How do you handle Chargebacks?

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We often get asked about how to handle chargebacks on digital goods. While Your Members can turn WordPress into a powerful membership site, only you can create unique content that’s compelling enough for people to purchase.

Note: While we discuss financial issues and insurance in parts of this article, this does not constitute financial advice. You should always discuss your options with your bank and card issuers.

Before we start, lets go through the major players in any chargeback:

• Purchaser/Consumer – The person who purchased the item.
• Merchant – The person/company the purchaser bought the product/service from.
• Payment Gateway – The company the merchant uses to process a payment. This is often their bank, but it could be a third party like WorldPay or PayPal.
• Card Company – The company that issued the credit card and is, therefore, providing the purchaser with chargeback protection.
• Claim Specialist – The person at the card company who determines the validity of the defence of the merchant against a chargeback.

What is a chargeback?

A chargeback occurs when a customer writes or phones their credit card company and asks them to revoke a payment made on the card. The cardholder then receives the money back in the form of credit, while the merchant receives nothing.

Chargebacks can be disputed, but it’s not particularly in the card company’s interest to hear such disputes (though they will always go through the motions). If you dispute a chargeback, the purchaser will still receive credit on his card, but on a successful dispute, the merchant is also recompensed. Note: Payment gateways will almost always charge additional fees for the extra work involved in a chargeback, regardless of whether or not you win.

While the buyer’s credit card protection is strong, there are fixed rules and boundaries. While the best piece of advice is to avoid getting chargebacks at all, they’re inevitable. It’s also worth bearing in mind that other payment methods have similar issues, including direct debit (via the Direct Debit Guarantee) or Facebook Credits (the whim of Facebook).

Chargeback fall into roughly 4 categories:

• Technical – Easily summed up as “bank error”. Unlike Monopoly, they’re never in your favour.
• Clerical – A mistake has been made by a person, rather than a machine.
• Quality – The purchaser claims the purchase never arrived or failed to arrive intact.
• Fraud – The purchaser claims he or she never made the purchase.

Realistically, the last two chargeback types are the only two a merchant can really dispute.

Why is it particularly hard for digital content providers to dispute chargebacks?

Normally, when a user purchases something, they’ll receive the actual goods in person or through a postal network. While not foolproof, most card companies accept that, if a major delivery network proves a delivery was made, then it can close the case. Unfortunately, digital goods don’t use a delivery network; the interaction is directly between the merchant site and the purchaser.

Is a PayPal claim a chargeback?

If you use PayPal, there are 3 types of disputes:

• A PayPal dispute
• A PayPal claim
• A chargeback

A PayPal dispute is normally the first step for an unhappy customer who hasn’t received a satisfactory response from you. Think of it like a controlled dialog. The merchant will be asked if he accepts the assertions within the dispute. If he doesn’t, he’ll be asked to talk to the user.

Either party can escalate this dispute to a claim. A PayPal claim is similar to a chargeback (and many of the tips will help both situations), but instead of the card company, PayPal mediates. PayPal assumes the merchant is guilty, and therefore, the merchant must prove otherwise. This is often a difficult task.

If someone uses a credit card to make a purchase through PayPal, they are protected by the PayPal claim process and the chargeback system. The big difference is, instead of doing the chargeback against you as a merchant, they do it against PayPal, who then passes it on to you. In this case, you’d deal with PayPal instead of the credit card company. PayPal will evaluate your evidence and take your case on if they think it’s worth fighting. Chargebacks against PayPal are rarely challenged (unless the user opened a claim prior and lost). And those that do have limited success.

Why do consumers open chargebacks?

Card companies encourage customers to make chargebacks, as part of the enhanced “consumer protection” features they offer on their cards. It’s also very easy to do a chargeback, since it only requires a couple of minutes on the phone or online.

From a consumer perspective, there’s very little risk. However, those who excessively or repeatedly make chargebacks may end up on blacklists used by major payment gateways. Being on the blacklist means payment gateways may choose not to process your cards or accept future purchases.

Once you’re on one of these lists, it can cost several hundred dollars and a change in behaviour to be removed. According to one survey, 98% of people who fraudulently chargeback wouldn’t do so, if they knew it would put them on such a list.

Deliberately opening a fraudulent chargeback is often referred to as “friendly fraud”. Obviously, it’s far from friendly, from a merchant’s perspective, especially for digital content owners.

How to avoid unauthorised use chargebacks

The number one reason people choose when doing a chargeback is “cardholder not-authorised”. This means the purchaser claims someone else purchased the goods. Why? It’s the first option on a very wordy form. Since purchasers know they get the money back regardless, their attention to detail is often lacking. As a merchant, however, this works to your benefit.

When registering users, always try to get a first name, last name and address you can then verify with services like PostCode Anywhere. It’s not categorical proof, but a real address can be used to compare with credit card information later.

If collecting card data yourself (and really you shouldn’t to minimise your PCI compliance), make sure you collect the 3 digit security number (4 digits for American Express), sometimes referred to as a CVV2 number. This number should be used on all transactions where the user is not present. In addition, at time of purchase, make sure you have the IP the purchaser used.

