the millions of credit card transactions generated around the world daily, it is
inevitable that a few will become "exception items" as a result of a
customer question or dispute, inaccurate or incomplete transaction information,
a processing error, or an indication of potential fraud. Like all payment
systems, the card issuers and the merchant banks have established a
communications process to resolve these situations in a timely and efficient
manner. Exception items may be a fact of life - but they don't have to be a way
of life. As a merchant or service
business, you are your own best defense against most exception item situations.
exception items can be costly to you, it is important that you understand what
they are, why they occur, and what to do when you get one. And, since exception
items are often preventable, we’ve outlined some information you can use to
minimize their reoccurrence.
Are Exception Items?
exception item is essentially a communication device by which a transaction
question, dispute, or error is initially sent by the card issuer to the merchant
bank for response or resolution. Exception items are copy requests and
copy request is a request made by the card issuer to your merchant bank for a
copy of the sales draft of a particular transaction. A chargeback is the
reversal of the dollar value, in whole or in part, of a particular transaction
by the card issuer to your merchant bank, and usually, by your merchant bank to
issuers are responsible for initiating copy requests. They do so most often
because cardholders question or dispute transactions appearing on their billing
statements. A card issuer may also initiate a copy request for legal reasons
such as to comply with a subpoena. The card issuer sends the request to the
appropriate merchant bank for fulfillment. The merchant bank has 30 days from
the date it receives the copy request to deliver a copy of the draft to the card
drafts may be stored on-site at your establishment, at a central merchant
location if you are part of a chain, for example, or with your merchant bank.
Depending on where drafts are stored, your merchant bank may be able to respond
on your behalf or may need to send the request on to you for response. If you
receive a copy request, retrieve the appropriate sales draft, make a legible
copy of it, and fax or mail it to your merchant bank within the time frame
specified. Your merchant bank will then forward the copy to the appropriate card
issuer. Legibility of the copy is important because of the growing use of
imaging technology by merchant banks in sending copies to card issuers. When the
card issuer receives the copy, the issuer will then send it to the requesting
cardholder. The initial question or issue the cardholder had with the
transaction is resolved most often by this means.
you store sales drafts on-site, retain the "merchant copy" of the
drafts (or copies of them, e.g., microfilm copies) for three years from the
respective transaction dates to ensure your ability to fulfill copy requests.
copy requests is very important. When copy requests are not fulfilled, or not
fulfilled within the prescribed time period, they almost always result in a
chargeback for which you have no recourse. So, if you store sales drafts, it is
in your best interest always to respond quickly to copy requests.
merchants using data-capture systems may fulfill copy requests with
"substitute drafts" if the request stems from a cardholder questioning
the transaction. A substitute draft is a printout of specific required
information which the merchant bank provides to the card issuer in lieu of a
copy of the sales draft. For all other data capture transaction retrieval
requests (i.e., those which do not stem from a cardholder request), you must
provide a copy of the sales draft or transaction record. TOP
your establishment does not store the merchant copy of the sales draft - if this
function is handled for you by your merchant bank - you are not likely to
receive a copy request. If you are part of a chain and drafts are stored by your
headquarters or at another central location and you receive a copy request, you
should forward it promptly to the appropriate area within your company for
copy requests, chargebacks are a dispute communication device initiated by card
issuers. A chargeback is a reversal of a sales transaction. This means that the
dollar amount of the original transaction that was credited to your account when
you deposited it with your merchant bank is now debited, in whole or in part,
against your account.
arise for many reasons, primary among which are customer disputes, potential or
actual fraud, processing errors, authorization issues, and nonfulfillment of
copy requests. Although you probably cannot avoid chargebacks completely, you
have considerable "preventive" control. Many types of chargebacks
result from easily avoidable mistakes and omissions - so, the more you know
about proper procedures, the less likely you will be to inadvertently do (or
fail to do) something that might result in a chargeback.
course, chargebacks are not always the result of something merchants did or did
not do; sometimes errors are made by merchant banks, card issuers, and
cardholders. Working with card issuers and merchant banks, the credit card
companies have implemented very sophisticated systems that have significantly
reduced chargebacks and vastly improved the chargeback process. Today, potential
chargebacks initiated by card issuers are checked for validity. When detected,
invalid items are returned automatically to card issuers, so merchants and
merchant banks never even see them. In addition, many merchant banks have
systems that routinely review most exception items, allowing these parties to
resolve issues when possible without sending the item on to the merchant. Thus,
the kinds of chargebacks which the merchant finally receives are generally those
that only the merchant can respond to, or those which cannot otherwise be
remedied. You should consult with your merchant bank if you have any questions
regarding what your liability is for chargebacks.
