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FAQ: What is the Chargeback Process? - YouTube
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- [Announcer] Presented
by ChargebackGurus.com.
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- [Narrator] 2020 chargeback
process explained.
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A chargeback isn't just a single event.
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It's a process, one that can
be lengthy and convoluted
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for all parties involved.
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For merchants, chargebacks
are especially troublesome
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because the lion's share of the liability
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for chargebacks falls on them.
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A chargeback may begin simple enough
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when a card holder contacts
their bank to dispute a charge,
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but the merchant can fight the chargeback.
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Banks can challenge
each other's decisions.
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The card networks can get
dragged in to adjudicate.
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Things can get real messy.
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What do merchants need to know
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about navigating the chargeback process?
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It doesn't help that
the chargeback process
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is largely defined by regulations
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that were written out long
before the age of e-commerce
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and that each card network
creates its own house rules
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based on their interpretation
of those regulations.
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Understanding how the
chargeback process works
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isn't just for personal edification.
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Knowing the ins and outs of the process
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can help you avoid costly mistakes,
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fight fraudulent chargebacks
more effectively,
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and get a better ROI on the time and labor
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you spend on dealing with disputes.
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Here's what you need to know
about the chargeback process.
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Who are the participants
in the chargeback process?
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With any given chargeback,
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there are five or sometimes six players.
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One: the cardholder or the customer.
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These may be the same
individual, but not always.
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The cardholder is the actual
owner of the payment card
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used to make the purchase under dispute.
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The customer is the individual
who placed the transaction.
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In a typical transaction or in
a friendly fraud chargeback,
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the cardholder and the
customer are the same person.
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In a true fraud scenario,
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the customer who made a transaction
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with a stolen card is not the same person
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as the cardholder who disputes it later.
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Two: the merchant.
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The merchant is the individual or company
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who sold a product or
service to the customer.
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When the chargeback is filed,
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the merchant must decide whether
to accept it or dispute it.
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Three: the issuing bank, issuer.
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A bank or other financial institution
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that issues a branded payment
card to the cardholder.
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Examples: Bank of America,
Wells Fargo, Capital One.
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Four: the acquiring bank, acquirer.
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The merchant's bank, which
holds their merchant account
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and enables them to accept
credit card payments.
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Five: the credit card network.
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The association that owns
the credit card brand
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used in the transaction.
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In the United States, the four
major credit card networks
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are Visa, Mastercard, American
Express, and Discover.
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These networks set the terms
for credit card transactions,
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which are followed by the issuing banks.
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Other companies that
service merchant accounts,
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such as payment processors
and payment gateways,
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may also become involved
in the chargeback process.
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What happens during
the chargeback process?
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One thing that makes
the chargeback process
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challenging for merchants is
the amount of input required.
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Every stage of the process
requires some action of response
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from the merchant in order to move forward
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or else the response
defaults to acceptance
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and the chargeback becomes
permanent and uncontestable.
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Merchants must be aware of the timeframes,
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deadlines, and response
times required of them,
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which will differ from network to network
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and can be complicated further
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by factors such as chargeback
alert or deflection services.
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However, a basic chargeback
process can easily be outlined.
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Just be aware that many chargebacks
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will deviate from this formula.
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One: The cardholder comes to believe
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that a transaction made to
their account is invalid
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and they should not have to pay it.
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They contact their issuing bank
to dispute the transaction.
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Two: The issuing bank listens
to the cardholder's claim
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and determines whether it constitutes
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a valid reason to grant a chargeback.
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If the claim is invalid, the
dispute will go no further
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and no chargeback will occur.
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Most banks, however,
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extend the benefit of the
doubt to their customers
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and will allow the
chargeback in most cases.
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Three: The issuing bank
gives the cardholder
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a provisional credit
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equal to the disputed transaction amount.
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Four: The issuing bank will
inform the card network
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of the chargeback.
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Five: The card network will inform
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the merchant's acquiring
bank of the chargeback.
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Six: Once the acquiring bank is notified,
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they will debit the merchant's account
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and charge them any
applicable chargeback fees.
