A Guide to Visa Chargeback Rules for High Risk Merchants

Visa compliance is getting more stringent over time. The recent VAMP rollout aims to enhance security and reduce risk. Part of that is by keeping chargebacks to a minimum.

However, chargebacks are common in high-risk industries. Merchants in these areas regularly deal with customer disputes no matter their efforts to limit them. And the details of how to prevent them from turning into chargebacks are still being worked out.

A good place to start developing a dispute-prevention strategy for your high-risk business is by considering Visa's chargeback rules. From there, you can create a solid plan of action that ensures your company remains in compliance, while also addressing your customers' unique needs and preferences.

Adaptiv Payments can help fulfill all the requirements for such a plan, as well as any other merchant account issues you may have. To start, we talk about Visa chargeback rules and how to follow them.

Why Knowing Visa Chargeback Rules Matters

Understanding how Visa judges chargebacks is important for every business. And for high-risk merchants, it is specifically vital for their future success. Here are a few more reasons why your company should be aware of Visa's chargeback rules:

High Risk Merchants Are 'High Risk' For A Reason

Adaptiv works with merchants from a variety of high-risk industries. These include specialized accounts like CBD, travel, nutraceuticals, gaming, gambling, and more. All of these industries experience higher-than-average refund rates, fraudulent transactions, and customer disputes.

This forces card networks like Visa to be strict about their risk thresholds, which involves both limits on chargebacks and fraud. Keeping your company aligned with these strict chargeback rules puts you in a better position going forward.

Visa Closely Monitors Chargebacks

A chargeback is different from a refund. Refunds are initiated by the merchant for a transaction with their customer. They are usually cheaper, quicker, and ensure better customer relationships with the merchant than traditional refunds.

On the other hand, chargebacks are performed by either an acquiring bank or a card network. They tend to be a last resort for customers due to distrust or a merchant's lack of transparency.

They're also more expensive, involving higher transaction fees and penalties against the acquirer or merchant. Chargebacks also erode trust and stability. All this leads Visa to keep a closer eye on both acquirers' and merchants' chargeback rates.

The Visa Chargeback Process Explained

Visa has a very detailed set of Dispute Management Guidelines for acquirers and merchants to follow. Its guidelines showcase how the Visa dispute process works.

For high-risk merchants, understanding the steps involved can help ensure better outcomes in the event of a chargeback dispute, helping you avoid transaction penalties or total account termination.

Here are the main steps in the dispute process:

1) Customer Disputes Transaction

A cardholder disputes a transaction with their bank or card issuer. The issuing bank reviews the transaction details and assigns a reason code. It is then sent through Visa's Claims Resolution (VCR) System.

2) Dispute Enters Visa Claims Resolution (VCR)

The claim is routed through Visa's main dispute system, VCR, which then determines whether the dispute involves fraud. If they determine there is fraud, merchants will have a hard time, receiving heavy penalties for every fraudulent transaction. They may even risk termination and blacklisting. If they see there's no fraud, merchants can continue to challenge the chargeback.

3) Representment

This step gives merchants an opportunity to prove that the charge to the customer's card was valid. They would have to provide evidence, such as signed receipts, IP address logs, delivery confirmation, refund policy disclosures, and so on. For merchants, it is important that documentation matches the reason code.

4) Pre-Arbitration

If the issuing bank rejects the merchant's representation, the dispute is sent to pre-arbitration, a phase before Visa directly gets involved. The acquirer or merchant can appeal further, but this may result in higher penalties. Savvy payment processors like Adaptiv Payments would then help you decide whether to accept the penalties or push further.

5) Arbitration & Final Decision

At this point, Visa reviews all the information provided. This will incur heavier administrative and network costs on whoever they decide is liable. The expense may be justified based on the transaction value, but because it's so high, many resolve or settle the disputed charge before this point.

Important Rules for Preventing Visa Chargebacks

Since establishing their VAMP system, Visa has been taking a serious stance against credit card fraud and high chargeback rates. This could put many high-risk companies across numerous industries on edge.

