Don’t Be Caught Off-Guard with Credit Card Chargebacks! Part 1

By Kathy Olevsky

In our school, as in most martial arts programs, we charge our clients monthly for their memberships. In our case, we try very hard to draft from bank accounts, rather than credit cards. However, most of our clients actually prefer to have us charge their credit cards.

We currently have 86% of our accounts charged to credit cards. When we have approached the 25- to 40-year-olds, most of them admit to not even having a check for their checking account. Their age group distributes money primarily through online methods.

In 2018, we experienced a growing problem in our industry. We were notified by a credit card processor that they had taken money out of our account because of a chargeback. Basically, a student disputed our charges.

As it turned out, over the past year we have had multiple students file disputes with their credit card company. The policy of these companies is to automatically take the money back and give it to their client. In our case, if we wanted the money back, we were required to prove why we were entitled to it.

We filed a response with the proper paperwork, which had to be done in a very timely manner. In one case, we were found to be correct and the money was returned to us. In other cases, we were found to be at fault and the money was left with our client. However, even in the case where we were found to be correct, the student then filed an appeal and inevitably won their case.

At this point in the process, we were told that we would have to enter the arbitration process — and that it would involve a fee of as much as $500 to get started!

We had a contract membership for the students we billed. We had a form with a copy of their credit card (blacked out numbers, except for the last four digits). The student had signed this form accepting that we were authorized to collect the funds from this card.

We also had proof of attendance in both digital and paper form. We had copies of all correspondence with the student. Even though the students did attend classes and we had proof of it, we lost all of these cases through the 2^nd appeal process.  

In addition, we had one student who filed a dispute for two months of fees, a total of $378. And when he was given his money back, he filed for another two months further back. He was also given that money back!

This, of course, brings up the question: Just how far back can someone dispute? Can they go back and ask for an entire year of martial arts membership fees?

When questioned about this, my bank officer told me that MasterCard and Visa generally side on behalf of the client, particularly if it is a recurring transaction like ours. My bank could not give me a clear answer as to how far back claims typically go, however. Now, I thought our whole industry might be in trouble if a student who took classes for two years could go back and ask for a refund of $5,000 worth of membership payments.

Even worse, can you imagine the panic a school owner would have if a family of four, who even attended regularly, could go ask their credit card company for $10,000 or $20,000 back?

At this point, I decided I had to learn more to protect our income. In my research, I learned something that is already well-known in the banking industry: There are people who make these claims and do get their money back, even when they have received the goods or services. They do this knowingly, with the intention of exploiting the service provider.

These types of claims are known as “Friendly Fraud.” Check back next month to find out what more I learned and how we are fighting to keep a level of security in our income.

Kathy Olevsky can be reached for questions or comments at [email protected]