Credit card disputes, known as “chargebacks” within the merchant processing industry, are the bane of internet merchants worldwide. As an author who has worked hard to create my books and products and build a business to market them, few things are as disappointing and frustrating to me as receiving notice of a new chargeback on my merchant account.
I’ve frequently searched the internet for advice on how to prevent and win chargebacks, but the information I’ve found has largely been useless. The problem is that it addresses the prevention of fraudulent transactions, and discusses ways to identify them and block them.
The problem, however, isn’t actual credit card fraud, identity theft, or any of the usual culprits that take the blame for chargebacks. In over four years of doing business online and tens of thousands of transactions, I’ve had less than ten chargebacks that were the result of actual credit card fraud - yes, less than ten. The real problem, and the cause of nearly all of my chargebacks, is so-called “Friendly Fraud” - dishonest people who order and take delivery of merchandise only to file a frivolous credit card dispute in an attempt to keep the merchandise without paying for it.
In the real world, this is known as shoplifting and everyone knows you will go to jail if you get caught doing it. On the internet, however, it’s a regular and consistent pattern of behavior for unethical people who want to rip you off and get something for nothing. The problem is escalating thanks to so-called “Identity Theft Solutions” and similar ideas advertised by credit card companies, which in plain English means “we’ll let you dispute any charge for any reason at all, or no reason for that matter.” In the pre-identity theft days, credit card companies would only process disputes that were the result of a lost or stolen card being used by someone other than the authorized cardholder. Nowadays, they’ll allow disputes for just about any reason at all, and the scumbags in our society know this and are taking advantage of it.
To complicate this problem, many merchants believe that there’s nothing they can do about it. They think chargebacks are final, and as a result, they don’t even respond to the chargeback notices. In reality, you must take either one or two steps to fight back and win against chargeback customers:
Option #1: Dispute the chargeback with your bank immediately upon receipt of the notice.
Option #2: If option #1 fails and the bank upholds the chargeback, you have the right to go after the consumer directly for the amount of the chargeback plus all other costs you incur as a result, such as bank fees.
The other issue I’m going to address later in this article is that of refund fraud: customers who buy a product that is backed by a money-back guarantee, with the full intent to use or copy the product and then return it for a full refund. For now, though, let’s talk about chargebacks.
With the possible exception of running a credit check on each and every customer before shipping merchandise - and that’s entirely impractical and unrealistic - there is no way to effectively prevent chargeback fraud from taking place. However, as I’ve said, you can win and recover your money in the end. I do on well over 90% of my chargebacks and that number continues to rise as I become more experienced in playing the chargeback game.
First of all, I’m going to run through all the things you need to have covered in advance if you expect to win your “friendly fraud” chargebacks:
1. You must use Address Verification Service (AVS) on your merchant account and decline orders which do not provide a valid billing address (contrary to popular belief, you don’t necessarily have to ship to the billing address - I allow orders to ship to other addresses, and none have resulted in chargebacks or other fraudulent transactions - but you must have AVS active and must decline orders from customers who cannot provide a valid billing address).
2. You must require card security codes (commonly known as CVV and some other acronyms) from customers and decline orders which provide either no code or an invalid code. Make sure you set up your shopping cart and/or payment gateway to accept orders from credit cards that do not have security codes, as there are many outside the U.S.
3. Accept American Express. This may sound like an odd suggestion, and many merchants don’t accept them due to higher processing fees, but Amex has the most fair chargeback process and I’ve won 100% of my chargebacks with them that I’ve responded to. They give you the last word and objectively consider your side of the story and your documentation, unlike some Visa/MC processors who will side with the customer all the time (if you’re stuck with one of these, change processors; e-mail me if you need a referral). The number of American Express cardholders continues to rise, which means less chargebacks for us.
4. You must use a trackable shipping service, and preferably one that obtains a delivery signature.
Note to sellers of electronic products: Without some form of proof-of-delivery, you will have a needlessly high refund rate, you will have zero chance of winning chargebacks, and you will not have the documentation available for your collection agency to verify disputed accounts (I’ll cover that later). If you sell dowloadable products such as e-books, software, and so on, you *must* also ship something tangible such as a CD-ROM copy, with tracking and preferably with a delivery signature.
This also has the effect of dramatically reducing refund rates on e-products, usually to less than 2%. People simply don’t go to the hassle of returning a product unless they really want their money back, unlike customers of digital products who can simply demand a refund without returning anything and usually while continuing the use of your product, for free - for this reason it’s very important to use some type of digital rights management with your e-products.
(If you sell e-products and are not willing to ship something tangible, you might as well throw this article in the trash because I cannot help you if you don’t have proof-of-delivery available for each and every customer.)
In addition, you’ll need to have your return policy clearly articulated on your website (I don’t advocate the inclusion of return labels with products because then you’re just encouraging people to refund). If you have a time limit on your return policy, say so. If you impose restocking or processing fees, say so. If products must be in new and undamaged condition, say so.