Their strict stance and lower risk threshold ratios increase the likelihood of penalties per fraudulent transaction. If you want your business to avoid the massive hassles of potential chargebacks, penalties, and account termination, we offer these key rules to follow:

Understand Visa's Accepted Reasons for Disputes

A good place to start when managing Visa chargebacks for your specialized account is understanding which types they consider valid. Here are the four main dispute reasons that Visa accepts (along with their reason codes):

• Fraud (10.x): Disputes in this reason code can range from cases where a cardholder's information was used without their permission, or they simply didn't remember or didn't recognize the kind of purchase they were making.
• Authorization errors (11.x): Under this reason code, transactions could have been made due to human errors, glitches in the payment system, or genuinely fraudulent activity with payment gateways or point-of-sale terminals.
• Processing errors (12.x): This may occur through duplicate processing errors, or inputting invalid transaction details like the wrong transaction code or currency.
• Consumer disputes (13.x): Disputes involving this reason code tend to be more specific cases, such as a customer not receiving their goods and services after payment, or receiving one that didn't fit those described by the merchant. Other instances may involve misunderstandings with the return policy or customers receiving counterfeit goods.

Using these, your business can develop policies and practices to minimize the likelihood of chargeback initiations from your customers.

Monitor Your Chargeback Ratios

Visa cardholder chargeback, along with the number of fraudulent transactions processed, is used to calculate your VAMP ratio. This ratio determines whether Visa deems a merchant to be "Above Standard" or "Excessive," with increasing penalty charges for each category.

Visa evaluates these ratios every month to hold acquirers and merchants accountable. It is important to note that they focus on ratios rather than raw numbers. This is an effort to remain as strict as possible to mitigate the immense costs of fraud and chargebacks, which total well over $40 billion a year.

Our recommendation at Adaptiv Payments is to keep an even closer eye on your chargeback ratios than they do. This is especially true for high-risk merchants that process high-volume transactions. Whether it's daily or weekly, you should aim to have as few chargebacks as possible. We provide a range of chargeback prevention tools to help you reach this goal.

Keep Refund Policy Clear & Provide Consistent Customer Service

Another way to avoid increasing chargebacks is to maintain a fair, clear, and streamlined refund policy (and place it in clear words on your site). Refunds allow merchants to resolve customer disputes immediately before they reach the card issuer, minimizing irritation on both sides of the table.

Of course, this doesn't mean you have to give a refund in every instance. A refund policy that's too loose and generous can be exploited by fraudulent customers, something that could look even worse to potential acquirers than a few too many chargebacks.

Instead, we recommend that your business provide a clear, concise, and understandable refund policy. It could be on a sign in your shop, regularly told to customers by your store associates, or appear just before the final order page on your website. Customers should have every opportunity to understand how you handle refunds.

When a dispute inevitably occurs, your business can then refer to its refund policy. From there, if the customer continues to dispute the transaction, there are ways for your customer service representatives to help alleviate the issue and ensure upset customers leave satisfied.

More importantly, these practices should stay consistent across all customers, and not just a few at a time. The opposite can easily lead to reputational losses and an increased likelihood of Visa chargebacks.

Implement Fraud Prevention Tools

Fraud is among the most common reasons Visa accepts and issues a chargeback to a cardholder. However, the result is a heavy fee on the acquirers or merchants responsible, especially those who force a dispute into arbitration.

Since fraud and chargebacks go hand in hand, it is more than necessary to implement fraud prevention tools into your business, especially if you're in eCommerce. Here are some solutions Adaptiv Payments can help provide:

• Real-time transaction monitoring that tracks suspicious transactions and flags them before any further issues can occur.
• Machine learning platforms that will analyze transactions for patterns of fraudulent behavior, so guilty parties can be identified, and payments aren't processed before it's too late.
• Address verification service integration to help confirm a cardholder's billing and delivery addresses, ensuring orders arrive at the desired location and the buyer's identity is genuine.
• Device fingerprinting & IP address analysis to find out whether a card or an account holder's identity has been taken over and used for fraudulent activity.

Avoid Visa Disputes & Accept Payment Smoothly with Adaptiv Payments.

Following the rules above is a great start to keeping in line with Visa's tightening grip on fraud and chargebacks. Altogether, it will reduce hassle for them and for you and ensure your business avoids unnecessary risks to revenue, trust, and brand reputation.

Chargebacks are especially costly to deal with and, unfortunately, are common among high-risk merchants. That's why it is especially important to use effective chargeback prevention techniques and systems for your business.

Want to ensure you avoid disputes while streamlining your payment processing for long-term growth? So does Adaptiv Payments. Sign up with us and learn how we can help high-risk businesses succeed with tailored solutions.