Robbie runs a shop selling electrical guitars and speakers. He sold one of his premium guitars for $2,300 and, as the customer lived locally, dropped the package off to him that same day. As the customer was at home, he handed the package over directly and did not get a signature or photo evidence that the exchange took place.
A few days later, Robbie received an email from his payment processing company telling him that the customer had asked for a chargeback. The customer told his bank that he never received the guitar even though the money had left his account. The bank decided that, based on the evidence available to them, the chargeback should be paid, and Robbie’s payment processing company charged Robbie $2,300 which was given back to the customer.
Robbie was adamant the customer received the guitar, and the chargeback was fraudulent. The payment processing company told Robbie there was nothing they could do as it was down to the bank to investigate. The bank had asked Robbie for evidence to support his claim the customer received the guitar, but Robbie could not provide any. Robbie was $2,300 worse off. Robbie thought the payment processing company could have done more to help him gather evidence for the bank and flag that the customer was unscrupulous.
The relationship between the merchant (Robbie) and the merchant’s bank is governed by a contract between them relating to the card-processing facility, which usually includes a merchant agreement and operating guide.
Merchant complaints often arise when the merchant has been the victim of fraud. A fraudster may have used a stolen card to pay for the merchant’s goods or services – usually by phone or internet. Such transactions, being unauthorised, will be charged back to the merchant. Both the merchant and the cardholder are innocent victims, but the merchant is liable for such transactions under its contract with the bank.
From the information available, we decided that the payment processing system had robust processes in place to limit their merchants from being held liable for chargebacks. However, the terms and conditions place the risk of fraudulent transactions onto the merchant.
The payment processing company offered $500 as a gesture of goodwill to settle the complaint. Although he was still at a financial loss, Robbie accepted this offer.
Insights for consumers
We understand Robbie’s frustration at having the transaction reversed when he was not at fault for accepting the payment. Online credit card transactions always carry risk, and he had agreed to bear that risk. The bank (via the payment processing company) was entitled to reverse the alleged fraudulent transaction and, unfortunately, Robbie had to bear that loss.
Chargebacks are a risk of carrying out e-commerce – a risk that banks are not willing to bear and which they pass back onto the merchant. Merchants should send parcels with a recorded delivery and keep organised and detailed records of sales.