Avoid and Win Charge-Backs

Credit card disputes, or “charge-backs”, present the biggest obstacles to running a successful e-Commerce business.

The most common scenario for a credit card dispute is not genuine web credit card processing fraud or identity theft at all. The majority of charge-backs comes from corrupt consumers who order and accept merchandise, and then file a fraudulent web credit card processing dispute with the card-company in an attempt to keep the product without paying.

On the Internet, it can be relatively easy for consumers who want to steal. The problem is magnified by the ease with which identity thieves and tech-savvy con-artists have learned to navigate e-Commerce merchant sites. Before Internet-driven identity theft, credit card companies only tolerated disputes due to stolen or lost cards. Now, card companies acknowledge disputes for almost all reasons and dishonest consumers are abusing the benefit.

Many merchants trust that charge-backs are final and they do not retort with a charge-back warning or notification. In truth, the merchant should strike back against fraudulent charge-back consumers to prevent wide-spread abuse of the system. For those merchants that choose to refute charge-backs, there are two typical courses of action.

Option #1: Dispute the charge-back instantaneously upon receipt of the warning or notification.

Option #2: If the bank grants the charge-back, the merchant can still act against or take legal action against the consumer directly for the amount of the charge-back plus all other costs incurred as a result (bank fees, etc.). Merchants should consult with an attorney for the proper protocol involved in such a process .

Another issue that plagues e-Commerce sites is Refund Fraud: customers who buy a product that is backed by a “money-back guarantee”, with the intention of using or duplicating the product and then return it for a full refund. This is extremely difficult to avoid and currently seems to be simply “part of doing business online”.

With the exception of checking every consumer’s credit report before shipping merchandise (for consumers in the US), it is close to impossible to altogether avert charge-back fraud. Yet, merchants can recover damages and money from fraudulent consumers. Follow some of these tips to prevent fraud:

  • Use an Address Verification Service (AVS) on merchant accounts and reject consumers not providing a legitimate billing address.
  • Demand card security codes (CVV) from consumers and reject consumers not providing a code or providing an invalid code.
  • Use a reputable and honorable transport company. Require a signature on every delivery and take insurance on product.
  • Use Proof-of-Delivery services. For businesses selling electronic products, without “proof-of-delivery”, merchants will have a high charge-back ratio with no chance of successfully disputing the charge-backs. Also, merchants will not have the documentation for a collection agent to verify disputes.
  • Accompany downloadable products with tangible products that can be shipped, tracked, and provide the recipient's signature upon delivery. Merchants who offer e-books, software, etc. should ship a CD-ROM, copy, etc. with a tracking number and require delivery signature.

Consumers do not want the aggravation of returning product unless they seek reimbursement. Electronic product consumers attempt to request a refund without returning the product.

Merchants should have Return Policies clearly elucidated on the website. Most processors do not recommend the insertion of Return Labels in initial product shipments as this can encourage consumers to refund by providing the opportunity to do so easily. Be sure to include time limits, restocking & processing fees, and additional conditions on return policies. Include any comments about the condition requirements of the product.

Merchants should have a logical and visible charge-back policy on the website. Consumers who undergo fraudulent charge-back can be reported to the major credit bureaus for the delinquent collection account. Even after the consumer pays, the consumer will still have a “paid” collection account on their credit report…this is a strong motivator against charge-backs.

Responding to charge-back notices:

Timing is everything! Website merchant account businesses should confirm the receipt of timely warnings and notices. Mail is a poor mechanism for receiving warnings and notices. Banks typically provide a quick timeframe to respond. Email AND fax the best methods of receiving notices and warnings. How the merchant responds depends on the nature of each charge-back. The following are the most common circumstances posed by consumers in a charge-back situation:

