Direct Sales on the Internet - Managing Chargebacks & Fraud

Stefan Capombassis
Senior Account Executive
Nutritional Supplements Division
Pivotal Payments

In recent years, the Internet has become an important sales tool for businesses in the natural products Industry. While the opportunity is obvious, there are many challenges to accepting payments online or over the phone that these companies need to be aware of. Unlike the traditional environment of a face-to-face transaction, on the Internet, the credit card holder is not present and there is no signed credit card receipt for the transaction. In this “card-not-present” scenario, the company or distributor is exposed to greater risks for fraud and chargebacks. A chargeback, not to be confused with a refund, occurs when a cardholder complains directly to his/her issuing bank rather than going to the merchant to get a transaction credited. If chargebacks are not kept below monthly thresholds set by Visa/MasterCard, a company’s ability to accept online credit card payments can be jeopardized and even terminated.

Tips for Reducing Online Chargebacks
There are many reasons that a cardholder would chargeback a transaction and in most cases they can be averted by following best practices of accepting online payments.

The first place to start minimizing chargebacks is directly on the website. Always set clear expectations for the customer as to what they are buying. Over inflating features and benefits might be good for sales but will only lead to customer frustration, which can then trigger a chargeback based on the "goods or services not as described" reason code.

A website should also have clear contact information and staff available to communicate with customers concerning any issues they may have with their purchase. If a customer is unable to reach someone at the company from which they purchased the goods, they may react with a chargeback of their transaction.

It is also important to have a clear refund policy on your website and that you process refunds within a timely fashion. There is a "non-receipt of credit" chargeback reason code which can be invoked by customers when a company fails to provide a refund based on their stated policies. It is also imperative to make the refund process as simple as possible for a customer to avoid chargeback arising from consumer frustration or confusion.

Another best practice is to never submit a transaction for processing before the merchandise is shipped. If the delivery time exceeds the customer’s expectations based on explicitly stated time frame, they may initiate a chargeback based on the reason code that “the merchant did not deliver the goods or services”. If you cannot ship within the given time frame, keep your customers updated of the delays or back orders.

It is important to also make sure that their credit card descriptor, which appears on the purchaser’s credit card statement, contains a recognizable company name and a toll free number. If the purchase is not recognized by the customer, they may chargeback the transaction.

One of the top reasons for chargebacks is customers claiming the “transaction was unauthorized”. Since there is no imprinted or magnetically swiped transaction, it is important to maintain proper sales records and data to be able to dispute these claims. It will be up to the direct sales company to provide the data for that transaction. If the required information is not provided, the chargeback will stand in the consumer’s favor.

To properly manage “transaction not authorized” disputes, Visa/MasterCard recommends that merchants accepting online transactions keep accurate and complete transaction data on file. The most important data to record are the authorization code and AVS response code. Both of these are captured by the gateway at the time of transaction and can easily be stored. To be fully compliant, contact your merchant account provider and request complete information – they are the experts and can help companies minimize losses.

Minimizing Online Fraud and Losses Managing online credit card fraud can also be a major challenge for companies accepting orders via the web. The most effective place to manage online fraud is directly through the gateway. All of the popular gateways such as CyberSource, VeriSign and have fraud settings that manage risk and compliance including: Address Verification Service (AVS) check that validates the billing address provided with the information on record and Card Verification Value 2 (CVV2), which prompts the cardholder for the 3 digit number printed on the card in an effort to confirm the cardholder has a genuine card in their presence. Most gateways also offer a variety of scalable fraud settings that can be implemented based on the complexity of the business.

While these fraud detection tools can help reduce fraud at the time of the transactions, it is also important to maintain a certain amount of vigilance when orders are processed. A “bill to” address that differs from the “ship to” address (particularly different states or countries) may be a sign of use of a stolen credit card. Spikes in sales from one geographic region or country may also be a sign of organized credit card fraud. Many companies accept foreign orders without knowing that international fraud is 4 times greater than domestic fraud – posing a higher risk. Careful consideration must be given as to how this risk can be mitigated, otherwise losses can accumulate quickly. It may also make sense to manually review orders that seem suspicious and in some case call the customer for order validation.

Chargebacks and fraud are an everyday reality for companies doing business on the Internet. In order for a company to effectively maximize online sales, it is important to learn how to apply best practices, employ best technology and re-engineer order review and acceptance processes. These preventative measures will not only optimize the business but will also minimize the costs of chargebacks and fraud.

Pivotal provides a full suite of payment processing services for retail businesses, chain stores, franchises, restaurants and dealerships, including credit & debit card processing, electronic check conversion, loyalty/gift card programs and terminal management solutions. Pivotal also provides Internet merchant account solutions including credit card processing and gateway services to ecommerce and mail/telephone order merchants. More Information...
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