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  1. #1

    False Chargeback Penalties - Your Thoughts

    We've noticed some providers will have a false chargeback fee / penalty in their TOS so that if a client disputes a legitimate charge, a penalty is assessed to the client for the time involved with proving the original charge was legitimate.

    I think this can be a strong deterrent to false chargebacks, but after speaking with our processor (Wells Fargo), they have told me that Visa / Mastercard can actually fine you if such a penalty is charged via their cards. In other words, if a client makes a false chargeback and you then assess a second charge as a penalty to the client on the the same card as the original charge, which the client then again files a chargeback for, at this point you may be fined or disciplined by the powers that be.

    Any real world experience or feedback on how you handle false chargebacks, whether a chargeback penalty is a good idea or not or related?

  2. #2
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    I would call my credit card company (the bank the card is issued with not Visa, MasterCard, Amex, or Discover,etc..)prior to the chargeback, explaining to them why you are not paying for the service you signed up for so they are aware of the situation. This way they can help walk you through the different scenarios and help protect your from exorbitant fees.

  3. #3
    @techy: I'm a provider, not a client.

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    Quote Originally Posted by Techy View Post
    I would call my credit card company (the bank the card is issued with not Visa, MasterCard, Amex, or Discover,etc..)prior to the chargeback, explaining to them why you are not paying for the service you signed up for so they are aware of the situation. This way they can help walk you through the different scenarios and help protect your from exorbitant fees.
    While you're discussing a similar topic, your post appears to lack any pertinence to the original post and the questions posed.

    Quote Originally Posted by diesel12 View Post
    We've noticed some providers will have a false chargeback fee / penalty in their TOS so that if a client disputes a legitimate charge, a penalty is assessed to the client for the time involved with proving the original charge was legitimate.

    I think this can be a strong deterrent to false chargebacks, but after speaking with our processor (Wells Fargo), they have told me that Visa / Mastercard can actually fine you if such a penalty is charged via their cards. In other words, if a client makes a false chargeback and you then assess a second charge as a penalty to the client on the the same card as the original charge, which the client then again files a chargeback for, at this point you may be fined or disciplined by the powers that be.

    Any real world experience or feedback on how you handle false chargebacks, whether a chargeback penalty is a good idea or not or related?
    It makes sense that you would not be allowed to hit a card for a charge that had previously been charged back. Any time we had a customer who filed a chargeback against us and then wanted to continue using services we've always required them to use another card or another payment method. It has happened a few times over the last few years where a spouse didn't recognize a charge and called the bank to reverse it meaning that the chargeback wasn't intentionally malicious but did still cause us some trouble.

    I would never knowingly charge a card that had previously filed a chargeback against us, even if there as no fine/policy against it.
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  5. #5
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    @diesel12 hrm sorry I must have misread the original post.

  6. #6
    The more I read, the more I think that false chargeback fees placed in TOS's are more of a deterrent than anything, something that is not necessarily enforced .... some large providers on WHT use them, hence my curiosity.

    Chargebacks are not a huge issue for us, this is our 2nd chargeback in years but am interested in learning if others actually enforce such a rule and if it is worth it if they do.

    Even if we did enforce such a penalty, I'm thinking that the fallout and negative reviews we would receive by aggravating an already aggrieved ex client would probably outweigh the benefits ... especially since we're pretty sure to reverse just about any chargeback that is placed .... so since we are receiving chargeback funds after a bit of a delay, we're made whole again apart from time cost of spending time working on the chargeback process and preparing the paperwork and screenshots for the merchant processor ... think we might chalk this up to cost of doing business and use the TOS false chargeback penalty fee as a deterrent ...

  7. #7
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    Chargebacks are indeed a cost of doing business and if you do the right fraud screening and get the appropriate documentation from accounts that seem even slightly risky it will make fighting chargebacks (and winning them) an easier process.
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  8. #8
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    Most/all merchant banks charge fees to the merchant for every chargeback in the case of Visa/MC, whether you win it or not...usually in the $20-$40 range. If it's an accidental chargeback, I don't see any issue billing the customer for the fee, and they have been happy to pay it in my experience. How they pay it is up to them...but I'm not going to eat a fee that is sometimes larger than the monthly revenue of the client...
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  9. #9
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    Quote Originally Posted by MikeDVB View Post
    Chargebacks are indeed a cost of doing business and if you do the right fraud screening and get the appropriate documentation from accounts that seem even slightly risky it will make fighting chargebacks (and winning them) an easier process.
    This. Chargebacks are a part of doing business. Factor it into your pricing and business model. And I doubt inclusion in a ToS will be much of a deterrent.

  10. #10
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    Quote Originally Posted by MikeDVB View Post
    Chargebacks are indeed a cost of doing business and if you do the right fraud screening and get the appropriate documentation from accounts that seem even slightly risky it will make fighting chargebacks (and winning them) an easier process.
    I agree 100%, its all about properly managing your business and keeping an open line of communication with your clients (if someone asks for a refund and its justified, give them their money back, even if its not, its always good to consider just giving them a refund anyway). The second part is making sure you are being thorough with your fraud screening so you dont end up with any legitimate charge-backs from people using fraudulent credit cards..ect.

