FutureQuest, Inc. FutureQuest, Inc. FutureQuest, Inc.
Responsibilities That Come with a Merchant Account
Posted on 01 November 2003 01:12 AM

With your merchant account comes many rules and regulations established by the credit card industry that must be followed. Failure to understand your responsibilities can result in your merchant account being terminated. The industry maintains a list of terminated merchants and if you wind up on this list, you will find it difficult, if not impossible, to establish another merchant account. For an Internet-based business, taking care with your merchant account is paramount to your business!

This section discusses the following topics:

Preventing Credit Card Fraud

Your primary responsibility as a merchant is to take all reasonable measures to ensure that credit cards are accepted only from the person who was issued the credit card. This is obviously easiest to do in the retail environment where cards can be inspected and swiped, and signatures can be compared. This is why retail credit card transactions have the lowest incidence of credit card fraud. However, when accepting a credit card over the Internet, you cannot visually inspect the card, swipe its magnetic strip, or compare the signature. And this is why Internet transactions have the highest incidence of credit card fraud. In addition, people who perpetrate credit card fraud consider new web sites established by inexperienced owners "fresh bait". They believe that the owner's inexperience will usually allow them to get their transactions processed and products delivered before the merchant has discovered the fraud.

Here are some things you can do to help reduce your chances of being the unwitting victim of Internet credit card fraud:

Understand the risks associated with your type of business. The types of products or services that you sell will have a direct bearing on your susceptibility to fraud. Once you establish your merchant account, make it a point to call your merchant bank and discuss with them the risks you should be aware of and how you might best reduce your risks. In general, the higher the cash value of your product or service, the faster it can be delivered to your customer, and the ease with which it can be turned into cash, the higher your risk. Jewelry, cameras, and VCRs are good examples of high-risk products. Food and clothing are examples of items that usually have lower (but not zero) risk associated with them.

Understand the characteristics, or profile, of most fraudulent transactions. These characteristics include:

  • An order for your most expensive products in unusually large quantities.

  • An order with a shipping address outside of the US. In particular, be especially wary of orders coming from countries with the highest incidence of credit card fraud. These include Belarus, Colombia, Egypt, Indonesia, Lithuania, Macedonia, Malaysia, Nigeria, Pakistan, Romania, and Russia. Not all credit card transactions originating from these countries are fraudulent. But these are the originating countries of the majority of fraudulent transactions outside of the US.

  • An untraceable email account. Most email accounts from free email account providers (like hotmail, yahoo, etc.) are untraceable.

  • Express orders requesting overnight delivery.

  • Shipping address different from billing address. It is a wise business practice to only ship to the billing address and to use the Address Verification Service (AVS) offered by your processor. AVS will attempt to verify that the billing address given by the customer matches the address maintained on file for the credit card. However, you should also realize that AVS is not foolproof and will issue "false rejects" by rejecting valid transactions. Also, AVS will not work with credit cards issued outside of the United States. (You may accept any valid credit card from any country.)

  • Suspicious billing address. You can use many of the map services that are readily available via the Internet to confirm that a given address is valid.

  • A delivery instruction to leave an expensive package at the door. Use a delivery service that requires a signature.

Unfortunately, all of the above are also characteristics of legitimate, valid transactions. However, knowing the "warning signs" can help to keep you alert to transactions that might be suspect. Be especially cautious when an order has several of these characteristics. If you suspect an order, call your merchant bank to obtain a telephone authorization for the transaction. Your bank's service representative can help you assess the risk and also advise you of steps you can take to further confirm the transaction.

Remember: An authorized transaction does not mean that the order is not fraudulent. An authorized transaction only means that the account has sufficient funds to cover the charge. It does not tell you that the card holder initiated the transaction.


Another important responsibility for merchants is to control chargebacks. A chargeback occurs when the cardholder disputes a charge with the credit card issuer. The customer's account will be credited (and your account debited) pending the outcome of the dispute investigation. During this investigation, you must prove that the sale was made to the rightful owner and that the product or service was delivered. Any "benefit of the doubt" will go to the customer and not to the merchant. If the dispute is not settled in your favor, you lose not only the amount of the sale, but most likely you have lost the product or service that was delivered as well.

The majority of chargebacks occur because:

  • The customer failed to receive the product or service ordered. You should plan your order fulfillment process such that you receive a confirmation of delivery from your delivery service or application.

  • The customer thinks the product or service was not delivered. You should plan your order fulfillment process such that you receive from the customer some form of delivery confirmation.

  • The customer forgot they made the purchase. In addition to delivery confirmation, you should arrange with your merchant bank an appropriate method to clearly identify your company on the customer's credit card statement. Most Internet purchases are spontaneous and it is very easy for the customer to not immediately remember what a charge that appears on their statement was for! You should arrange for your web site URL to appear on the receipt so that the customer will realize this was an Internet purchase. The URL will also allow the customer to visit the web site to refresh his or her memory, and may even make another purchase while there!

While fraud and delivery failure are the primary reasons why a dispute and chargeback may occur, you should also understand that chargebacks may also occur just because the customer wanted to cause you a difficult time. All the customer has to say to file a dispute is "I didn't get my merchandise." Just as you can't please all customers, you can't avoid all disputes and chargebacks.

You should understand what levels of chargebacks are typical for your type of business given your volume. Talk to your merchant bank about what should be typical for your business conditions and what level they expect you to achieve. Knowing what your merchant bank expects you to achieve will go a long way toward effectively managing your chargebacks.

If the number of chargebacks that your business is generating is higher than you (or your bank) want it to be, concentrate on analyzing your order process and your customer service process. You should ensure that your refund policy is clearly stated wherever possible and appropriate. Look for ways to improve how you obtain fulfillment confirmation both from your delivery service providers and from the customer. Chargebacks are usually proportional to the quality of your customer service policies and practices. Providing for more lenient policies for returns and exchanges, where appropriate, can many times help avoid chargebacks. Also, if you do not quickly and efficiently deliver on whatever refund policy you have stated, you are inviting customers to dispute charges.

More Information: The Internet offers many tools and resources to help merchants learn to avoid, offset, and even reverse chargebacks when they do occur. As one example, Visa provides some tips to avoid potential chargebacks at:

Additional Responsibilities

The following are some additional rules and regulations that apply to merchant accounts:

  • Credit card transactions should never be processed for another merchant.

  • Your merchant account should never be used to buy merchandise from yourself or to obtain cash from one of your own credit cards.

  • You may not charge any kind of fee, or surcharge, for purchases paid by credit card.

  • You may not establish any minimum or maximum transaction amounts for credit card purchases.

  • Any tax that is required to be collected on a sale must be included in the credit card transaction and not collected separately.

  • You must ship or deliver your product or service within 24 hours of capturing a credit card transaction. If separate shipments are required, you should charge for each portion as it is shipped.

  • Credits should not be issued to a different credit card than the one used for the original charge.