Online fraud and charge-backs

A charge-back , or cancellation of puchase, is when a customer demands a refund from their credit-card company. The rights of the consumer are quite powerful in this area as card providers like Visa and Mastercard have set an international standard period for charge-backs that currently stands at six months.

Banks protect themselves against charge-backs and the Merchant Service agreement you have with your bank allows them to transfer liability for payments of charge-backs to you. As an additional security measure, the bank may retain the payment from the customer for a period of time (e.g. 30 days) before crediting your account with the funds.

Many Merchant Services also need you to lodge a bond to cover any charges incurred through fraud and charge-backs. This sum will vary depending upon your average transaction value and monthly turnover as well as less tangible features like the time it takes your business to fulfil orders and consequently the exposure to risk of charge-back or fraud. (More detail on exposure to risk in the next section). You can estimate the size of bond by discussing this with your acquiring bank. When you come to use the free online payments comparison tool, you will find that you can adjust the size of the bond on the "Acquiring costs" page. The tool will then assume that you have to pay interest on this sum in its calculations. This will give you a true cost comparison between the PSP solutions that use merchant services and the other types of solution that do not need acquiring services.

As Internet transactions fall under the banner of Customer Not Present and because many Internet sales are carried out ‘cross-border’ (potentially increasing the risk of fraud) there is no way to reduce the six -month window in which a charge- back could occur.

Even the processes of Authorisation and Capture (where the Acquiring Bank approves the card transaction) do not provide protection against charge-back, although insurance against loss can be arranged separately through a trade body or sometimes the Payment Gateway. Outstanding customer service is the best protection.

Having good terms and conditions on your website can limit the charge-backs you experience but nothing beats good service. Note that your charge-back level will affect your banks assessment of your risk.

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