    End of the day, I believe if you are running a proper business, you wont have much of an issue with charge-backs. I've noticed that the companies that put those types of clauses in their TOS are usually either inexperienced or lack the proper funds to be running a business in the first place.
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  11. #11
    Quote Originally Posted by MikeDVB View Post
    While you're discussing a similar topic, your post appears to lack any pertinence to the original post and the questions posed.

    It makes sense that you would not be allowed to hit a card for a charge that had previously been charged back. Any time we had a customer who filed a chargeback against us and then wanted to continue using services we've always required them to use another card or another payment method. It has happened a few times over the last few years where a spouse didn't recognize a charge and called the bank to reverse it meaning that the chargeback wasn't intentionally malicious but did still cause us some trouble.

    I would never knowingly charge a card that had previously filed a charge back against us, even if there as no fine/policy against it.
    It opens up a new information to me, thanks for this detailed explanation mike.

  12. #12
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    In USA, also refer to the FCBA: www.ftc.gov/os/statutes/fcb/fcb.pdf.

    As far as I am aware, you can't legally pass on the chargeback cost. As noted, it's also in the Visa, Mastercard, etc policies. You're not allowed to re-bill once you've been denied the original charge. Banks convider that to be fraud. A lot of BS written into a TOS/AUP/SLA isn't legally enforceable. Only novice hosts write these kinds of ridiculous clauses. Another sign of a kiddie host and/or somebody that has no idea how to run a business.
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  13. #13
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    Companies have those clauses in their T.O.S. that you agreed to as a way to make sure they can go after you IF they see fit. I am sure if the number is big enough, they will in fact come after you. So the 'threats' can be enforced, and I am sure there are plenty of companies who have legal on retainer to go after you.

    It's good business. If it's publicly listed, and you agreed to their T.O.S. then they can go after the additional fees, and expense. Chargebacks are a part of any online business. The fees vary, but a lot of times fighting a charge back can take an hour or more of filling out paperwork, printing screen shots, and all of the rest.

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  14. #14
    I'm with Michael Denney. Common sense says that attempting to charge clients who have you in the chargeback zone is not going to pay well in the end.

    A client relationship this fractured is a liability.

  15. #15
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    Quote Originally Posted by kpmedia View Post
    In USA, also refer to the FCBA: www.ftc.gov/os/statutes/fcb/fcb.pdf.
    This has to do with creditors/lending and I can't find anything in it at a glance that would apply but you're welcome to point out a page number or a certain term to search for.

    Quote Originally Posted by kpmedia View Post
    As far as I am aware, you can't legally pass on the chargeback cost. As noted, it's also in the Visa, Mastercard, etc policies. You're not allowed to re-bill once you've been denied the original charge. Banks convider that to be fraud. A lot of BS written into a TOS/AUP/SLA isn't legally enforceable. Only novice hosts write these kinds of ridiculous clauses. Another sign of a kiddie host and/or somebody that has no idea how to run a business.
    You may not be able to charge the same card but as far as I know you are welcome to assess an administrative fee to the end user for dealing with the chargeback but you would need to collect on it using another method and you would need to be able to demonstrate, should it go to court, that the customer does indeed owe you the money.

    Let's just make a quick example:
    A customer signs up - orders a dedicated server for 6 months (up front) - signs a credit card authorization form - and pays. Now 5 months into this they file a chargeback to recover all funds.

    Most banks I've worked with will look at the evidence and make a decision - and some will always side with their customer... Let's say this particular customer is with a bank who will side with them no matter what.

    Now they've used 5 months of services, left you without being paid for those services. Most providers will work to recover this loss be it via a debt collection agency or legal action and most will include any fees assessed to them due to the chargeback in any debt collection attempts. Putting it in the Terms of Service I can imagine would only be a step towards making sure that the extra administrative fee isn't thrown out should it go to court.

    Now there are a LOT of variables so to whether this would happen, whether the added fee would be applicable under law, etc...

    Another simple example is that the chargeback is legitimate and the card was actually used without the *real* cardholder's consent... If you then try to hit that card for a fee due to the chargeback you could very quickly end up in hot water.

    The simple version is:
    1) You cannot charge a card which has successfully completed a chargeback against you.
    2) You cannot simply do whatever you want because it's in the Terms of Service as the law is above your Terms of Service.

    Now I wouldn't immediately dismiss a Terms of Service and clauses within just because it's a Terms of Service... It's still a contract - now as for whether the contract itself or its individual provisions are enforceable would be for a court to decide if it were to get to that point.

    If you really want a legally enforceable Terms of Service my advice is to actually go to a contract attorney and have them draw one up for you. You can tell them what you want it to cover, what you want protected from, what fees you want to assess and under what circumstances and they can draft a legally binding contract that is within the confines of the law.