If you have the option, consider implementing 3d Secure. It’s not 3d, or particularly secure, but it does (in the eyes of card issuers) reduce the chances of genuine card-unauthorised chargebacks and may make a difference.

Before implementing 3d Secure, think it through. Implementation can cause a significant drop in sale completions. So, make sure the amount of money lost to chargebacks is worth more than the drop in sales. The important thing is that the emphasis switches from the merchant, to the purchaser, who must now prove they didn’t make the purchase. It’s also worth noting that several merchant gateways are now reducing fees for customers with 3d Secure enabled.

By combining the data you’ve collected (the buyer’s name, email, address and IP) with the information the payment gateway and cardholder has, there’s a good chance of winning a “cardholder not present unauthorised” chargeback, especially when combined with 3d Secure and CVV2.

How to avoid goods not delivered chargebacks

The second most common chargeback category is “goods were not received” or “goods were faulty on arrival”. This is a nightmare for merchants in many respects, especially for digital goods. For physical goods, you simply send in the courier delivery slip or tracking information and it’s sorted.

Unfortunately, digital goods don’t have a central tracking system. Consequently, winning a goods-not-delivered chargeback depends on who hears the case. Most claims specialists barely understand the Internet, so don’t expect it to be anyone too technical.

Here are some tips to help with not-delivered chargebacks:

Always use double opt-in email addresses. By default, WordPress forces the user to log into your site. In doing so, it stores their IP and as much detail as possible.

Always store IP and other information when a user makes a payment, as well as the times and dates. Use a plugin like Log User Access (http://wordpress.org/extend/plugins/log-user-access/) to keep a record of logins by users. When presenting a not-delivered chargeback appeal, specify:

• The time and date of registration.
• The IP for the user registered
• The time of first login, the username, the IP and any relevant custom fields (first name, last name for example).
• The last known login .
• If the user is on a given package type, a log entry accessing content from that package type.

It’s also worth including any additional correspondence, questions about access, and statements related to the content.

You might also wish to consider sending a physical good to the purchaser’s address. It gets around the lack of proof of purchase if sent via a delivery network, but it does open up other issues.

Another option is to use third party services to deliver content, since email providers use postmarks or content delivery networks. Be aware that, just because a company is considered to be reputable in the web community, a claims specialist won’t necessarily see their proof as being any more valid than information they receive from you. However, it does provide another level of protection.

Recurring billing not cancelled

This is a simple one. A surprising number of chargebacks occur when a recurring subscription doesn’t get cancelled. The solution is to not get into the position in the first place by having clear instructions on how users can cancel an account and have a clear cancellation policy. Set aside a few minutes a day to process the cancels by hand. Or, use a gateway that allows the user to cancel.

General advice

First of all don’t get upset or angry. While it’s depressing, chargebacks happen to everyone.

Have a clear refund policy. If you don’t have one, get one. It should provide exact references for when a refund is possible, how it will happen, and perhaps most importantly, a point of contact and escalation path.

The escalation path is particularly important. Where possible, prevent a refund request from turning into a chargeback by keeping communication lines with your purchaser open, even if they don’t want to talk.

Always be specific. Quote exact times, not just dates. If you can, quote as much detail as possible, right down to the type of browser they used. The more detail you can provide the better. Claims specialists are human, and are more willing to side with someone who is well-prepared and has the facts on hand. While it’s not in the card company’s interest to side with the merchant, getting into a long protracted debate with someone who has a wealth of evidence and information is not in the claims specialist’s best interest.

Some companies like Chargeback File will provide access to information about chargebacks for a small fee, but how to use that information is up to the merchant. The information provided is very generic, but it can be used as part of a greater scoring and fraud system.

Reduce your prices. It sounds silly, but smaller amounts of money often make the hassle of chargebacks not worth it for a purchaser. Also, most banks will only chargeback one transaction. So, if you use recurring billing, only the last charge will likely be reversed.

Likewise, find out what the average chargeback rate is in your industry, since some niches like porn and gambling will have higher rates than others. Payment gateways will often take this into account when dealing with chargebacks from these niches. Many payment gateways that specialise in such niches will not dispute chargebacks under any circumstances. This is often specified in the terms of service, so do read them carefully.

Is it worth disputing?

Chargebacks are distressing and time consuming. So, while the advice above will help, the vast majority of chargebacks are upheld by the card companies. There are several reasons to dispute a chargeback, however, including:
Chargebacks reflect on your account.
They can affect your processing fee costs and the terms of your banking. (Card companies will lean heavily on banks who have high chargeback customers.)
It is a loss of money, especially on annual or larger one-off subscriptions.
The potential recovery of funds is worth more than the time taken.

In principle, if the chargeback is wrong in your mind, you might want to dispute it just to clear your name. In such cases, remember that the card company doesn’t really care, and the purchaser will never know you’re right.

Put aside at least an hour to put together a decent chargeback defence and factor in an hour’s time to handle the dispute. It is, however, in most people’s interest to dispute chargebacks, simply to try and retain a good standing with payment gateway. Most gateways look at the number of chargebacks received, as well as the number defended when deciding your risk score. As such, the advice is to avoid chargebacks all together.

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