  • “I never received the product.” The merchant should incorporate a copy of the proof-of-delivery tracking, a duplicate of the transaction receipt showing a positive AVS (address verification) and card code match, and all consumer support tickets or e-mail demonstrating receipt of the product.
  • “I returned it but didn’t get a refund.” If the consumer never returned the product to the merchant and is trying to scam the merchant, the merchant should provide a detailed response and request tracking showing proof-of-delivery to the correct return address. If the consumer returned the product outside of the merchant's designated return timeframe, the merchant should detail the timeframes and include a copy of the return policy in the response.
  • “I was dissatisfied” or “product was not as described.” This is a weak excuse for a charge-back. If the consumer is not satisfied with the product, the proper procedure (which is now clearly listed on the merchant website) is to return the product for a refund… Dissatisfaction with a product does not entitle the consumer to keep the product and charge-back. Merchants should provide a copy of the proof-of-delivery tracking, a copy of the transaction receipt showing positive AVS and card code matches, a copy of the merchant return policy and a statementfurther explaining the return policy. The consumer should be alerted that he or she has a right to a refund only if the product is returned, as described in the agreed-upon refund policy, to the merchant. Consumers attempting to circumvent this approach are often attempting fraud.
  • “I cancelled my order but they shipped it anyway.” Website merchant account businesses should include clearly-defined and understandable “terms & conditions”, which explain that once an order is placed, product leaves the fulfillment center for shipping and cannot be stopped. The merchant can provide a copy of the proof-of-delivery tracking, a copy of the transaction receipt showing positive AVS and card code matches, a copy of the merchant return policy, a copy of the terms & conditions, and a statement explaining that the consumer has a right to a refund when the product is returned, as stated in the refund policy.
  • Consumers who have already received a refund and then dispute charges are clearly attempting fraud. The merchant should provide a transaction receipt showing proof of the credit that was issued to the consumer. Always contact an attorney for this type of fraud, as it is easier to sue for damages resulting from these fraud attempts than most other fraudulent charge-back strategies.

In situations where the charge-back is obviously fraudulent, merchants have the option of filing a report with the consumer’s local police department. If the product was delivered via U.S. Mail or to a Post Office Box, merchants can file a mail fraud complaint with the postmaster. For consumers that use the anomity of a P.O. Box, fraud may fall under the jurisdiction of the U.S. Postal Service. File a complaint for criminal mail fraud.

After a charge-back response, merchants will receive an answer from the processor, bank, or card-issuing company. If you win a charge-back dispute, the consumer has the right to appeal the decision. In that situation, the merchant should respond with the same information and documentation and repeat previous arguments.

If the merchant rebuttal to the charge-back is ignored, the merchant's only resourse is to mail the consumer a final demand letter and invoice, then speak to an attorney.

Skilled con-artists will dispute the collection account, either directly with the collection agency or with the credit bureaus, in an attempt to remove the debt from their credit reports. The collection agency, in compliance with Federal law, will give about ten days for the merchant to counter by providing records proving the consumer actually owes the debt. Merchants need to provide the original transaction or shopping cart receipt, a copy of the tracking/proof-of-delivery and copies of the charge-back documentation demonstrating the consumer did indeed hit the merchant with a charge-back.


Refunds are just as threatening to the eCommerce community as charge-backs. The web is overwhelmed with consumers looking for products offering money-back guarantees simply to fraudulently obtain a product or service free of charge. These consumers will buy product, copy it as soon as they receive it, and immediately return it for a refund. They may also use the product for an entire trial period, and cancel the payment and demand a refund as soon as the free trial expires.

Website merchant account businesses must offer a money-back guarantee, and generated revenue must overshadow any losses due to refunds. The following are steps merchants can take to minimize refunds:

  • Do not include return labels with your products. Sending return labels will encourage fraudulent consumers to return product for a refund.
  • Do not fund shipping charges for return products. If a consumer opts to return your product for a refund, the consumer should pay the postage.
  • Only refund the price of the product, not shipping and handling fees. Merchants cannot recover those fees and the consumer did get the opportunity to review your product.
  • Impose restocking fees on returned products. So long as this is clearly explained in the return policy posted on the website, this is a fair practice. A restocking fee may cover the cost of goods and will discourage customers from returning product.
  • Impose penalties for failure to follow the return instructions. Even if return instructions are provided to consumers, a small percentage of consumers never read the instructions and simply return the product to some out-of-state fulfillment house rather than to the correct address. Some merchants instruct the fulfillment house to send a return penalty. Consequently, consumers failing to follow instructions have a fee deducted from their total refund amount.
  • Do not allow a consumer to purchase a product if they initially inquired about its money-back guarantee. Statistics show that a large portion of those consumers will immediately request a refund. The website merchant account MUST reserve the right to refuse to do business when appropriate.

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