The 411 on Chargebacks
In today’s increasingly electronic payments world, nothing can be so frustrating and confusing to retailers than chargebacks. And convenience stores should care about chargebacks for one very important reason: Chargebacks impact your bottom line. “In a business that is not afforded the comfort of huge profit margins, we need to make sure we are not giving away free money,” said Caleb Burke, payment card operations manager for CITGO Petroleum.
Understanding how chargebacks work is essential. “Basically, a chargeback is a forced return of funds to the customer without return of the goods or service,” Burke said.
While the chargeback process varies from banks and card firms, the basic format starts with the cardholder initiating the chargeback request to the card issuer. Then the bank sends the chargeback to the merchant acquirer, and the merchant can either accept or reject the chargeback. If accepted, the merchant is debited the amount of the chargeback. If rejected, the retailer supplies documented proof (called re-presenting) to the card issuer.
“It’s important that when merchants re-present a sale, it’s done correctly the first time to avoid having the transaction moved into arbitration—a legal process that can be costly to the merchant,” Burke said.
Retailers who have a good system in place to handle chargebacks will find success in both resolving and reducing chargebacks.
A Brief History of Chargebacks
During the early adoption of credit card usage, many consumers were leery of being held responsible for a large bill if their card was lost or stolen. In 1974, the U.S. Congress enacted the Fair Credit and Billing Act, which essentially lays out consumers’ rights to dispute credit card charges. The act says that consumers have 60 days after receiving their credit card statement to dispute a charge with a card issuer if the charge:
- exceeds $50
- is unauthorized
- displays the incorrect date or purchase amount
- was incorrectly calculated
- or the good or service was not delivered.
“While the payments industry has evolved, the chargebacks have largely stayed the same, which is why we’re in the predicament that we’re in today,” said Caleb Burke, payment card operations manager for CITGO Petroleum.
Chargebacks happen because of fraud (80%), authorization problems (7.5%), customer disputes (7.5%) and processing errors (5%). A fraudulent chargeback occurs when a counterfeit or lost/stolen card is used to pay for goods or services. Overall card fraud accelerated 33% in 2017 over 2016. Automated fuel dispenser (AFD) fraud has increased 60% since 2015, with the three-year deferment of EMV liability shift at the pump making AFDs a prime target for fraud. In addition, 80% of fraud is labeled “friendly” fraud, which means a customer makes a purchase with a malicious intent or experiences buyer’s remorse afterward.
Overall card fraud accelerated 33% in 2017 over 2016.
“Fraud has migrated to non-EMV businesses,” Burke pointed out. For retailers waiting to upgrade to EMV chip card technology, here are his suggestions for limiting fraud:
- Require ZIP code verification at AFD
- Prompt for the last four digits of the cardat point-of-sale (POS) inside the store
- Limit the sale of high fraud merchandise, i.e., gift cards and cigarette cartons.
For retailers already EMV compliant, Burke recommended limiting AFD magnetic-stripe fallback (i.e., when the chip can’t be read) by sending the customer to the inside attendant to complete the purchase, prompting for a personal identification number (PIN) when available and completing all scheduled POS updates in a timely fashion.
For authorization chargebacks, retailers should never make up an approval code or enter a code provided by the cardholder. “Remember, if the card cannot be electronically approved, you have the right to ask for an alternate form of payment,” Burke said.
Keeping a record of all sales transactions helps to prove that the transaction was authorized to go through. “One thing we started doing at CITGO with authorization chargebacks was to work with our acquirer to get the logs to show that the issuer approved the transaction,” he said. “We’ve had some success in those disputes by showing that information.”
For processing errors, Burke’s best advice is “to make friends with your POS product managers because what they do directly impacts your chargeback team.” The key to preventing processing errors from triggering chargebacks is to:
- Complete all software updates in a timely manner
- Verify that any applicable taxes are being calculated correctly
- Periodically check the date and time in the POS
- Train your staff on proper sales procedures.
“Mistakes by staff in applying coupons and discounts, adding taxes, etc., is one processing error you can most easily fix,” he said.
For customer disputes, make sure cardholders recognize your business name on their credit or bank statements and receipt. To avoid confusion, each receipt should have your business name and address, itemized charges (including taxes and fees), the last four digits of the card used for payment, the approval code, EMV data, the transaction date and time and the customer name and signature (if applicable). “You should also disclose your return or cancellation policy,” Burke said.
When you receive a chargeback request, there are certain steps a merchant should take, whether or not you approve the chargeback. “Remember, the burden of proof lies with the merchant, which means that you can directly impact the results of a chargeback,” Burke said.
Having a roadmap for how to handle chargebacks can make the process easier. In a typical c-store, all members of the management or leadership team should know how to respond to chargebacks. “You never want to make one person solely responsible,” Burke said. “Have a standardized procedure in place and log a record of all chargebacks you respond to so that work is not duplicated.”
Visa automatically shifted liability to the merchant for fraud and EMV descriptors, which will make it harder for merchants to win with re-presentment.
Retailers should decide if they should respond to every chargeback, as the cost of re-presentment might not make sense in some cases. For example, if the amount is too small, the time spent might not be worth it. “I ask questions like ‘Is it a case that I’ve had success with in the past? Do I have the proper documentation?’ before contesting the chargeback,” Burke said.
To make that determination, retailers should review all chargebacks to confirm their validity because issuers often shift responsibility back to the merchant even when they shouldn’t. “You should also respond to all requests in a timely manner, even if you are going to accept a chargeback, because that moves the chargeback process along and keeps you in good graces with issuers,” he said.
It is also extremely important to provide all relevant documentation during the initial re-presentment because that will save money in the long run. For re-presentment, Burke’s motto is “There’s no such thing as too many documents.” Here is his list of documentation to submit when disputing a chargeback:
- Statement of work or a work order
- Any communication with the customer
- Additional sales data
- Correcting sales data
- Subdrafts for AFD
- Rebuttal letter
For AFD chargebacks, retailers should use a subdraft or sales draft to recreate an AFD receipt. A subdraft is an electronically generated outline of the sales receipt and is most commonly used when disputing AFD chargebacks, as no store copy of the receipt occurs at the truncation. A subdraft should have the following:
- Terminal (merchant) ID
- Location name and address
- Transaction date and time
- Type of card used
- Last four digits of the card used
- Approval number
- Product purchased
- Price per gallon
- Fuel quantity
- Total price
Both Visa and MasterCard are making changes to their chargeback process. Starting in April 2018, Visa Claims Resolution aimed to simplify and reduce chargebacks by preventing invalid issuer chargebacks and by streamlining the customer experience. The main takeaways include a shortened response time to 30 days and an allocation versus collaboration mindset. “Visa automatically shifted liability to the merchant for fraud and EMV descriptors, which will make it harder for merchants to win with re-presentment,” Burke said. “Collaboration means that Visa wants retailers to work with customers to fix customer disputes and processing errors.”
For MasterCard, changes to its MasterCom Claims Manager took effect in April 2019, with a shortened response cycle and more aligned reason codes. “MasterCom is trying to make a more positive customer experience,” Burke said.
Overall, retailers should pay close attention to chargebacks. “Be ever vigilant,” Burke said. “Issuers make mistakes. Make sure you are taking the time to review your incoming chargebacks to confirm they are, in fact, valid.”
Caleb Burke, payment card operations manager for CITGO Petroleum, led a webinar on chargebacks for NACS partner Conexxus, a nonprofit organization that addresses technology standards to improve business processes, reduce costs and increase productivity for the convenience and fuel retailing industry. View the webinar today at www.conexxus.org/content/chargebacks-101-basics.