ACH Processing: Chargeback Protection

by Wayne Akey

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Published on this site: January 12th, 2010 - See more articles from this month

Any merchant that accepts credit cards or electronic checks for payment faces the risk of chargebacks. A chargeback happens when the consumer disputes the ACH debit (ACH Processing allows a business to debit a consumer or business checking or savings account-many businesses use ACH Processing to streamline payment collection and enjoy the benefits of reliable cash flow).

The consumer or business being debited does have protection against unauthorized debits to their account. There is a 60 day window for the customer to report to their bank that they have been electronically debited (ACH) without permission.

There are essentially two ways for the consumer to do this. The first would be for the consumer to tell their bank the ACH debit was not authorized-they never gave permission to debit (R10 Bank Return Code). The second is to "Revoke Authorization" meaning yes initially they gave permission but now are unhappy with product ( buyers remorse?)- (R7 Code). An example would be the consumer ordered a product from ABC company and when received it was substandard. They tried to get money back from the company they ordered the product from with no success. They can possibly go to their bank and revoke that authorization. In both instances of a chargeback the consumer signs an affidavit and their bank puts the money back in their account. The 3rd party ACH processor would then be debited those monies and in turn debit the company initiating the payment (ABC).

Let's assume ABC has great products and the customer is simply committing "friendly fraud" and trying to get their money back. Company ABC would protect itself by 1) getting a signed (physically or digitally) agreement whereby the consumer agrees to be debited electronically (this is mandatory for recurring ACH Payments). For telephone or web based one-time payments you should provide a receipt with all relevant payment and merchant contact info. You should capture IP address if web based and record calls (if possible) by phone.

The merchant will receive notice from their third party processor they have a chargeback. The MERCHANT (ABC) would then contact that customer's bank and offer proof of authorization. The bank SHOULD reverse the chargeback. Some banks will while others (that want to appease the client) essentially ignore the proof. If the merchant is persistent and lets the bank know the transaction was authorized you may have success.

Without authorization ABC has no recourse to overturn the chargeback. As a merchant you may also want to consider check verification tools such as ATMVerify as a front end fraud protection tool. ATMVerify validates bank account number and a positive funds balance.

Chargebacks do happen but if the merchant does their part (getting authorization-front end protection) your risk can be reduced. ACH Payment Processing offers many benefits to merchants-chargeback protection should be part of processing methodology.

Wayne Akey: ACH-Payments.com - Secure, Efficient Payment Processing Solutions Guaranteed to Save Time and Money. To learn more on how you can save 80-90% or more on fees visit www.ACH-Payments.com.