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 card holder has up to 6 months typically to contest a transaction with the bank or company that issued the credit card to them.  The credit card issuing company always sides with their customer, the card holder.  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 7 days to contest from his point of view.  Now, had this merchant already refunded the card holder with a check, he or she might think that they will simply show his processor the invoice and the cancelled 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 cancelled, or stolen, or whatever; it does not matter.  Always a credit can be issued to that card in the form of a refund.  The customer can claim that credit from their credit card company.

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, 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 law and correct procedures.  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 actually accepting credit.