Planning vital to avoid costly credit card chargeback losses

Discount Store News, June 9, 1986 by Larry Schwartz, Pearl Sax

Planning Vital to Avoid Costly Credit Cart Chargeback Losses

A credit card holder makes a purchase from a retailer and then refuses to pay for the item when it appears on his statement. There are many reasons why he refuses to pay, such as dissatisfaction with the product, unauthorized use of the card by another person, return of the product and inability to pay.

The merchant from whom he bought then gets a chargeback from his Visa or Master-Card merchant bank, removing the money it paid into his bank account at the time of the transaction.

In hundreds of thousands of cases merchants willingly accept such chargebacks, causing them hundreds of millions of dollars in totally avoidable losses. We will reveal in thsi article how you can prevent such losses.

A typical contract between a merchant bank and a retailer states: "You (the merchant) agree to indemnify and hold us (the bank) harmless from and against any and all liabilities, losses, damages and expenses arising from any defense, dispute, offset, claim or counterclaim made by a cardholder with regard to goods and/or services provided by you."

Here are some of the ways in which banks are causing losses to merchants, ways which indicate that the bank and its contract offer little or no protection to the merchant--therefore impelling the merchant to protect himself.

1. The bank fails to provide the merchant with a copy of the cardholer's letter protesting the charge.

2. The bank issues a chargeback, claiming that the card had expired, when in reality the cardholder had not paid on his account. The bank might have failed to investigate the applicant's credit standing, including the total amount the applicant owes against his earnings.

Many banks issue new cards to people who already own a number of cards, frequently extending their credit far beyond their ability to pay. Many banks fail to check the employment listed on the application and rate the customer based on negative files and the point system without verification. When the account becomes delinquent the bank will issue a chargeback to the merchant.

3. The bank issues a chargeback because the cardholder claims it wasn't his charge. Some fraudulent transactions involve numbers stolen by bank employees who have easy access to thousands of credit card numbers. Yet no bank has ever pointed a finger at their own employees.

4. The credt card might also have been applied for fraudulently by a person who falsified his name and/or or other information. No bank volunteers to pay for the merchant's loss when it has failed to provide adequate screening of its credit card applicants.

5. The bank maintains that the merchant's fraudulent charges (as determined solely by the bank and generally not documented) exceeded 8% of his charges for two consecutive months and that therefore they can henceforth charge anything they wish against his account, including counterfeit cards and non-payment by cardholders.

6. The bank asks its merchants to use the "hot list" on all sales under $50, knowing that the hot list is as many as six weeks out of date, does not list cards just reported stolen, nor delinquent accounts, accounts over the credit limit or expired card accounts. Merchants using the hot list are always at risk and in danger of being penalized for unknowingly processing stolen cards, cards whoe credit limit has been exceeded, cards which are delinquent in payment or cards which have expired.

7. The telephone (or point of sale terminal) authorization procedure or all Visa and MasterCard merchant banks only confirms that a credit card exists with the digits used for the transaction being reported, that it has a credit balance sufficient to cover the transaction and that it has not yet been reported lost or stolen. It in no way tells the merchant that the customer is actually the cardholder and not a thief. This one shortfall on the part of banks' authorization procedure costs merchants hundreds of millions of dollars a year in losses.

Here are the steps that you can and must take if you wish to avoid paying when you shouldn't pay, including paying when your customer fails to pay his issuing bank for merchandise he bought from you. These steps are single and easy--and they are all legal. Thousands of merchants who own our manual, "Credit Card & Check Fraud: A Stop-Loss Manual," are already using them successfully.

1. Secure agreement from your bank that it will advise you in advance of proposed chargebacks. This will give you adequate time to research and refute them before they are issued.

2. Insist that a copy of the letter from the cardholder stating the reason for the request for credit accompany every chargeback.

3. If authorization was secured on a transaction and the bank claims the card has already expired, ask them to supply you with a copy of the history tape confirming the date on which authorization was provided plus an affidavit giving the correct expiration date of the card in question.