You should also have a chargeback policy on your website. Mine is very clear - customers who pull chargebacks *will* be reported to all major credit bureaus as a delinquent collection account. End of story. Even if they pay, they will still have a paid collection account on their credit for at least seven years; this is an extremely strong motivator against chargebacks and will be your primary weapon in motivating people to pay after disputing directly with your merchant bank fails. It’s also perfectly legal as long as the information you report to the credit bureaus is up-to-date and accurate.
Which brings me to my next point: How to respond to chargeback notices that you receive from your merchant processor.
For starters, you need to make sure you receive these notices on time. Mail is not an option - banks give you a very small window of time to respond and you may miss it if you have to wait for the notice to arrive in the mail, and if you’re traveling you won’t get it at all in time. So, contact your merchant account provider and get set up for either e-mail or fax notices, and use an eFax account that sends them directly to your e-mail. This will give you plenty of time to respond. If your merchant account provider does not have this capability, switch to one that does.
How you specifically respond will depend on the nature of each chargeback. Here are examples of the most common kinds and how I successfully respond to them:
1. “I never received the product.” I include a copy of the proof-of-delivery tracking, a copy of the transaction receipt showing a positive AVS (address verification) and card code match, and any customer support tickets or e-mails from the customer that would prove they did indeed receive the product.
2. “I returned it but didn’t get a refund.” If the customer never returned the product to you and is trying to scam you, simply say so in your response and request tracking showing proof-of-delivery to your correct return address.
If the customer returned the product outside of your return period, say so and include a copy of your return policy in your response.
3. “I was dissatisfied” or “product not as described.” This is a weak excuse for a chargeback because if someone is not satisfied with your product, the correct procedure is to return it for a refund, not to keep it for free via a chargeback. 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 your return policy, and a statement explaining that the customer has a right to a refund and that you’ll be happy to provide one if they’d return the product; however, unless and until they return the product, no credit is due. People who do this are generally trying to steal the product from you, so fight hard on these.
4. “I cancelled my order but they shipped it anyway.” My website terms & conditions explain that once an order is placed, it goes out to the fulfillment center for shipping and we cannot stop it. You should have the same terms on your website. Again, people who do this are generally thieves and ripoff artists because they file the chargeback without ever returning the product. Their intent all along was to get the product for free. 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 your return policy, and a statement explaining that the customer has a right to a refund and that you’ll be happy to provide one if they’d return the product; however, unless and until they return the product, no credit is due.
5. Customers who have already received a refund and dispute charges on top of it. This one is the most disgusting and clearly criminal and fraudulent of all chargebacks, but thanks to credit card companies’ “dispute any charge for any reason” crap it’s becoming more and more common. In this case, provide a transaction receipt showing that you’ve already issued the credit to the customer. You’ll almost always win this form of chargeback, but if for some reason you don’t, report these people to their local police. What they’ve done is criminal in most cases.
In all cases where the chargeback is clearly fraudulent and with ill intent, you also have the option of filing a report with the customer’s local police or sheriff’s department. If the product was delivered via U.S. Mail or to a Post Office box, you may also file a mail fraud complaint with the postmaster. I did this to a customer who ordered three products three months apart, and then pulled chargebacks on all three without returning any of them or otherwise contacting us. He also refused my certified demand letters. Because he was stupid enough to hide behind a P.O. Box, it came under the jurisdiction of the U.S. Postal Service and I filed a complaint for criminal mail fraud against him (that may sound harsh, but judging by his actions, he probably scammed merchants on a regular basis and needed to be stopped).
After you respond to a chargeback, you will get an answer one way or the other from your merchant processor. My success rate in the above examples is about 70%. If you win a chargeback, the customer does have the right to appeal that decision and dispute again. If that happens, respond with the same information and documentation and reiterate your position. Most of the time, these appeals fail and the decision in your favor will be upheld.
If your rebuttal to the chargeback is denied and it is upheld in the customer’s favor, it’s time to move on to the next step - a final demand letter and invoice from you, mailed directly to the customer.
I use a simple form letter that explains to the customer that they have wrongfully and fraudulently disputed charges and are now responsible to me for the full charge amount plus the bank chargeback fees. They are notified that they have thirty (30) days to pay in full, and if they do not, they will be placed with a third-party collection agency and their account will be reported to all credit bureaus as a delinquent collection account, severely damaging their credit rating for at least the next seven (7) years. The letter also explains that we will no longer accept a return of the merchandise as settlement for the debt and will only accept payment in full.
The response to this letter will vary, but the people who care about their credit will pay immediately. It’s amazing how many people think they can get away with ripping us off with no consequences, and then immediately mail a check the instant they receive notice that their credit score is about to go down the toilet. With credit standards tightening and the disappearance of the sub-prime credit market, I expect the threat of damaged credit to become even more effective in collecting these outstanding debts.
In addition, at the time I mail these letters, I print the tracking information for each account. Many delivery services such as FedEx and DHL only keep them on file for sixty days, and you’ll need to have them available for the next phase of this process, so print (or .pdf) them and file them away with the copies of the letters you’ve mailed.
