Accepting credit card payments via the internet: what you need to know.
1. Closure of sales that would otherwise be lost. Do any of the following apply to your products?
- Price range up to $300,
- Easily available elsewhere either as the same product from another vendor or as a competitor product,
- Discretionary expenditure rather than "essential" to the buyer.
Products with these characteristics comprise most "impulse" internet purchases which depend heavily on a very user-friendly purchase path, usually a shopping cart with credit card payment facility. They form the thick end of the on-line market.
In contrast, if you are one of a few suppliers selling a higher-priced product that has few direct competitors and is important to the buyer, then requiring payment by cheque or interbank transfer will lose few sales.
2. Convenience in periodic payments for services.
Both your customers and your own accounting department benefit from
semi-automatic periodic payments. The customer is not called on to take positive action and you receive your payments on time.
1. Chargeback - this occurs when a customer who has not signed a credit card slip informs the card issuing company that the charge was not authorised. The customer does this by making a "false charge claim" in writing to the card issuing company. In the absence of a signed credit card slip, which is the usual situation in internet-mediated transactions, the card issuing company will take back the amount charged plus a fee, usually about $25. This process is known as a chargeback. You have a short period (usually one week) to provide a signed slip as evidence that the charge was authorised. Many chargebacks occur because the customer has forgotten the purchase or does not recognise the vendor name on his monthly card statement. If you do not have a signed slip, you can provide other documentary evidence (a signed order form or a courier delivery confirmation, for example) that the charge was authorised. In these cases, the customer usually agrees to withdraw the false charge claim and the chargeback is cancelled. HOWEVER, if the customer persists with the false charge claim, in the absence of a signed credit card slip you have ABSOLUTELY NO administrative recourse (i.e. recourse via correspondence with the card issuing company, bank or card processing company). You will lose the payment and have to pay the chargeback fee. If the sum of money is large and you have documentary evidence, you can go to court with some chance of winning. You will not win if the goods were delivered to someone other than the card holder (the card holder's spouse, for example), even if you have courier documentation proving that the goods were delivered to the customer. In most cases, even when the customer is located in the same country as the vendor, the court expenses are prohibitive and the loss has to be written off.
The chargeback situation is equally bad if you are selling services. Usually it takes three to six months for a chargeback to work its way through the system to you. This means that you could provide six months of services before you know that the customer is refusing to authorise the charges.
Note that obtaining an authorisation code from the card issuing company before processing a charge DOES NOT protect you against a chargeback. The authorisation code provided by the card issuing company guarantees that the card was issued and has not been reported lost, stolen or cancelled. It does NOT guarantee that the payment will be fulfilled if the card holder subsequently makes a false charge claim. A signed credit card slip is the ONLY protection you have against a chargeback. Unfortunately, many individuals know this and in certain sectors, such as on-line purchase of flowers for delivery to third persons, the chargeback rate is is high - 20% (one in five) in this example.
In summary, it is essential that your internet transaction system retains details of a transaction in a manner that allows you to send a printout to the card issuing company in the event of a false charge claim. This will help in cases where the customer has forgotten the purchase or does not recognise the vendor name on his card statement. It will not help if the customer persists with the false charge claim or if the card details were used
There is one procedure that you can follow to alleviate the chargeback
problem. Send your customer a printed release form authorising a
charge against the customer's card. This can be for a specific
amount once off, or for a periodic charge of the same amount, or the
periodic charge of a varying amount calculated as specified on the
release form. Ask the customer to sign and return the release,
preferably by post although a faxed signature is also valid. This
document will go a long way towards satisfying your card company in the
event of a false charge claim.
2. Fraud - the card number and full details of the owner for a large number of credit cards are in
public circulation without the card owners' knowledge. If you obtain an authorisation code (valid usually for three days) from the card issuing company,
the card company bears the loss which is incurred when the card owner of
a stolen card files a false charge claim. If you process card payments
in your shop or office, either by hand or via an on-line system, and you
fail to obtain an authorisation code from the card issuing company for
each transaction, you will bear the cost of any fraudulent transaction.
If you make use of a card processing portal that provides instant card
validation, you should clarify with the portal operators as to who will
bear the cost of a fraudulent transaction.
Reasonable vigilance can reduce successful fraud.
If the phone area code matches the postal address, phone the card owner
if in doubt.
If no phone number is provided, contact the customer by e-mail for
confirmation and check the following:
- does the e-mail address make sense? If the card address is Texas, the
e-mail address should not be a company operating in Brazil or Western
Samoa. Beware of hotmail.com and other free e-mail addresses.
- if the card address is in Germany, for example, does the customer know
that language? Many card fraudsters are located in east Asia, parts of the
former Soviet Union and AFrica and know only English as a second language.
- if the card address is in an English-speaking country and the card
owner's name is typical of a native speaker, is the English in the
e-mail idiomatic? Does the respondent use first and family names in the
When in doubt, do not process the order. A genuine customer will contact
you about it.
3. Fees - the percentage charged on a transaction by the card
issuing company, in addition to setup fees, can consume a significant
amount of a narrow profit margin. If you own a hotel or bricks and
mortar shop, the transaction fee can be quite low, as low as 1.5% for
some hotels. In contrast, internet transactions are high risk and the
rates are typically 4-5%. If you use a card processing gateway for
instant validation, there will be additional costs.
If you plan to process internet card transactions via your bricks and
mortar card accounts, be sure to clarify the legal validity of this
procedure. Are you permitted to process mail order or telephone orders?
In other words, does your contract permit you to process card data where
the customer is not present and the slip is not signed?
Accepting credit card payments makes good sense for customers you know,
who make periodic payments and who are located in another country. If a
customer is located in your own country, high fees will encourage you to
look at options such as standing orders for interbank transfer or
payment via the Post Office.
Once-off sales via the internet will incur fees plus significant losses
due to fraud and chargebacks.
Higher value transactions for the purchase of antiques and other rare or
unique items, or transactions of importance to the customer such as
deposits on vacation rentals can and should be carried out by bank
transfer or even by personal cheque. A trip to the bank or Post Office
by the customer is usually not too much trouble in these cases, and once
a cheque has cleared and the funds have been deposited, the burden of
evidence for a chargeback falls on the customer, not you.