The chargeback: A forcible reversal of funds typically due to a credit card holder’s dispute of the transaction.

Originally established in 1968 as a credit card holder’s protection against clerical error, the chargeback has become a major tool in the fight against identity theft, especially for online credit card processing and ACH transactions.

For a small business, though, credit card processing chargebacks can be a huge headache. Don’t get me wrong, we’re all for consumer protection, but as you can see below, they can be also be caused by miscommunication or flat out consumer fraud. At worst, chargebacks can affect a small business’ ability to maintain a merchant account and accept future credit card or ACH payments. Merchant account providers can also impose steep fines associated with high chargeback rates (upwards of 1% of all transactions) or put funds on a hold.

So, how can you help protect your business and maintain good standings with your merchant account provider? First, familiarize yourself with the four basic types:

• Technical: Expired authorization, non-sufficient funds or bank processing error
• Clerical: Duplicate billing, incorrect amount billed or refund never issue
• Quality: Consumer claims to have never received the goods as promised at the time of purchase
• Fraud: Consumer claims they did not authorize the purchase or claims identity theft1

For some types, such as expired authorizations or incorrect billing, following proper online credit card processing regulations and best practices (your merchant account provider can supply these) can thwart would-be disputes. However, for fraud disputes, the majority result from fraudulent consumer purchases (as opposed to a business charging without authorization).

Here are 5 ways to verify lawful transactions and avoid credit card processing disputes:

1. Closely examine orders from foreign countries that do not ordinarily purchase from you. A large chunk of fraudulent internet purchases originate in Russia, Indonesia, and from Eastern developing countries.
2. Require a CVC or CVV2 code on your payment form (or check to see if your merchant account processor offers it). This helps to ensure that the customer has the credit card in hand while making the online payment
3. If the name on your customer’s statement is different than the one they’re familiar with (say, if you’re part of another legal entity), be sure to explain this beforehand and on their receipt.
4. Go with your gut: If it seems suspicious, call or email the customer to confirm the order.
5. Post a warning message on your order page to people who may attempt to make a fraudulent order.

With diligence, chargebacks can certainly be reduced, saving your business time, money and its reputation.