You, the Credit Card Merchant, obtain your "Merchant Account" from a "Sponsoring Bank", sometimes called an "Acquiring Bank" or "Merchant Bank". It is called a Sponsoring Bank because the bank is sponsoring you, the Credit Card Merchant, as a business that is qualified to accept credit cards. Your Sponsoring Bank typically uses a "Processor" such as ECHO to acquire the credit card transactions from you and process them through the bank system.

By giving a credit card to a Cardholder, the Issuing Bank is granting the Cardholder the rights to borrow money from the Issuing bank (up to a "Credit Limit") for the purposes of purchasing goods and services from a bona fide Credit Card Merchant such as yourself.

Your Processor accesses the Visa/MasterCard network to communicate the authorization transaction (containing a "Transaction Amount") to the Issuing Bank to ensure that the credit card is valid and that the Transaction Amount does not exceed the Cardholder's credit limit. The authorization transaction also puts a "hold" for the Transaction Amount on the Cardholder's credit limit. That way, the funds are available to you when you submit the corresponding "Deposit" transaction.

If the authorization succeeds, and you subsequently (or at the same time) submit the Deposit transaction, you are informing (in effect promising) your Processor, your Sponsoring Bank, and the Issuing Bank that you are prepared to deliver to the cardholder the goods and services that are expected by the cardholder, and that you wish to receive payment for these goods and services from the Issuing Bank.

Your Processor (e.g. ECHO), based on your Deposit instruction, then again works within the Visa/MasterCard network to request the Issuing Bank to deposit the "Net Settlement Amount" (i.e. the "Transaction Amount" less the "Discount Amount") into your bank account at your Sponsoring Bank.

The Discount Amount (i.e. the Discount Rate times the Transaction Amount) and other fees, such as transaction fees, are used to pay the various entities that help you collect from the Issuing Bank. In particular, the Issuing Bank, the Visa/MasterCard Network, the Sponsoring Bank, and the Processor all share in dividing up the Discount Rate proceeds.

OK, now lets talk about protection.

However, this promise from the Issuing Bank does not come without some strings attached. When you submit the Deposit transaction, you are, in effect, promising the Issuing Bank that you will deliver to the Cardholder the goods and services that you promised to the Cardholder.

In effect, the Issuing Bank's promise to pay you is only as good as your promise to the Issuing Bank that you will deliver "expected" goods and services to the Cardholder. The word "expected" is important. If you have made representations to the Cardholder, leading the cardholder to create "expectations" in his/her mind, then by accepting a Credit Card for payment, you are in effect promising the Issuing Bank that you have or will "make good" on those expectations.

So it is a two way street. If you make good on your promises to satisfy the Cardholder's expectations, the Issuing Bank will make good on its promise to pay you the Net Settlement Amount.

In order to expedite your payment of the Net Settlement Amount, the entire system operates on the basis of trust with you. When you submit the Deposit, your Processor, your Sponsoring Bank, and the Issuing Bank all TRUST that you have or will fulfill your commitment to satisfy the Cardholder's expectations. The system does not ask the Cardholder if he/she is satisfied before you get your payment, the system TRUSTs that you have or will (in the immediate future) satisfy the Cardholder, and based on this TRUST, your Processor instructs the Issuing Bank to transfer the Net Settlement Amount into your account at your Sponsoring Bank. In fact, that is one reason why your Sponsoring Bank is called "Sponsoring". The bank is sponsoring you as a trustworthy merchant - one that consistently fulfills the Cardholder's expectations.

Now, here is the rub. What happens if the Issuing Bank gets informed by the Cardholder that you did not fulfill the Cardholder's expectations?

Maybe the Cardholder thinks that he/she never ordered the goods or services that showed up on the Cardholder's credit card bill from the Issuing Bank.

Maybe the Cardholder received the goods and services, but they did not meet the Cardholder's expectations, so the Cardholder wants to return the goods (if any) and wants his money back (e.g. a refund).