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Seven: The acquiring bank
will notify the merchant
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about the chargeback.
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This can be some time out
from the initial dispute
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and is usually the first
the merchant hears about it.
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The merchant must then
decide whether to accept
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or fight the chargeback
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before their time to respond expires.
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But the back and forth between the issuer,
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network, and acquirer can
eat into some of this time.
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A common way for the
chargeback process to end
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is when the merchant
stops submitting responses
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intended to dispute it.
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As soon as the merchant
accepts the chargeback,
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the provisional credits
and debits become permanent
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and the chargeback case
is closed for good.
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Merchants may decide to accept chargebacks
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for several reasons.
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Sometimes the chargeback
is premised on true fraud
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or some other valid inarguable reason
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and there is no point
in trying to fight it.
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Many merchants, however,
except chargebacks
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because they're too busy to deal with them
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or they've become
convinced that chargebacks
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are just an unavoidable
cost of doing business.
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Some merchants may be able to
get away with this attitude,
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but it can be highly damaging
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for others to adapt this outlook.
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With fees and overhead
added, chargebacks can cost
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well more than double the
original transaction amount,
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making them a grave danger
to a merchant's revenue.
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Fighting chargebacks,
especially fraudulent ones,
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helps merchants recover revenue,
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discourages repeat offenders,
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and can help preserve your
reputation with issuing banks,
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making them less likely to
reflexively side against you
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in future disputes.
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How can merchants fight chargebacks?
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When a merchant responds to a chargeback
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with intent to fight it,
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it's called chargeback representment,
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because the merchant is presenting
the charge a second time.
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With representment, the
merchant must include evidence
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that refutes the cardholder's claim.
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The right evidence will depend entirely
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on the substance of the claim,
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but for typical chargebacks
relevant evidence may include:
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transaction data, including
a date and timestamp,
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AVS, CVV, and delivery verification,
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the cardholder's transaction history,
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communications between the
merchant and the cardholder,
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signed delivery receipts
or other pertinent data,
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or documentation related to
the transaction being disputed.
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The merchant's evidence
will be passed along
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from the acquirer to the
network to the issuer,
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who will review it and make a decision.
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If the issuer finds
the merchant's evidence
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valid and compelling, they
reverse the chargeback
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by taking away the cardholder's
provisional credit.
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The acquirer will then return
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the merchant's funds to their account.
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If the issuer does not believe
that the merchant's evidence
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disproves the cardholder's
claim, the chargeback will stand.
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What happens after the chargeback process?
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Win or lose, representment
is not necessarily
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the end of the chargeback process.
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The cardholder can still
dispute their bank's decision,
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but the card networks
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handle this escalation of
the dispute differently.
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Visa calls it pre-arbitration
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and MasterCard has what it
calls arbitration chargebacks.
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Either way, more fees will be incurred
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by whichever party ends
up losing the case.
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Our detailed breakdown of
the process will stop here,
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but it should be clear now
that the chargeback process
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can be a long and winding road indeed,
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and the best way to deal with chargebacks
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is to avoid them in the first place.
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Aside from the constant
threat of lost revenue,
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chargebacks can endanger merchants
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by putting their merchant
accounts at risk.
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If you carry an excessive
chargeback rate for too long,
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you might not be able to find
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any reputable payment processors
willing to work with you.
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Brick-and-mortar merchants
can avoid many chargebacks
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simply by using payment
terminals with EMV chip readers.
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For e-commerce merchants,
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prevention can be more of a challenge,
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but standardizing the
procedures and protocols
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for credit card payments can
be an important first step
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in avoiding authorization
and fraud chargebacks.
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Anti-fraud software tools
can be a big help too.
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To protect themselves, merchants
must always be vigilant
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about reviewing their
operations, policies,
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and even their marketing materials
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for chargeback vulnerabilities.
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Investing in the services
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of chargeback management specialists
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can assure merchants of greater success
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in these tricky endeavors.
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- [Announcer] To learn more,
visit ChargebackGurus.com.
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