Customers Dispute Chargebacks

Chargebacks are one of the most important issues that small business merchant account users have to deal with. Not only are they costly and time consuming but, if left unchecked, they can potentially cause the suspension of the credit card processing account. Certain industries are more prone to chargebacks than others and, as a result, the payment card processing rate for merchants operating in these industries is higher. Customer disputes are one of the most common reasons for chargebacks. There are a number of possible reasons but a customer will most often dispute a transaction because:

• A credit has not been processed when the customer expected it would be.


• Product or service ordered was never received.


• A service was not performed as expected.


• The customer did not make the purchase; it was fraudulent.

Because chargebacks, resulting from customer disputes, may indicate customer dissatisfaction - and the potential for lost sales in the future - addressing their underlying causes should be an integral part of your customer service policies. Your credit card processing practices can be optimized to minimize or avoid the possibility of misunderstanding. For example you should deposit your transactions on the date the merchandise is shipped, not on the date the order was taken.

If a cardholder with a valid dispute contacts you directly, act promptly to resolve the situation. Issue a credit, as appropriate, and send a note or e-mail message to let the cardholder know he or she will be receiving a credit.

What Is Member Service Provider (MSP)?

Member Service Provider (MSP) is a company that is authorized by MasterCard to provide merchants with merchant services. Companies authorized by Visa to provide the same service are called Independent Sales Organizations (ISOs). Typically, companies are licensed as both ISOs and MSPs.

In order to get authorized, a merchant card processing applicant has to go through a rigorous process. It starts with finding a sponsor bank to serve as an acquirer. Acquirers do the authorization, clearance and settlement of merchant credit card payment processing transactions. They are members of both Visa and MasterCard and guide the applicant through the process. The application requirements include a detailed business plan and marketing plan, a check of the applicant business financial statements and its principals' tax returns, personal financial statements and credit files. If the results are satisfactory, the applicant must pay registration fees of $5,000 to both Association. The registration to provide credit card transaction processing services is up for review once a year and, upon approval, a fee of $2,500 per Association is charged.

Merchant account service providers, sponsored by US-based acquiring banks, are authorized to provide credit card processing accounts to US-based businesses only and settlement is done in US dollars. Both MSPs and ISOs are required to display the name on their acquiring bank on each page of their websites and on every form of advertisement or a marketing material.

Downgraded Transactions

Interchange is actually a general term describing dozens of credit card transaction processing rates legislated by the Credit Card Networks. They depend on a variety of factors related to the sale and the way the charge is processed. There are three general classifications. When a transaction is processed in accordance with the rules and standards established in the Payment Processing Agreement, signed by the merchant and his or her merchant account processor, and complies with all applicable security requirements, it is charged the most favorable credit card payment processing rate. That rate is called a qualified rate and is set in the Payment Processing Agreement. Should a transaction meet some but not all of the above mentioned criteria, it will be classified as either mid-qualified or non-qualified and it will be billed at a higher rate. This is known as a downgrade. Most likely, your credit card merchant processor will report downgrades as non-qualified transactions. But many small business merchant accounts providers simply lump all of the downgrades together and report them as a miscellaneous fee.

Generally, if your downgrade levels exceed 10%, you have a problem.

To protect the integrity of their system, Visa and MasterCard do not publish their rules and regulations or the payment processing standards required to get the lowest interchange rate. It’s up to credit card processing companies to know and implement them to their merchants' benefit. A high downgrade rate may indicate that your processor does not know the standards, or may be reluctant to implement best practices or new rules changes.

Please be advised that such problems may arise from the way you process your orders, and may have little to do with your merchant services provider. Yet, even if the cause originates with your business practices, your credit card processing service partner should be reviewing your merchant account and suggesting ways to reduce these downgrades.