Well, the Issuing bank still is operating on the TRUST system. They assume that either the cardholder is mistaken, or that you, as a trustworthy merchant have or will "make good" on your promises to the Cardholder. But the Issuing Bank is obligated to investigate the Cardholder's complaint.

To resolve a Cardholder complaint regarding non receipt of goods or services, the Issuing Bank first (typically) sends a Retrieval Request to your Processor. Your Processor (e.g. ECHO) will then forward this Retrieval Request to you. The Retrieval Request is basically asking you, the Credit Card Merchant, for proof that you sold and delivered the disputed goods or services to the complaining cardholder. This proof usually consists of a document, in your possession, that has been signed by the Cardholder acknowledging the Cardholder's receipt of the goods or services that were charged on the credit card.

If you can prove in a timely fashion that you delivered the goods or services to the Cardholder, then your Processor will forward that information to the Issuing Bank, who in turn will inform the Cardholder, and the complaint is usually dropped (but not always).

Important!. If you do not have such a "proof" document, or something equivalent, or if you cannot find and deliver a copy of that document to your Processor in a timely fashion, then you need to know that the system will assume that the Cardholder is right and that you did NOT deliver goods and services as you promised when you submitted the deposit transaction. When this happens, several things occur. First, the Issuing Bank submits a chargeback to your Processor. Simultaneously, the Visa/MasterCard network takes the original Transaction Amount of the disputed transaction out of your bank account at the Sponsoring Bank. (Often, this is a deduction from the net settlement for your most recent deposit transactions). Finally, the chargeback goes on your Merchant Account Record.

Are chargebacks bad? The answer is YES - you need to do everything you can to avoid them. The system understands that if you do any volume at all, some small number of chargebacks may be unavoidable, and part of the cost of doing business. (You should assume this too in your budgeting). However, if you get too many chargebacks, then the system starts wondering about the TRUST it put in you. This jeopardizes your standing as a Credit Card Merchant. If it gets too bad, then your Merchant Account may be terminated by your Sponsoring Bank, and you may find it impossible to find another Sponsoring Bank. If it appears that you intentionally created many chargeback situations, then you may be liable for charges of fraud, and criminal prosecution.

OK, so part of your responsibility as a Credit Card Merchant is to avoid chargeback situations. It is not all that hard. Here are some guidelines to help you do that.

If you can physically touch the Cardholder's card (e.g. the card presented to you by the Cardholder), then you should verify the signature on the back of the card matches both the name on the front of the card, and the signature on your sales slip. If you can, ask for another form of identification to give you more confidence that the person who has physical possession of the card is in fact the Cardholder.

If you cannot physically touch the card, (e.g. as in phone sales, mail order sales, and Internet sales), then it is more difficult to verify that the person that is using the card number is in fact the Cardholder, and this increases the risk that someone is fraudulently using a stolen card number. In this case you have several methods for verifying that the person providing the card number is the Cardholder.

1. Get the Cardholder's name and telephone numbers (home and business phone), and if you are willing, tell the presumed Cardholder that you intend to call him back before delivery. Fraudulent shoppers (people who use credit card numbers that do not belong to them) will not want to give out too much information to you that can be traced back to them.
   
2. If you are using the Internet to capture orders, then require your Internet order-taking software (or service company) to capture and record as part of the transaction the shopper's phone number and Email address (and verify that the Email address contains a valid domain name). Also require your software or service bureau to capture and record the shopper's IP address. If fraud can be shown, then the IP address, along with the time and date can be used to track down the fraudulent party. (This threat may prevent some attempted fraud). Also require your Software or Internet order-taking service company to post on the Internet a warning to shoppers that attempted credit card fraud will be prosecuted to the fullest extent of the law.
   
3. For domestic orders, take advantage of the address verification service offered by your Processor. Address verification requires that you capture the Cardholder's billing address (the street number and zip the Issuing bank uses to bill the Cardholder), and then submit that address as part of the Authorization transaction to your Processor. Your processor will attempt to verify the address with the Issuing Bank. If address verification fails completely (for Domestic addresses), you may wish to not accept the order, or to confirm the order by telephone call to the Cardholder. Address Verification is available through many brands of PC credit card processing software, ECHO¡¯s ECHOBoX service, and through most reputable companies that offer a service for Credit Card order-taking over the Internet.
   
