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Credit Card Refund Scam Against Merchants!
One of my clients called recently to ask some questions about refunding a customer. This particular customer paid a deposit on a custom engineering project and then decided to cancel the order. The merchant told this customer he would refund the card. However, the card holder argued that they didn’t have the card anymore and could the merchant write a check? The merchant called me to inquire.
The answer is a resounding, “NO!” This is a scam waiting to happen.
A cardholder typically has up to 6 months to contest a transaction with the bank that issued the credit card. When the issuing credit card company then carries out the chargeback with the merchant’s processor for the amount of money contested, the money for the chargeback is immediately sucked out of the merchant’s bank account. The processor is required to do this by law. In a few days, the merchant gets a chargeback notice about the issue with seven days to contest from his point of view.
Now, had this merchant already refunded the cardholder with a check, they might think they would show his processor the invoice and the canceled check. But this does not resolve the issue with the processor. All refunds for credit card payments must be refunded by credit card only. Even if the customer’s story were true, that they didn’t possess their card anymore, or that the card was canceled, stolen, or whatever, it does not matter. The refund can always be issued to that old card.
If the merchant had written a check to this customer for the refund amount, they would lose the money three times; once for the product or service lost, second from the check cashed, and thirdly from the chargeback from their processor.
And the processor is not the bad guy here. The processor is merely following the Visa/MasterCard rules and regulations. It is up to the merchant to understand how to handle a merchant account. It is up to the merchant to do due diligence in accepting credit cards. Just because most of the time, the money is deposited from a credit card transaction directly into their bank account the next day, and it feels like cash does not mean it is cash. The merchant is, in fact, accepting credit.
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