Small Business: Avoid fraud to prevent 'charge-backs'

Experts advise small businesses must take steps to

Experts advise small businesses must take steps to limit charge-backs, which results when a consumer disputes a charge and asks a credit card company to remove it from the bill. (Credit: iStock)

Jamie Herzlich

Newsday columnist Jamie Herzlich Jamie Herzlich

Herzlich writes the Small Business column in Newsday.

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In the retail world, getting a "charge-back" is like being hit with a triple whammy. You lose the sale revenue and the product that was bought or shipped, and you're subject to fines.

A charge-back occurs when a consumer disputes a charge and asks his credit card company to remove it from his bill. Charge-backs can't be totally avoided, but experts say merchants can take steps to decrease them.

"A lot of it's common sense," says Monica Eaton-Cardone, co-founder of Clearwater, Fla.- based Chargebacks911, which helps merchants prevent and dispute charge-backs.

Some charge-backs are the result of outright fraud, such as cases of identity theft, but some are the result of "friendly" fraud, she says, where a consumer legitimately made the purchase but then disputes it.

Either one can crimp a retailer's bottom line. Fines alone from credit card companies can range from $15 up to $100 per charge-back, Eaton-Cardone notes. And too many charge-backs -- generally those surpassing 1 percent of total monthly transactions -- could result in the merchant's losing the ability to process credit cards, she says.

But there are ways to curb both types of charge-backs.

Prevention. You can use a fraud-screening service that can detect and verify suspicious orders. That's what Jildor Shoes Inc., a retailer and e-tailer of women's designer shoes, does. The company, with locations in Cedarhurst, Great Neck, Woodbury and Southampton, uses preCharge Risk Management Solutions, says Jildor e-commerce manager John Siergiej.

Using the service has not only prevented charge-backs but also increased sales, because there were some seemingly suspicious orders that they may not have approved in the past but passed preCharge's screening and turned out to be legitimate.

Jildor will first try contacting the customer on a suspicious order before they process it, but if they can't reach the customer, they'll send the order to preCharge to verify. If preCharge approves the transaction, it will cover the cost of the order if it does turn out to be fraud.

"Charge-backs can be a major expense if you're not proactive and aware," says Siergiej.

Howard Schecter, director of client services for Manhattan-based preCharge, says some customers have them verify every transaction while others only send them the suspicious ones. PreCharge starts as low as $100 a month, he notes.

Transactions likely to raise red flags are ones where the billing and shipping addresses don't match, Schecter notes. Also, be wary "of new customers asking for overnight delivery and ordering high dollar amounts."

Simple steps. Steve Schwimmer, regional sales manager for Renaissance Merchant Services, a Syosset-based credit card processing company, offers tips to prevent true fraud charge-backs:

1. Don't accept a credit card before the start date or after the expiration date.

2. Don't accept a credit card if signatures are missing or not similar without verifying with photo ID.

3. Don't accept altered credit cards.

Also, have a clear, visible customer service policy explaining under what terms merchandise may be returned and in what condition, says Schwimmer.

Keep good records of transactions, he adds, because if a dispute arises, the merchant must provide a detailed written account of what happened.

To help prevent friendly fraud, make it easy for customers to reach you. "You want to resolve a consumer's dispute before it becomes a charge-back," says Eaton-Cardone. If they can't reach you, the next logical step is to call their credit card company.

Offer superior customer service and loosen the return policy if necessary, possibly offering an exchange or store credit, she advises. "Give them some alternative solutions" to avoid a disputed charge.


Hey, Big Spender

Want to avoid a charge-back? Then look out for fraud. In 2012 the average ticket value for a fraudulent order was 35 percent higher than a valid order ($200 versus $149).

Source: CyberSource: 2013 Online Fraud Report