4. Do not ship to an address that is not the same as the Cardholder's billing address (as used in address verification). A crook, using a stolen card number, will not usually want you to ship to the real cardholder's address, even if he knows it.
   
5. Know your Cardholder personally if at all possible. If you have a repeat customer, and you know them personally, then you might be able to relax some restrictions you might otherwise apply.

If you cannot verify to your satisfaction that the person presenting the card number is, in fact, the Cardholder, then you need to decide the risk you are willing to take. If you are delivering low cost services, or products for which your unit and shipping costs are low (e.g. software or manuscripts that are delivered over the Internet), and you have taken reasonable precautions (e.g. as mentioned above), then you probably can accept the transaction, but expect some chargebacks. Remember, you are liable for the chargebacks, so if you expect some, then you need to budget for their occurrence.

If you are delivering high cost services (e.g. that consume a lot of your time), or products for which your unit or shipping costs are high, then a chargeback could force you to take a loss for these costs, and you will want to reduce your chargeback risks as much as possible. In particular, you should avoid taking orders for high cost goods to one-time customers in non-domestic (e.g. overseas) locations.

The second way to reduce chargebacks is to get a signed receipt from the Cardholder and if applicable a signed proof of delivery from the shipper for delivered goods. (A signed receipt from someone that is not the Cardholder, or alternatively does not represent the Cardholder, will not do you any good). This signed receipt from the Cardholder is your proof of sales and delivery that you will need to satisfy any retrieval requests. Ideally, the receipt should be signed by the cardholder, and the receipt should be stored in your files so that you can promptly respond to a retrieval request. If you are accepting transactions and delivering goods or services over the Internet, then be sure your software or your service provider provides you with a hard-copy receipt of the order and delivery fulfillment, including as much information about the Cardholder as possible. If you are delivering by ground carrier, then use a carrier that requires a signature on delivery, and allows you get a printout of that signature.

The third way to reduce chargebacks is to advise shoppers of your warranty and return policy, and then consistently live up to that policy. Remember, your warranty and return policy set expectations in the minds of your customers, and as a trusted Credit Card Merchant, you are obligated to meet those expectations. If you are advertising and accepting orders on the Internet, then California (and possibly other states) requires you to include your phone number, address, and return policy on the Internet order form so that Cardholders know how to reach you in case they wish to exercise their warranty or return rights. Remember, if the Cardholder's expectations are not met, and you do not issue a refund for returned merchandise or otherwise honor your warranty according to expectations, then you may get a chargeback that you will have to pay.

Also, be sure your Internet software, or your Internet Service Bureau permits you to submit credit transactions to your Processor. You will need to submit a credit transaction if a Cardholder requests, and you grant, a refund (full or partial) as per your refund/return policy.

There are four reasons why you should honor requests for refunds promptly.

1. If you process with ECHO, then when you issue a credit transaction, ECHO returns to you the discount rate charges that you paid for the equivalent deposit transaction. For example, if you sell a product to a Cardholder for $100, and your discount rate is 2%, then your Net Settlement Amount is $98. If you subsequently issue a refund to the cardholder for $100, and your discount rate is still 2%, then ECHO will net the $100 credit from a $100 deposit that day before computing your Net Settlement. In effect, ECHO puts back into your bank account the original $2 of discount rate charges before debiting your bank account for the $100 refund. With ECHO, the combination of the original deposit transaction, followed by the subsequent credit transaction, does not cost you any discount rate charges. This $2 comes out of ECHO's pocket, since the Issuing Bank, Visa/Master Card Network, and Sponsoring Bank do not give back their share of the original Discount rate charges. This is one of the benefits of Processing with ECHO, and is ECHO's way of encouraging you to promptly issue credit transactions according to your refund/return policy as a mechanism for avoiding chargebacks.
   