After those thirty days have passed, it’s time to take the customers who still haven’t paid and send ‘em to collections, which will also cause a collection account to appear on their credit reports, which will severely damage the customer’s credit rating and prevent them from getting credit and subsequently ripping off other creditors and merchants. And, if they buy or refinance a house, the title company won’t allow the deal to close until all outstanding collections are paid off, which will greatly increase your odds of getting paid, even if it’s down the road.
This will also further motivate customers to pay. A paid collection account on a credit report is still a negative entry, but it’s better than an unpaid account. Next time they are denied for a credit card, car loan, mortgage, cell phone, or need to pay a hefty deposit for utility services or cable TV - you name it - all because they tried to rip you off, your odds of getting paid go up dramatically.
If you need a referral to a good collection agency, e-mail me. They’re cheap, they charge a flat rate rather than a percentage of the accounts, and they report to all major credit bureaus.
Professional deadbeats will attempt to dispute the collection account, either directly with the collection agency or with the credit bureaus, in an attempt to get it off their credit reports. This is where it’s vital to have that tracking information available. Your collection agency, in compliance with Federal law, will give you about ten days to respond with documentation proving that the customer actually owes you the debt. You will need to send them the original transaction or shopping cart receipt, a copy of the tracking/proof-of-delivery, and a copy or copies of the chargeback documentation showing that the customer did indeed hit you with a chargeback. With this information, the customer’s dispute(s) will be denied, the account will stand, and it will continue to appear on the customer’s credit reports.
If this approach makes you nervous or seems harsh, stop that thinking right now. You have every right to do this under the law, as well as both morally and ethically. Customers who buy products and then slap the merchants with unjustified chargebacks are the lowest scum of society and cost honest businesspeople like you and me a huge amount of money. It is your obligation to send these deadbeats to collections and get the account on their credit reports in order to protect other creditors from them - if they get credit, they’re just going to defraud and steal some more, and it’s your job to make sure that doesn’t happen.
Once you place delinquent accounts with collections, more and more will start to pay up as soon as they receive collection letters and realize their credit and financial health is at stake; in other words, they’ll know your threat to ding their credit in your final demand letter was real, you were not bluffing, and now it’s time for them to either pay up or suffer for the next seven years in the form of denied credit and higher interest rates.
On the subject of refunds, this can be an even bigger problem than chargebacks. The internet is plagued with people who look for products offering money-back guarantees, especially information products. These thieves will buy your product, copy it as soon as they receive it, and immediately return it for a refund.
On the bright side, the reality is that you must offer a money-back guarantee in order to maximize your sales. The increase in sales will far, far outweigh any losses due to refunds. Having said that, there are steps you can take to keep the serial refunders to a minimum:
1. DO NOT include return labels, either postage-paid or not, with your products. While some may see this practice as “good customer service,” all you’re doing is encouraging dishonest customers to return your products for a refund. If you were a general, you wouldn’t supply your enemies with weapons, would you? Then why would you provide serial refunders with tools to help them in their ripoff game?
2. DO NOT pay for or reimburse shipping charges to return products to you. Again, why empower the enemy? If someone wants to return your product for a refund, let them pay their own postage.
3. Only refund the price of the product itself, not shipping and handling charges. You can’t recoup those, and the customer did get the opportunity to review your product (and has probably copied it) so it doesn’t make sense for you to pay for those charges.
4. Impose restocking fees on returned products. This is well within your rights as long as they are clearly spelled out in the return policy posted on your website, which few, if any, customers read before ordering. A restocking fee may cover your cost of goods and will discourage customers from returning the product, especially when they must also cover the cost of shipping on top of it.
5. Impose penalties for failure to follow the return instructions. For example, even though my return instructions are provided to customers in three separate places (on my website, in the e-book they download, and in the print book that is shipped to them), a small percentage of customers never read them and simply return the product to my out-of-state fulfillment house rather than to my office. This results in a return processing fee being charged by my fulfillment house, as well as added time and hassle in receiving the returned item. As a result, customers who fail to follow the instructions have a fee deducted from their refund amount. This is only fair because it takes my staff extra time to process these, and customers should be held responsible for the extra fees my fulfillment house charges for these improper returns.
6. This is very important: NEVER allow a customer to purchase after he or she inquires about your money-back guarantee. BAN THEM! After about a year of selling my products online, it occured to me that fully 100% of customers who called or e-mailed in advance to verify that a money-back guarantee existed returned the products for a refund almost immediately after receiving them! I now ban customers who inquire about the money-back guarantee, and this has really cut back on returns and the lost money that goes along with them. Remember, you reserve the right to refuse to do business with anyone, so exercise that right to protect yourself from professional refunders.
Hopefully this information will empower you to fight back against chargebacks, refund fraud, and the dishonest customers who commit them. The only way we as merchants and as a business community can put a stop to the ever-increasing “Friendly Fraud” chargebacks is to hold the people who initiate them responsible, and force them to either pay or suffer the consequences. If enough merchants follow these steps and punish dishonest customers who make a regular practice of ripping off honest businesspeople, fraudulent chargebacks will become a thing of the past.