Chargebacks: Seller beware!

Retailers need to protect themselves against fickle or unscrupulous customers using credit cards for upfront payment – especially for custom-made or big-ticket orders – as Phil Gresham, Fotofast Brisbane, discovered to his chagrin recently.

FotofastRetailers can find themselves victims of the generous (to credit card holders) international rules on ‘chargebacks’, the term used for debiting a retailer’s bank account with the amount of a transaction that had previously been credited.

The chargeback system is not part of Australian financial or consumer law, but rather written into the international terms and conditions of Visa and Mastercard. Consumers are becoming increasingly aware of the chargeback as a way of seeking redress in a dispute – or sometimes simply to resolve ‘buyer remorse’, when they change their minds about a purchase.

A chargeback can be made up to three months after the initial transaction.

Fotofast’s story began with a customer who ordered a large framed canvas print which he said was for display in a window.

He ordered and paid by Visa card but when he came to collect the finished product told Fotofast that he didn’t in fact want the canvas framed – even though he had clearly ordered the framed product (via online kiosk software). Nowhere in store, online or in their price lists do they offer unstretched canvas as an option.

The offer was made to redo the work free of charge and provide a 30 percent store credit  to make good on the unwanted framing component of the job.

The customer was not happy with the offer of the store credit, and ultimately reneged on the order altogether after the second print was made, with Visa then taking back the full $289.95 cost of the original order, leaving Fotofast out of pocket, and with two wasted canvas prints.

While Fotofast responded fulsomely to the Visa’s request for ‘their side of the story’, with full documentation and a narrative of the encounter, the chargeback was initiated regardless.

‘I haven’t experienced anything like this in 23 years,’ said Phil Gresham. ‘Basically if a customer orders a product and pays upfront – it may be a one-off custom-made product or even a $10,000 lens – if they don’t pick it up they are entitled to a full refund!

‘So if I order something then see a better price somewhere I can call my card provider and have the amount refunded back on the card.

‘It is written in the credit card rules of all cards, but so deep I can’t find it.’

He said he intended to pursue the matter in the Queensland small claims court, as there was a valid contract between Fotofast and the customer, and the goods were produced to order.

Beyond this example, it’s feasible that when a customer collects an item they had previously paid for by credit card, if the retailer doesn’t get a signed receipt acknowledging collection, the customer, if he or she is sufficiently dishonest, can claim they never collected the item and seek a chargeback. Visa and Mastercard demand proof that the customer has signed for receipt of goods.

Mr Gresham said that in theory, a retailer should secure a a signature on anything which leaves the store with a customer.

‘EFTPOS is OK and obviously cash, but anything on a card can come back and bite you. The only recourse for the small retailer is to take legal action.

(In fact it seems that if customers use the Credit channel on their EFTPOS cards, they are also entitled to use the chargeback facility.)

10 Top reasons for chargebacks

1. Unauthorised Mail/Telephone Transaction
Occurred because the cardholder denies participation in this transaction. You can avoid this by ensuring that you are authorised to accept Mail Order/Telephone Order (MOTO) transactions and being more alert and getting as much customer identification as possible such as a faxed id.

2. Requested Item Not Received
Occurred because the requested information was not returned to ANZ within the applicable timeframe.
You can avoid future chargebacks of this type by supplying a copy of the sales slip as specified in the retrieval request letter.

3. Duplicate Processing
Occurred because a transaction was charged to the cardholder’s account two or more times.
You can avoid future chargebacks of this type by crediting the cardholder via your terminal or contacting your bank when it is realised that a cardholder has been charged more than once for a transaction.

4. Invalid Account Number
Occurred because the cardholder’s bank cannot locate a valid account number for the credit card number.
You can avoid future chargebacks of this type by ensuring that the account number recorded on the sales receipt is correct ie. swiped or imprinted and updating your records if you have signed authority.

5. Transaction Exceeds Floor Limit
Occurred because the transaction was over your floor limit and required authorisation. We have reviewed our records and cannot locate an authorisation for this sale.
You can avoid future chargebacks of this type by obtaining proper authorisation on all sales.

6. Sales Voucher Not Imprinted with Card
Occurred because the credit card was not imprinted or the swipe was not read at the time of sale. Cards which will not swipe read must be imprinted.
You can avoid future chargebacks of this type by ensuring all sales vouchers are imprinted or cards are swiped and read at the time of sale.

7. Invalid Transaction
Occurred because the transaction was processed using an incorrect account number, transaction amount, or an addition or transposition error was made when calculating transaction amount.
You can avoid future chargebacks of this type by ensuring all calculations of transaction amounts are correct.

8. Merchandise Not Received by Purchaser
Occurred because the cardholder states that she/he has not received the merchandise purchased.
You can avoid future chargebacks of this type by ensuring that the merchandise has been shipped to the cardholder prior to billing occurring.
Ensure goods are delivered to the person at the delivery address and obtain formal identification (eg, licence).

9. Credit Voucher Not Processed
Occurred because a partial or full credit was not issued.
You can avoid future chargebacks of this type by processing a partial or full credit to the cardholder’s account.

10. Posting Direct Debits
Occurred because the cardholder cancelled a direct debit but is still receiving the debit.
You can avoid future chargebacks of this type by updating your records as soon as the cancellation is received.
– From ANZ website


6 thoughts on “Chargebacks: Seller beware!

  1. ‘EFTPOS is OK and obviously cash, but anything on a card can come back and bite you. The only recourse for the small retailer is to take legal action.’

    For clarity – Phil would have been protected if this was an in-store credit card transaction. Rightly or wrongly, this is the risk of online (“card not present”) transactions.

  2. The transaction was made in store after the customer had completed the order on one of our Dakis kiosks (mirror of our on line site)

    So even though they had accepted the cost and used a pin, they did not deny using the card just that they hadn’t received the goods as they choose not to.

    Conceivably if they went into Michael’s and purchased a $10,000 Leica they could do the same. It is up to Michael’s to show a signed document to prove that they the cardholder have received the goods. Our computer supply company will make us sign even for a $5 sale that we have collected the goods. Umart is superbly run by Chinese owners no doubt they too had been stung by Asian customers!

    In response to on line we use PayPal which is much more seller friendly, they say with the evidence that I sent to our bank, they would not refund to the buyer in similar circumstances.

  3. Paypal is much worse, you don’t even know if a credit card is being used to pay for the goods and paypal have no control over a chargeback from the credit card company.

  4. Have had a couple of chargebacks from both Visa and Paypal. Both for online orders. The first was for $8000, 8 years ago, after being told by my bank it was perfectly safe. Since then the buyer tried it again and Federal Police knew of this particular scam, yet no luck getting the money back. Paypal was for a job for prints placed online and collected from our Laboratory. Yet despite going through the dispute centre and talking with the buyer that he had not made a complaint the money still withdrawn from our account. This time cost in time to recover substantially exceeded profit on the job.

  5. Paypal say you should allow a margin to cover chargebacks, this is probably feasible for printing work but pretty difficult when selling a DSLR !

  6. We’ve just lost a case through the ombudsman against the NAB for chargebacks. Our paperwork is about to be posted off to the senate enquiry. A law firm has also expressed interest in it because banks charge a higher fee for card not present transactions “because of the added risk” but the retailer is still liable.

Leave a Reply

Your email address will not be published. Required fields are marked *

Recent Related Posts