Chargebacks are a fact of business for acquirers. Can't wish them away, can't be absolutely sure when and how they'll occur. So, how does an acquirer learn to live with chargebacks?

There are numerous "best practices" that acquirers, whether ISOs or financial institutions, have learned the hard way should be implemented to address chargebacks and their ramifications. These business practices should be applied with a view toward the legal protections that may be available.

First, both training materials and the merchant contract should very clearly indicate that an authorization is not a guarantee or absolute protection against a chargeback. These documents should likewise state that any retail merchant that accepts a non face-to-face transaction does so at its own risk. Without the ability of valid MO/TO accounts to provide collateral documentation such as a delivery receipt, the merchant, even with address verification, may not be able to support the sale in the face of a cardholder affidavit that the cardholder did not authorize use of the card. Even if a transaction has resulted from a valid sale between the merchant and the cardholder, improper or untimely handling of a chargeback can lead to its being assessed against the merchant with little means for reversal. The actual processing of the chargeback must follow established rules and timeframes for the acquirer's ultimate protection; therefore, the merchant's manuals and contract should spell out clearly its responsibility for responding to requests for drafts and collateral documents in a timely manner to avoid losing the dispute.

Second, the merchant agreement should incorporate the merchant application so that any representations the merchant has made on the application can be used as the basis for action against the merchant should those representations have caused the acquirer to accept an account that it might otherwise have declined. The agreement should also give the acquirer broad discretion to create chargeback reserves and hold the money through any time following termination that the Visa and MasterCard rules would still permit a chargeback. Instead of relying on '180 days following termination' under the assumption all chargebacks will have occurred in that timeframe, the contract should instead provide a reasonable time after all chargeback rights under the rules will have expired and the acquirer has sufficient time to complete its accounting for the chargebacks.

Third, the rules require that a merchant terminated for cause, most frequently due to excessive chargebacks, be immediately listed on the Terminated Merchant File. The contract should clearly state that such an action may occur and provide the merchant's waiver of any claims or causes of action that could result from being listed on the TMF.

And last, if the acquirer's agreement with an ISO allocates some or all risk from chargebacks to the ISO, the acquirer can gain additional security, beyond any merchant or ISO reserves, by requiring the ISO to assign some portion of its portfolio to the acquirer in the event the ISO is unable to cover, from its reserves or other financial resources, all chargebacks for which it is responsible.

Following these suggestions and adding dozens more won't keep an acquirer out of court if a merchant believes it has a grievance and obtains a lawyer who agrees. However, having clearly addressed those issues in all aspects of the merchant relationship is likely to obtain a more positive result for the acquirer.

Ms. Ford, a licensed attorney, has over 14 years legal and consulting experience in the industry and is currently SVP and General Counsel for CardSystems Solutions, Inc. She resides in Tucson, Arizona, where her company maintains its third-party authorization, clearing and settlement operations.

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