7 Practical Tips for Merchants to Avoid the Risk of Chargeback and Recalls

Published on 19th January 2021

Let’s go back in time –in the past when a merchant received a wire transaction, it was considered the most secured method of payment. Using the SWIFT or SEPA systems, money is transferred from one bank to the other and the account of the merchant was credited with the amount wired.

It was considered so safe, that suppliers delivered the product F.O.B (free on board) or provided the service based solely on a SWIFT/SEPA message copy confirming that the funds were sent and before the funds actually settled into their account.

Is it really safe? Is the merchant protected?

Let’s review the situation a bit more closely. Merchants often receive investments or payments from clients using the international wires system, sending funds through a bank or a payment processing company such as Wallter, UAB (WLT). The client then receives a service or product from the merchant. 2-3 months later the client approaches his bank and requests to make a recall of the funds he sent previously. The product was delivered, the service was provided. The client for whatever reason demands his money back and approaches his bank. If for example the client invested in an investment vehicle (forex exchange rate, cryptocurrency, stock options or a specific stock) – his investment may go up or down in value. Yet he would still claim a recall of the funds from his bank. Let’s look at this situation.

What is the exposure to the merchant?

The problem: Often the product was delivered or the service was provided, and then the bank or the payment service provider decides to chargeback the merchant’s account.

This relationship between the merchant and the client is now affecting the banking relationship of the merchant and his financial institution and/or his payment service provider and/or the risk scoring of all the financial services providers in the chain. In today’s world, compliance departments in banks grow to enormous sizes. Transactions are monitored closely due to stricter and stricter regulatory requirements by the authorities who are forcing the financial institutions to participate in the search for money laundering and/or terrorism funding.

From the perspective of the financial institution, once a recall of funds request is received, it alerts the financial institution’s compliance department. Too many recalls on an account, very similarly to chargebacks in credit cards, raises the risk level of the account and triggers sanctions by the financial institution in the form of account suspension and/or termination of the relationship, this may lead to further investigation for the financial crime units and even further sanctions on both the merchant’s account and the financial institution.

For the merchant, this means his business account, in some cases his only transactional account, will be terminated and this can cause direct damage for the merchant. For a payment processing company, it will terminate one of its network and chain of bank accounts and is ,ore significant damage than that of the merchants’. For the financial institution it will raise the level of risk.

How do we solve this problem? What should merchants do?

1. Merchants must keep AML policies in place and collect clients’ information.

2. Merchants must post adequate warnings and disclaimers on their websites and provide a return or cancellation policy, to provide the investors and clients with knowledgeable information about their investment and payment method.

3. Merchants must deal with these situations in their terms of use and provide a clear clause that no recalls are allowed once products are delivered or services are performed.

4. When merchants get notifications from the financial institution and/or the payment service provider, they should take immediate actions to mitigate the damage. Responding to clients, answering their needs and concerns is often the right and cheaper solution. Resolving the dispute can be sometimes cheaper and more advantageous for the merchant.

5. Merchants must make sure the clients sign an ‘I Accept’ before they wire funds, confirming that they know which products they purchased or which services they requested and if higher risk is involved, notifying them of the risk and that they cannot make wire recalls.

6. Lastly, merchants must choose their payment processing provider wisely. Maintaining the relationship with your payment gateway is by far more important for your banking needs and your cooperation’s development. Choose a company that can protect you and that has the knowledge and expertise to deal with these complicated banking situations. More importantly, adhere to and maintain your payment processor AML procedures and compliance rules, respect them and don’t abuse the solutions provided to you. You will better protect your business and strengthen your banking services and mostly mitigate damage and have control over recall cases.

7. We highly recommend to accept SEPA INSTANT payments, where applicable, which does not allow for recall or chargeback, hence once the funds are received by the merchant, the clients cannot recall or chargeback the payment.

By Isaac T. Armoni, 

Chief Executive Officer of Wallter®.

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