Charge-Backs: A Deadly threat for E-Commerce Merchants

Worlwide there are about 1.2m credit cards which are either stolen or are at risk. You can imagine if each of these cards do a transaction worth just USD1000, there is a potential loss of more than USD1B to the ecommerce industry worldwide.
According to cybersource (http://www.cybersource.com) approximately 1% of accepted orders turn out to be fraud, and in 2005 we lost USD2.5B due to these.
That’s not all, merchants reject 4% of incoming orders due to suspicion of fraud! (You can imagine the losses here!)
In India, as we embark upon the e-commerce revolution, we need to learn and prepare ourselves from the deadly threat of fraud and more specifically chargeback.
What Exactly is a Chargeback?
A chargeback occurs when a customer contacts a credit card-issuing bank to initiate a refund for a purchase they made on their credit card.
For merchants chargebacks can be costly , because not only the dollar amount of sale is lost, but also there is an added processing cost and time.
The Chargeback Process
Let's take a look at the chargeback process used by Visa and MasterCard. The process is as follows:
1. The customer disputes a transaction by contacting their card-issuing bank
2. The card-issuing bank researches to determine whether the reasoning for the chargeback is valid.
3. A provisional credit is provided to the customer. The card-issuing bank initiates a chargeback process and obtains credit from the merchant's processing bank.
4. The merchant's processing bank researches the validity of that chargeback.
5. The chargeback amount is removed from the merchant's account and the merchant's processing bank provides written notification to the merchant.
6. Did a processing error occur? If so, the sale is re-presented to the card-issuing bank for corrections.
7. The merchant provides documentation to remedy the chargeback. If the provided documentation is found to be satisfactory, the chargeback is declined and the customer is once again charged for the sale. If the documentation is found to be unsatisfactory, the chargeback is successful and the process ends.

Look forward to my next posting on the reasons and remedies for avoiding Charge-backs.