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© Bertys30 | - Woman Hand Holding Credit Card Photo

Chargebacks: The Good, The Bad, and The Ugly

© Bertys30 | - <a href="">Woman Hand Holding Credit Card Photo</a>According to the dictionary, a chargeback is  "a debit to a depositor’s account that offsets a previous credit that was not collected." For merchants, the debit may occur when the credit-card provider has been unable to collect payment by a consumer because of a fraudulent or disputed transaction. In practical terms, the sale you thought you made and the funds you thought you earned evaporate. This hurts your profits and impedes your cash flow. But this isn’t the only chargeback you need to be concerned about. Here’s what you need to know.

The good

As a merchant, you may be entitled to chargebacks from suppliers under the terms of agreements with them. For example, there may be volume discounts set forth in your agreement with a particular supplier. When your purchases exceed a set threshold specified in the agreement, you may be entitled to a chargeback.

Craig Savell, CPA, who is an accounting and auditing partner with Margolin, Winer & Evens LLP  in New York, advises that the best way to take full advantage of chargebacks to which you are entitled is to:

  • Understand the terms of your agreements. What are the volume thresholds? Is it up to you to request the chargeback?
  • Keep good records. Track you purchases in accordance with the volume discount thresholds.

The bad

Chargebacks can also result from seller errors, such as early or late delivery, freight issues, and handling charges. You can avoid these types of chargebacks by using care in filling orders and shipping them. This will avoid customer complaints for incorrect items or late deliveries that can result in chargebacks. Also, when problems do arise, you may be able to resolve them so that chargebacks are reversed in whole or in part.

The ugly

Unfortunately, a great part of chargebacks result from fraudulent or disputed transactions with customers. A report in 2014 found that chargebacks accounted for as much as 2.2% of total transactions in one city. The study claimed that as much as 86% of chargebacks resulted from “friendly fraud” where a consumer makes unauthorized purchases that he/she attempts to reverse by claiming there has been fraud. Many customers do not contact the merchant before seeking a chargeback; they go directly to their credit card companies to initiate a chargeback.

The strategies to use in minimizing fraud-related chargebacks depend on whether your customer is presenting the card to you in person or you’re doing the transaction by mail, telephone, fax, or Internet (referred to as card-not-present, or CNP, transactions).

Card is present.

  • Observe the customer. Suspicious behaviors include making purchases when a store is opening or closing, trying to distract the salesperson, and purchasing items — including expensive ones— without questions or regard to size or price.
  • Follow processing protocol. Make sure the card looks right: it hasn’t expired, it’s been signed, and the embossing is clear. If a card is declined, do not try to reprocess the same one (call the authorization center and obtain special authorization if it is available).
  • Use chip technology to process transactions. If you do not, you as the merchant bear the risk of loss. Find details about EMV technology and liability, which shifted in October 2015 to merchants that “swipe” instead of “dip” (inserting the chip card).

Card not present.

  • Be suspicious. Think twice when a customer requests that items to be shipped to international addresses, or you note multiple orders charged to different cards being shipped to the same address, even domestically. Ship only to the credit card’s billing address for customers you don’t know.
  • Follow processing protocol. Be sure to obtain complete credit card information: cardholder’s name, credit card number, expiration date, and the credit card validation code.


Merchants bear a heavy burden to monitor their purchases so they can benefit from chargebacks to which they may be entitled, while at the same time working to avoid chargebacks against them from customers. As the holiday season, and peak of consumer buying for the year, is underway, it’s time to examine your business practices. Actions you take now can improve your bottom line.