CHARGEBACKS Will PUT YOU OUT OF BUSINESS

By Ross Federgreen

Direct response marketers live on a precarious three-legged stool, which consists of presentation, connectivity and payments. The most fragile of these three legs is payments.

The rules governing the acceptance of electronic payments both merchant services (credit cards) and ACH (electronic checks) continue to become more complicated. Companies now have to face the daunting tasks of increasing governmental regulation and association regulation (MasterCard, VISA et al).

Of all of the issues involved one of the least understood, frightening and damaging is that of chargebacks. Chargebacks by definition are any disputed credit or off-line debit card sale that is returned to the acquirer (merchant’s processing bank) for reimbursement of the cardholder’s account. Chargebacks can be procedural (Issuer-Initiated Chargeback) or substantive (Cardholder Initiated Chargeback). Issuer initiated chargebacks is a procedural chargeback issued by the card issuer for various processing errors or for violations of Visa and/or MasterCard rules and regulations. Examples include: merchant did not receive authorization for a purchase over the floor limit; transaction was charged to an expired card; and a card was listed on the Warning Bulletin File. Cardholder Initiated Chargebacks are called a substantive chargeback. Or sometimes called a cardholder initiated dispute. Reasons for disputes include: the goods or services were never received; the transaction amount is incorrect; or the transaction is a duplicate.

OH MY! I JUST RECEIVED A CHARGEBACK!

First, do not panic and second do not ignore. A chargeback is transmitted to the merchant on a standard form called an “ICA-3”.

There are three pieces of information that are contained on the ICA-3 that every merchant must understand. They are the chargeback period, the chargeback reason code and the chargeback reference number. The chargeback period is the number of calendar days from the central processing date of a transaction receipt during which the issuer may exercise a chargeback right. The number of days varies form 45 to 180 days, according to the transaction type. However in certain instances this time period can be up to 270 days. The chargeback reference code is a numerical code that identifies the specific reason for the chargeback. MasterCard and Visa each have unique codes. The chargeback reference number is an issuer-assigned number that identifies the source of an outgoing chargeback.

CAN I REFUTE A CHARGEBACK?

The answer is yes but this is a very complex area. In addition to the “standard” information you must understand the time frames in which you must respond by. There is a certain degree of variability in this dependent upon the processor but the rule of thumb is the quicker the better. In fact mechanisms are in place for an appeals process to be entered into with the associations MasterCard and Visa if your acquirer and/or processor stands by the negative decision. However, before you challenge a specific chargeback make sure that your documentation is complete.

WHAT ARE CHARGEBACK LIMITS?

It is safe to state that if your chargebacks exceed 1% of your total transactions then there is a high likelihood that the account will be reviewed. It must be understood that just as the total percentage of chargebacks can cause a merchant to be terminated the type of chargeback is of significance as well. For example if there is evidence that the chargebacks are due to “fraud” on the part of the merchant and the “reason code” reflects this than there is no waiting for a one-percent rule to take effect.

WHAT ARE THE MATCH, MCMP and HRCMP?

Do these acronyms strike fear in you? They should!

Exceeding limits can lead to being placed on various watch lists or ultimately being banned from accepting payment cards. Merchants who exceed threshold or violate various rules and standards may be listed on the MATCH. MasterCard maintains the MATCH The MATCH is the Member Alert to Control High-Risk Merchant System. Multiple reasons exist for MATCH listing. MATCH listing reason code 04 is “Excessive Chargebacks/Credits/disputes” The operational definition of MATCH CODE 04 is: The merchant’s chargeback’s, credit and/or disputes in any single month exceeded 1% of its MasterCard branded sales transactions in that month, and those chargeback’s, credits and/or disputes totaled $2,500 or more. As used herein, disputes are claims that the cardholder or another person authorized by the cardholder did not engage in the transition.

Visa also applies the 1% threshold. Visa maintains two programs the MCMP (Merchant Chargeback Monitoring Program) and the HRCMP (The High-Risk Chargeback Monitoring Program). MCMP applies to all merchants with more than 100 total transaction per month and an overall transaction to chargeback ratio of 1% or greater. The HRCMP applies to merchants who are considered high-risk and include direct marketers, travel services, outbound telemarketers, inbound telemarketers and others.

The critical difference between the MCMP and the HRMCP is that of warning. In the MCMP group Visa will issue a one-time warning before sanction in the HRMCP no warning is issued. Fines and other penalties including account termination are imposed immediately.

We strongly recommend that you engage an outside firm with experience to help you manage and respond to these issues. There is simply too much to know to do and too much at risk.