often are generated as a result of a customer dispute about a particular
customer may dispute a transaction because a credit has not been processed when
the customer expected it would be; because the merchandise ordered was never
received; or because the service was not performed as expected. Because these
kinds of chargebacks may be indicative of customer dissatisfaction and may carry
the potential for future lost sales due to customer attrition, you may want to
address the underlying cause or causes of them as part of your customer service
also may result from errors made at the point of sale. These might include, for
example, processing the same transaction more than once, accepting an expired
card without getting an authorization approval, and making a mistake when
key-entering an account number at a point-of-sale terminal. Other situations
that can give rise to chargebacks include not depositing transactions within the
prescribed time, and not fulfilling a request for a copy of a sales draft.
you may be able to "remedy" a chargeback by providing additional
information about the transaction or about actions you took regarding it. For
example, if the reason you received a chargeback is that a cardholder claims
credit has not been received for returned merchandise, you may be able to
resolve the issue by providing proof that you submitted a credit on a specific
date. You would send this information to your merchant bank within the specified
time frame. Although not every chargeback can be remedied, many are resolved
without the merchant losing the sale. This Guide identifies cases where there is
no remedy, thereby saving you the time and expense of needlessly contesting the
can effectively reduce the occurrence of chargebacks by taking a few simple
precautions and following a few simple procedures. TOP
at the signature panel on the back of the card. Look for any signs of scratching
or erasing. If the panel has been torn or worn away, you will usually see the
word VOID printed underneath it. If the card is not signed, ask the cardholder
to sign the card and, if permitted by state law, to show you government-issued
identification such as a driver's license, passport, or military ID. Once the
cardholder has signed the signature panel on the card, compare this signature to
the signature on the identification. If they are spelled the same, proceed. If
the cardholder refuses to sign the signature panel, do not accept the card.
the "Good Thru" date is before the transaction date, the card has
expired. You must obtain an authorization approval using the expiration date
shown on the card. If you do not get an authorization approval, the transaction
could be returned to you as an "expired card - no authorization"
not complete a transaction if the authorization request was declined. Do not
repeat the authorization request after receiving a decline.
you have a point-of-sale terminal with a magnetic stripe reader, swipe the card
through the reader for every face-to-face transaction. If the terminal isn't
working or a card's magnetic stripe cannot be read, key-enter the account
information and make an imprint of the embossed information onto the sales draft
using a manual imprinter.
if the transaction is authorized and the cardholder signs the draft, if the
sales draft does not have an imprint of the embossed account number and
expiration date, the transaction may be charged back to you for "no
imprint" if the cardholder also denies participating in the transaction.
the cardholder's signature on the sales draft for every face-to-face
transaction. Failure to obtain the cardholder's signature could result in a
chargeback for "no signature" if the cardholder denies authorizing or
participating in the transaction.
the cardholder's signature on the sales draft to the signature on the back of
the card before returning the card to the cardholder. The signatures should
appear to be the same and the names should be spelled the same. Signatures that
are clearly not the same may be indicators of potential fraud.
Some credit cards now have a digitized cardholder signature on the front of the
card for easier viewing; however, these cards also have a signature panel on the
back of the card. Sales staff must always compare the customer's signature on
the sales draft with the signature on the back of the card.
that the transaction information on the sales draft is complete, accurate, and
legible before completing the transaction. An illegible draft, or a draft which
produces an illegible copy, may be returned because it cannot be processed
properly. The growing use of electronic scanning devices by merchant banks for
the electronic transmission of copies of drafts to card issuers makes it
imperative that the copy being scanned be very legible.
your establishment does not accept merchandise returns or give refunds, or if
your policy is to limit refunds (e.g., permitting "in-store credits"
only), this information must be disclosed to the cardholder at the time of the
transaction. Your policy should be pre-printed on your sales drafts; if not,
write or stamp your refund and return policy information on the sales draft near
the customer signature line before the customer signs; be sure the policy shows
clearly on all copies of the sales draft. Failure to disclose such policies at
the time of the transaction will be to your disadvantage should the customer
wish to return the merchandise.
only one imprint of the card for each transaction. Making more than one imprint
can lead to duplicate deposits and increase the chance for a chargeback. If you
need to redo a sales draft because of an error, write VOID across the incorrect
draft, inform the cardholder, and tear up the incorrect sales draft in view of
that transactions are entered into point-of-sale terminals only once - and
deposited only once. Entering the same transaction into a terminal more than
once, or depositing both the merchant copy and the bank copy of the sales draft
with your merchant bank, or depositing the same transaction with more than one
merchant bank can all result in "duplicate transaction" chargebacks.
batches and deposit sales drafts with your merchant bank as quickly as possible,
preferably within one to five days of the transaction date do not hold on to
them. Failure to close batches and deposit drafts in a timely manner could lead
to chargebacks for "late presentment."
credit vouchers with your merchant bank as quickly as possible, preferably the
same day as the credit transaction is generated. Failure to issue credits in a
timely manner could lead to chargebacks for "credit not issued."
your establishment stores sales drafts, always respond to a request for a copy
of a sales draft within the specified time frame. Send a legible copy of the
requested sales draft or draft substitute to your merchant bank. Failure to
respond, or failure to respond within the specified time frame, almost always
leads to a chargeback for "non-fulfillment of a copy request" for
which generally there is no remedy.
a customer requests cancellation of a transaction which is billed periodically
(monthly, quarterly, annually), always respond to the request and cancel the
transaction immediately or as specified by the customer. As a customer service,
you should advise the customer in writing that the service, subscription, or
membership has been canceled and state the effective date of the cancellation.
