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Trouble in Credit Card Processing Paradise: Refunds, Chargebacks, and the MATCH List

Every small business will have to deal with refunds, chargebacks, and maybe the MATCH list

If you have an online or physical store, then dealing with refunds and returns are an everyday fact of life. In fact, if you sell online, up to 30% of such sales are returned. Not only do you have to deal with return shipping and restocking, you have to give people their money back too. Sadly, if they paid with a credit card, giving a refund isn’t free to you. This is why we think it’s helpful for you to understand what credit card refunds, credit card chargebacks, and the MATCH list are in credit card processing. We’ll explain how they fit in the credit card processing workflow too.

Let’s start with the easiest and the least painful: refunds.

What is a Credit Card Refund?

When a customer is unhappy with a purchase, believe it or not, you’ll actually want them to come to you for a refund instead of doing anything else. For one, it gives you a chance to make the customer happy again, so they might come back in the future and buy more from you. For another, if this unhappy customer goes to their credit card company and asks for money back (this is called a chargeback), it will cost you all sorts of other problems down the road.

We’ll discuss chargebacks in the next section. Right now, let’s focus on how credit card refunds work.

When a customer pays with a credit card, your payment processor charges you a fee and the credit card association charges you a fee. The credit card association’s fee is called the interchange fee.

When you issue a customer a refund, the credit card association refunds you the interchange fee. Your payment processor typically keeps their fee.

So, giving a credit card refund costs you some money, but it’s a cost of doing business. It doesn’t affect your business’s ability to process credit card charges in the future.

What is a Credit Card Chargeback?

A credit card chargeback is a formal payment dispute between the credit card holder and the merchant. It has its own dispute procedure and its own costs. The issuing bank, your acquiring bank, and your payment processor are all involved in this procedure, and they all want you to pay them for their time.

Some dissatisfied customers think a credit card chargeback is the same as a refund. But it’s not. The merchant initiates a refund. The issuing bank—i.e. the bank that the cardholder pays credit card bills to—initiates the chargeback.

A Chargeback Can be Expensive and Have Other Bad Consequences

A credit card chargeback typically costs a merchant $25 but can cost as much as $100. You have to pay this as soon as the credit card holder initiates a chargeback. You don’t get the money back even if you win the dispute. A credit card holder has between 60-120 days to file for a chargeback.

Not only do chargebacks cost you money, if you have too many chargebacks, your acquiring bank might stop doing business with you. This is because they think there’s something wrong with the way you do business (e.g. your website shows a great product but the actual product is shoddy and defective). Because acquiring banks front you the money from credit card sales and they think all your customers will want their money back, they will peg you as an unacceptable credit risk. And they would stop doing business with you.

Standard Reasons for Credit Card Chargebacks

Technically, there are a set of acceptable reasons for chargebacks. If a credit card holder’s reason doesn’t fit within these acceptable reasons, then they won’t be allowed the chargeback.

Practically, though, these reasons cover a lot of territory. The most popular reasons include:

  • Actual fraud when the credit card number has been stolen
  • Item not shipped or arrived damaged
  • Refund not received after the customer returned the item
  • Item or service received but not as described, was defective, or was damaged
  • Business name on statement not the same as business name providing goods or services
  • Late cancellation of subscription

As you can see, with some of these reasons like actual fraud, there’s not much you can do about the chargeback request. But you can often do something about other reasons like making sure your business name is the same that shows on the credit card statements, reminding customers that they need to cancel their subscription or they’d be charged, or refunding an item quickly after you receive a return.

What is Excessive Chargeback?

The payment processing world often works on statistics. So, if your business has 1% or less of credit card chargebacks, you’re doing OK.

As for fighting a chargeback, yes it’s possible. You’d still have to pay your basic chargeback fee. But, if you win, then there’s no record of the chargeback. This way, you might be able to successfully keep your chargeback percent at or below 1%.

However, it is the issuing bank who decides whether or not a chargeback request is valid. And, for the issuing bank, its relationship with the cardholder is more valuable than its relationship with a merchant. So, they tend to rule in favor of the cardholder far more often than for the merchant.

What is a Merchant Account Reserve?

If you have a lot of chargebacks, the first step a payment processor might do (instead of stop doing business with you) is to set up a reserve account for you. A reserve account is a bank account in addition to your regular merchant account. It acts as a buffer so that you’ll always have money to pay the credit card chargeback costs.

How Payment Processors Fund Reserve Accounts

The payment processor has access to this reserve account, but you do not, even though it’s technically your money. Once a reserve account is set up, there are several ways to fund it.

If you have a very risky business, your acquiring bank may require you to fund a reserve account even before they agree to process credit cards for you. More typically, though, some of the money from your credit card sales will first go into the reserve account to fill it to a certain amount. Once you reach that amount, you might receive 100% of your credit card sales. Or you might have to continue to deposit into the reserve account but can take out the money you put into the reserve, say, six months ago.