    Oh well, I guess I better step down off of my soapbox.
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  16. #16
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    In terms of maintaining a long term relationship with a customer, I'm not sure it makes sense to penalize them for a false chargeback IF truly an honest mistake on their part. Certainly if they offer to cover some of your costs for the chargeback, you can decide then...
    Part of the cost of doing business - just try to keep the customer happy over the long-term so you can re-coup the cost.
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  17. #17
    On a false chargeback we'll contact them by post with an invoice letting them know it'll be passed to a debt collector next.

  18. #18
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    Now 5 months into this they file a chargeback to recover all funds.
    Almost all institutions require you to make a claim within 1-2 billing cycles. So you can't chargeback for 5 months worth of something. There are legal restraints on how much time can pass between the initial charge, the customer complaint, and the investigation period.

    You're also forgetting that Visa/Mastercard/Paypal/etc have contracts with merchants, some of which may preclude you from having authorization to further file suit against a customer that won a chargeback, once the banking institution has ruled in the customer's favor. To do so would put YOU in breach of contract with the payment processor.

    I've only seen these things end in three possible ways:
    1. Business deals with it, cost of doing business.
    2. Business is a run by morons, who attempt small claims, and fail.
    3. Buyer really is a problem person, and ends up as part of a criminal investigation.
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  19. #19

    Risky Practice at Best......

    I'm the Director of Compliance at Litle & Co, a company providing payment processing services for leading companies selling directly to consumers through multichannel and internet retail, direct response marketing.

    This is a risky practice at best. When merchants charge a fee to a cardholder who has previously issued a chargeback, it typically results in a subsequent chargeback. Additionally, the payment brands may file a compliance case against the merchant for charging a cardholder without authorization to do so.

    Chargebacks can be costly.........And, in an age where consumer is king and merchants are doing all they can to build revenue; focusing on proactively mitigating chargebacks through providing great customer service, easy access to information online, etc. is the best way to go. While it doesn't mitigate all chargebacks, it can save lots of wasted time, money and frustration in the long run.

  20. #20
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    Most of the posts in this thread address reducing the number of chargebacks that are a result of fraud.. but this is about chargebacks from supposedly legitimate customers.

    Let's think about this for a second.. there are 2 primary reasons a legit customer would do a chargeback.

    1. They just don't want to pay, or they have some kind of beef with you.

    2. They did so on accident, maybe their card was stolen and used and they did a chargeback on all charges that didn't look legit. Maybe they didn't recognize your company name or dba on their statement (Do you communicate to your customers what the charge will look like?)

    In the first case, this is probably not a customer you want anyway.. cancel the service and move on.

    In the second case, it was unintentional.. feel it out, is this a customer you want to pass that chargeback fee onto? Or would it be better to chalk it up to the cost of doing business? If it hasn't happened before, and they are a good customer, let them know what that chargeback cost you and then "waive" it and move on. Some customers may offer to pay it anyway, realizing their mistake. Do not charge a fee to the same card number.

    Ultimately this is something that should be decided on a CBC (case-by-cases) basis. The argument can be made that a chargeback fee should be in a TOS, in the same way a returned check fee would be. Personally I don't see any good reason to have it in there. If it's not an *extremely* rare occurrence you're probably doing something wrong.
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  21. #21
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    Quote Originally Posted by MikeDVB View Post
    If you really want a legally enforceable Terms of Service my advice is to actually go to a contract attorney and have them draw one up for you
    +1

    a badly written contract is only going to cause you grief when the worst happens; in some cases it could be worse, almost, than virtually no contract at all!

    the contract needs to be clear, set out mutual obligations between supplier and customer, and spell out how and when the contract can be terminated and what happens during normal and abnormal ending of the contract.

    if your service is provided cross-state or between international territories, it's even harder to get it right.
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  22. #22
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    I like what @pphillips says and agree there are really 2 types of chargebacks.

    1) those that do not want to pay and you should write off the fee and move on as quickly as possible.

    2) those that did so in error. Perhaps as a blanket response to fraud on their card or because they have a new person doing their A/P who did not recognize the charge.

    If dealing with option 1 then I let it go and move on as quickly as possible. Fortunately I can not remember the last time I had one of these chargebacks so it is probably like 5 years ago or longer.

    Option 2 does happen maybe once every other year. We deal with it on a case by case basis and generally do not charge them any additional fee. Although I think it could be looked at like a bad check fee and presented to them in this manner and would recommend having them pay via a check for this.

    I do not think having this in the TOS will help much and since you indicate it is only your 2nd chargeback since you started in business, I would probably not worry too much about it too much.
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  23. #23
    I worked for a hosting company several years ago and the company charged $75 to get back the cost of the charge back and the time it took for handling the charge back.

    The way it was done is the offender was sent a detailed bill as well as a copy of the tos they agreed to upon ordering on company letterhead asking for remittance and stating that if the bill was not paid by the due date (30 days) they would send the bill to collections and additional fees/ penalties may apply as well as damage to your credit report.

    They had about a 60% success rate with this and those that did not pay were turned over to collections.

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