Failure to respond to customer cancellation requests almost always leads to
the merchandise or service to be provided to the cardholder is delayed, advise
the cardholder in writing of the delay and the new expected delivery or service
date. Not only is this good customer service, but it also may help avoid a
chargeback for "merchandise not received" or "service not
the merchandise ordered by the cardholder is out of stock and delivery will be
delayed or this item is no longer available, advise the cardholder in writing
and offer the cardholder the option of purchasing a similar item or canceling
the transaction. Do not substitute another item unless the customer agrees to
accept it. By giving the customer notice and the option to cancel, you may help
avoid a customer dispute regarding the merchandise and a possible chargeback for
"merchandise not as described."
is very important that your customers be able to recognize transactions made
online or at your establishment when they appear on their credit card
statements. It is especially important that cardholders are able to recognize
your establishment's name. When cardholders don't recognize transactions, they
call their card issuer to question or dispute the item. The card issuer may then
request a copy of the transaction to aid the customer in identifying it.
Sometimes, these questions lead to chargebacks.
To ensure that your establishment's name
is recognizable to your customers, ask your merchant bank to show you how your
name appears in the settlement record (this is the way your name will be passed
through the processing system to the card issuer for posting to the cardholder's
statement). Verify that the name matches the name you show on your sales drafts
and the receipts you give your customers. Generally, the name used for
settlement should be the name you use for your business signage. This may help
you avoid the $25 fee that can be charged when a card issuer requests
information about a transaction which a cardholder does not recognize. TOP
neither the card nor the cardholder is present at the point of sale, Internet,
mail order and telephone order transactions have a higher incidence of fraud
associated with them than retail transactions. Since the card is not present,
many of the fraud detection and prevention devices built into credit cards
cannot be used for mail order and telephone order transactions, thus creating a
greater need for merchants to exercise care and to follow good risk control
procedures when accepting credit cards as a means of payment for these types of
Address Verification Service (AVS) was designed specifically for Internet, mail
order and telephone order merchants to help them minimize the risks inherent in
these transactions. Using AVS allows a merchant to verify the cardholder's
billing address with the card issuer at the same time that an authorization is
requested. The card issuer compares the address sent by the merchant to the
billing address it has for that customer account and sends back a code
indicating the results of that comparison (e.g., exact match on both the street
address and the ZIP code, no match on either, or a partial match on either the
street address or the ZIP code). This additional information helps merchants
make more informed decisions about whether or not to complete a transaction.
merchants accepting these non-face-to-face transactions also accepted liability
for these transactions in the event they proved to be fraudulent. Although this
rule remains true today, with the advent of AVS, merchants have gained two
important bonuses. AVS is a risk management tool that provides important
additional information about the transaction and enables you to respond to a
"fraudulent transaction" chargeback under certain conditions.
may be able to resubmit a "fraudulent transaction" under the following
the transaction received an authorization approval;
the transaction received an AVS "exact match" response (meaning
the address and the ZIP code both matched); and
the merchandise was delivered to the AVS address (the cardholder's
billing address) and you have the carrier's certification of delivery.
the AVS result was other than an exact match, if merchandise was sent to an
address other than the address used for the AVS request, or if the cardholder
still certifies in writing that he or she neither authorized nor participated in
the transaction, then this particular chargeback cannot usually be remedied.
recurring transaction is usually non-face-to-face and is one for which a
cardholder has authorized a merchant to debit the cardholder's credit card
account on a continuing and periodic basis for goods and services received over
the same period of time. Examples of recurring transactions include annual
renewal of subscriptions, periodic payment of insurance premiums, utility
charges, health club dues, monthly shipments of flowers, and others. Typically,
payments continue automatically until and unless canceled by the cardholder.
cardholders call their card issuers because they are having difficulty canceling
these periodic debits, any recurring transactions processed after the
cardholder's first attempt to cancel may result in a chargeback. If you offer
such a service, and a customer requests cancellation, take prompt action on the
request and follow proper transaction cancellation procedures to avoid potential
chargebacks. If the customer has signed a "no cancellation" contract
agreeing to pay a specified amount, you may have a legal right to payment by
some other means even if the cardholder cancels the recurring payment from his
or her credit card account. TOP