Understanding risk for small businesses accepting payments online

April 01, 2015
Zac Davies

Online commerce has made it easier for businesses to reach wider markets with lower overheads than ever before. It’s relatively straightforward to set up an online storefront with connected payments and instantly start selling to your target audience.

While the promise of making it big online is exciting, it’s important to understand the risks involved and how to best protect yourself from online fraud and losses to your business.

Parties involved in a credit card transaction

By accepting payment with Visa, Mastercard, and American Express, you become a part of their global payment networks. It’s important to understand the parties involved in any transaction.

  • Card Scheme

    A credit card brand, such as Visa, Mastercard, or American Express. Card schemes outline the dispute processes followed by Issuing Banks.

  • Issuing Bank

    The financial institution who manages the issuance of cards and billing with its card holders.

  • Cardholder

    The customer paying for goods or services using a card supplied by their Issuing Bank.

  • Merchant

    The business accepting payment for a product or service, via a Service Provider or Acquiring Bank.

  • Service Provider

    A company partnered with the Acquiring Bank to provide payment services to merchants.

  • Acquiring Bank

    The financial institution which processes the card payment for the merchant.

Risk compared to card-present transactions

Online payments can present unique challenges compared to face-to-face payments. Because a physical card isn’t required, and the customer’s identity can be masked, the chance of encountering fraud is higher. A fraudulent transaction will likely result in a Dispute from the cardholder.

What is a dispute?

A dispute occurs when a cardholder contacts their card issuing bank to challenge an unrecognised charge on their card. If the dispute is ruled on behalf of the cardholder, a chargeback will take place with funds returned to the cardholder.

Disputes are a feature of the Visa, Mastercard and American Express networks intended to protect cardholders, but they can present challenges for merchants, especially if they’re new to selling online.

Common reasons a dispute is raised:

Not as described
The cardholder claims to have never received the goods, or the goods were materially different from their expectations.
Not recognised
The cardholder has no recollection of what a charge in their bank statement relates to.
The cardholder claims they did not authorise the purchase (e.g. their card information was stolen and used fraudulently).
Admin error
Duplicate billing, incorrect amount billed or a refund which was promised but never processed.

The dispute process

  1. Dispute raised

    The Cardholder disputes a transaction with their Issuing Bank.

  2. Issuing Bank

    The Issuing Bank sends details of the dispute to the Acquiring Bank.

  3. Acquiring Bank

    The Acquiring Bank notifies the Merchant or the Service Provider.

  4. Merchant notified

    The merchant can accept the dispute or supply evidence in order to contest it.

  5. Evidence review

    The Acquiring Bank reviews the evidence. If it addresses the dispute, it is sent to the Issuing Bank.

  6. Arbritration

    The arbritration process between the Issuing Bank and Acquiring Bank commences.

  7. Outcome

    Funds are returned to either the Cardholder or Merchant, depending on the banks’ final decision.

This arbitration process is handled between the issuing and acquiring banks. Payment Service Providers (such as Pin Payments) are there to assist merchants during the process to ensure information flows to and from the acquiring bank.

Strategies to minimise disputes

Hopefully the above explanation helps paint a clear picture of what disputes are and the parties involved. In order to minimise disputes it’s important to have processes set up prior to receiving any dispute request from your acquirer or payment processor. Here are some suggestions.

Beware of unusual transaction activity

Merchants should look into abnormal behaviour, as it could suggest the customer is trying to purchase with stolen credit cards.

  • Multiple failed payment attempts, followed by a successful charge. Even greater concern if attempts are with different credit cards.
  • Customer tries lower amounts after previous higher charge amounts fail.
  • Order from a new customer for a dollar amount much higher than your average sale amount.
  • Customer places an order with an international shipping address for a product that should be easier to obtain locally.
  • Customer uses suspicious phone number and/or e-mail address (e.g traep68399@hotmail.com). If you’re unsure, try contacting the customer to confirm they are who they say they are.

Communicate with your customers

Try to resolve a dispute directly with a customer before they consider disputing the charge with their bank. This will save you a lot of time and additional fees imposed by your Acquiring Bank or Service Provider.

Accurate Statement Description

Ensure that your Service Provider allows you to accurately set what appears on your customers bank statements. If the customer purchases from a website named “Bulk Fishing Supplies” but appears as “A & R Outdoors Pty Ltd” on their bank statement, there’s a high chance the customer won’t recognise the charge.

Proof of purchase and delivery

Ensure that you retain proof of sale, delivery and any communications that you have with your customer. This will be vital for challenging disputes.

Be timely in response to disputes

Each step in the dispute process has a defined time limit during which action can be taken. Generally, if you don’t respond within a five day period following initial notification of a dispute the bank will rule in the cardholder’s favour.

The reality is that you’re likely to be exposed to disputes at some point when selling online. However they don’t need to be an impediment on your business, as long as you understand how they work and be prepared by keeping the appropriate sales and customer information.

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