just because of the penalties assessed, but because of damage to reputation and lost sales opportunity. Why is this happening? Roughly speaking, there are three alternatives:
- The customer is not happy with the goods or the fact that they were not delivered.
- The customer is the victim of fraud or identity theft, or
- The customer is perpetrating a fraud.
It can be difficult to tell the difference, but how you respond or act to prevent this in the future should be different in each of these situations. It is important to be pro-active, though. Prompt attention to credit card chargebacks is an essential part of building and maintaining your own business credit.
The Customer is Not Happy
This one is not worth fighting about. Mistakes happen. Blue widgets/black widgets, just fix it. The same is true if something went wrong with delivery. You may be able to convert an unhappy customer into a loyal fan with prompt response. Is it time to re-examine your marketing approach or shipping arrangements to determine if there is a more general issue? Sometimes chargebacks happen simply because the customer does not recognize the name on the bill. If it is not going to be obvious, advise the purchaser, so the charge doesn't appear to be from an unfamiliar source.
The Customer is a Victim of Fraud
This may be harder to prevent in online sales than in face-to-face transactions. If the customer is present, ask to see the credit card and valid photo identification. Require the customer to enter a PIN number for debit transactions and sign for credit transactions. Take an imprint of the card. If the card is declined, don’t swipe it twice. For telephone and online transactions, make sure to document the entire card number, the expiration date, the name as it appears on the card, the billing address and the CVC code. If you have a sales staff, make sure that they are trained in these steps.
The Customer is Perpetrating a Fraud
Sometimes euphemized as “friendly fraud,” it still involves keeping goods without paying for them. If you are relatively certain that the situation does not fall into one of the previous two categories, this is the time to dispute the chargeback. Each card association has a system for resolving disputes between customers and merchants, and these disputes may be quickly resolved where the transaction was properly documented. When a customer continues to rebut the merchant’s response, these procedures generally require the parties to submit to arbitration, with the loser paying the cost of the process. Obviously, these additional steps only make sense where the sum involved is relatively large.
Paying attention to the problem of credit card chargebacks, although sometimes a nuisance, is an important step in building business reputation and credit.