If the acquiring bank had to take money out of the reserve account to cover chargebacks, then you basically won’t get that money back. With some reserve accounts, you’d have to fill the reserve before you get 100% of your credit card sales revenue. And you’d have to refill the reserve account the same way you filled it before.

Acquiring Banks Use the Reserve Account to Protect Themselves

Using a reserve account, your acquiring bank has guarantees that they can recoup the money they fronted you for credit card sales. Without one, they might have a hard time getting their money back once you’ve taken the money out of the merchant account.

Both a traditional payment processor and a third-party processor can require you to open a reserve account. You can rehabilitate your business off your reserve account if you can lower the chargeback percentage and keep it there for a long time.

What is the Credit Card MATCH List?

The credit card MATCH list is basically a list of businesses with really bad credit. Acquiring banks use this list to decide whether or not they want to process credit cards for you. And, if you’re on the MATCH list, the usual answer is no, they don’t want to do business with you.

MATCH stands for Mastercard Alert to Control High-risk Merchants. As the name suggests, Mastercard keeps this list. Mastercard charges a fee for acquiring banks to check this list. Only acquiring banks can place and remove merchants from this list.

How to be Put on the MATCH List

A merchant can get on the credit card MATCH list for a number of reasons. Some reasons they have control over and others they do not. Some examples of reasons to be on the list include:

  • Credit card info stolen at the merchant’s end
  • Merchant engaged in money laundering activities
  • Excessive chargebacks (defined as, for any month, chargebacks exceeding 1% of the amount charged through Mastercard and the amount was $5,000 or more; American Express has its own standard for excessiveness)
  • Excessive fraud (defined as, for any month, fraud-to-dollar sales ratio exceeds 8% and constitutes 10 or more such fraud charges totaling $5,000 or more)
  • Merchant bankruptcy
  • Violation of Mastercard or American Express rules
  • Violation of credit card industry data security standards (called PCI standards)

If your business is on this list, it’ll be very hard to nearly impossible for you to set up credit card processing.

For the credit card industry, putting someone on the MATCH list is sort of a last resort for risk management. So, it’s not so easy to be put on the list. Nevertheless, it’s best for you to do everything possible to stay clear off the list.

How to Get Off the MATCH List

If you can prove that your acquiror put you on the MATCH list by mistake, then you can get off the list right away. The only other way to get off the list is to age off the list, which takes five years. If you make another violation during the five years time period, the clock resets and you’ll have to wait five more years.

The Credit Card Processing Workflow

In our earlier article, we sketched out what the credit card processing workflow looks like if nothing goes wrong. That is to say, it’s the workflow when a customer buys something with a credit card and lives happily ever after with their new purchase. Now, we’re going to add a dose of reality to the workflow.

Here’s what the credit card processing workflow looks like when you have to deal with credit card refunds and chargebacks. We again start with when a person takes out a credit card or e-wallet at a store’s checkout to pay for a purchase:

  1. Person swipes, taps, or dips the card into the card terminal.
  2. The terminal reads the card information and sends the information and the amount charged to the payment processor.
  3. The payment processor directs traffic and sends the information to the correct card network.
  4. The card network performs various checks for fraud. If the information is encrypted (usually via tokenization), the card network decrypts the information and sends it securely to the issuing bank.
  5. The issuing bank checks the credit limit of the cardholder. If the purchase is within limits, the bank clears the purchase.
  6. The clearance goes to the acquiring bank and the payment processor, which, in turn, sends a clearance message to the merchant.
  7. The cardholder walks away with the purchase.
  8. The acquiring bank fronts the purchase by depositing the charged amount into the merchant account.
  9. If there is a reserve account, money might be moved to the reserve account to ensure there are enough funds in that account.
  10. The payment processor takes out its payment processing fees.
  11. The merchant takes out the rest of the money and deposits it into their own bank account. The acquiring bank and the payment processor can’t touch the money in this account.
  12. If there is a return or chargeback up to 120 days after the credit card transaction (can be up to 180 days for international transactions), the fees are charged and taken out of the merchant account or, if one is set up, the reserve account.

Understanding the Mechanics of Credit Card Processing is Important for Every Merchant

This article is the second article on the mechanics of how credit card processing works. Ordinarily, it’s not crucial for you to understand every little aspect of credit card processing. But if you do understand the process in at least a general way, you’ll have an idea of where to start if you have to handle disputes in the future (with customers or with your payment processor).

You’ll also have a better idea of how your credit card processor is charging you for credit card processing, including refunds and chargebacks. When you’re ready to shop around for better credit card processing rates, you’ll know the lingo.

Lastly, the processing workflow in this article is what the industry currently uses. It’s been in use in a very similar form since the 1950’s. Once you understand how the industry works today, you’ll understand how some fintechs are trying to shortcut this workflow. And you might be able to use some of these shortcuts to save your business processing costs.

Interested in starting and running a small business? Here’s the beginning of our step-by-step guide: What to do right after getting that great business idea.

Questions? Comments?