2. If you get a chargeback because you did not refund promptly (or for any other reason), then ECHO does not return the original discount charges.
   
3. If you get a chargeback of any kind, your reputation as a trustworthy credit card merchant drops just a little bit. If you get a lot of chargebacks, your reputation drops a lot!. To keep your reputation up, promptly issue refunds according to your policy.
   
4. Your Sponsoring Bank is counting on you to issue refunds promptly. In fact, your Sponsoring Bank and/or your Processor may request that you report to them periodically on how you are performing in this regard. If you are keeping up your obligations, you will continue to be viewed as a trustworthy Credit Card Merchant. If you fall behind, then your Sponsoring Bank may ask for a percentage of your deposits to be put in reserve to help cover potential chargebacks. If you fall behind in giving refunds, and do not promptly inform your Bank or Processor that you are behind, then you run the risk of your Merchant Account being Terminated. You do not want your Merchant Account to be Terminated. When that happens, your Sponsoring Bank is obligated by the Visa/MasterCard rules to put your name in a master database that is accessible by all Sponsoring Banks in the world. If one Sponsoring Bank terminates you, then your chances of getting another Sponsoring Bank to sponsor you are very low indeed. This could make it very difficult for you to ever get approved to accept credit cards again. Remember, do not fall behind in issuing refunds.

The fourth way to reduce chargebacks is to not submit a deposit transaction until you already have, or are ready to deliver the associated goods or services. If you submit the deposit transaction days or weeks before you deliver the goods, you do two things.

1. You are accepting money from the Issuing bank that is really not yours. Remember, because of the way chargebacks work, the Net Settlement Amount you receive from a deposit does not really "belong" to you until you have satisfied the cardholder's expectations. You have not even begun to satisfy the cardholder's expectations until you deliver your goods or services, and even then, they must have the quality and features you have advertised.
   
2. You substantially increase your risk of a chargeback. Issuing Banks are very good at including a recent credit card charge on a Cardholder's credit card statement. If you submit a deposit transaction on Day 1, and this charge is near the end of a billing cycle for the Cardholder, then the Cardholder may see your charge on his statement on Day 5, for example. If you have not delivered your goods or services prior to Day 5 (in this example), then you run the risk of annoying the Cardholder (your customer), and in getting a Retrieval Request. If you cannot honor the Retrieval Request, and do not immediately submit a credit transaction, then you will get a chargeback. Retrieval Requests themselves cost you money since you have to take time out to respond to them. It is best to avoid them, and one good way is to deliver goods and services very near the time you submit the deposit transaction.

The fifth way to reduce chargebacks is to protect your merchant id and terminal id (i.e., ECHO-ID). Your terminal-id identifies you to your Processor. You do NOT want anybody submitting transactions to your Processor using your terminal-id without your permission. Keep your transaction processing equipment physically secured in your place of business. Be sure that only authorized individuals have access to that equipment at all times. If you use Internet order-taking software, or contract with an Internet service organization to accept credit card orders over the Internet on your behalf, then be sure your software and/or Internet service organization keep your terminal-id absolutely confidential. Also, qualify your Internet service organization as being completely honest and reputable. In particular, do not permit your terminal-id to be exposed to Internet shoppers, even in hidden HTML fields. In general, YOU are responsible for all transactions submitted to your Processor with your terminal-id, so manage its use as carefully as you manage your bank accounts.

The credit card system offers measures of protection to both the Credit Card Merchant and to the Cardholder. To the Credit Card Merchant, the protection is offered by the Issuing Bank who represents that if the Credit Card Merchant fulfills his bargain, then the Merchant will receive (and get to keep) the Net Settlement Amount. To the Cardholder, the protection is that if the Merchant does not fulfill his bargain, then the Cardholder will not be out the price of the merchandise. This is easy for the Issuing Bank to enforce, since the Issuing Bank will just charge back your account for the Transaction Amount.