Everything Landlords Should Know About Credit Card Chargebacks
December 23, 2020
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Online rent collection has become crucial to the success of a real estate business. The benefits of online rent payments are extensive. Just some of the most notable include reduced delinquencies, recurring and automated payments, flexible payment options, and automated bookkeeping. These alone should illustrate the importance of collecting rent online.
Unfortunately, online payments do come with some risk. ACH transactions can bounce, would-be tenants can commit online payment fraud. But one risk of online payments seems to get brought up as a concern by landlords more often than any other: credit card chargebacks.
We’ll spoil the ending for you – credit card chargebacks are not something you should be worried about, but they are something you should be informed about.
Credit card chargebacks can reverse what was a successful payment, taking money straight from your wallet. You likely have some idea of what chargebacks are, but it’s important that you understand why credit card chargebacks happen and what they mean for you as a landlord. Below, we take an in-depth look at chargebacks and how they relate to your real estate business.
What are Credit Card Chargebacks
Under the Fair Credit Billing Act (FCBA), consumers have the right to dispute charges that they believe have been made in error on their credit card. This type of dispute is known as a chargeback. Applicable errors can include being charged twice for a purchase, being charged for an item that has been returned, being charged for an item that was never received, or a fraudulent transaction they had no knowledge of.
The Consumer Submits a Chargeback
When consumers exercise their right to dispute charges they believe to be made in error, an investigation ensues in order to determine if the charge was, in fact, incorrect. The credit card company reaches out to the business on behalf of the consumer and requests information proving the charge. Depending on the reason for the dispute, the evidence requested may vary. For online payments, it typically includes some sort of receipt of goods, IP address information of the access point, and billing information collected.
Merchant’s Respond to a Chargeback
Cardholders generally have up to 120 days to submit a chargeback request on a payment they believe to be fraudulent or incorrect. Once submitted and delivered to a merchant, the merchant has 45 days to respond. The merchant can accept the chargeback and the funds will be immediately deducted and returned to the consumer, or they can provide evidence to contest the chargeback.
Issuing Bank Reviews Evidence and Rules
Once a merchant’s evidence is submitted, the issuing bank from which the funds originally came reviews the evidence and rules whether or not it’s sufficient. If this doesn’t feel entirely objective, it’s not. Chargebacks generally favor consumers and that is by design. Chargebacks tend to be a “guilty until proven innocent endeavor” and the jury in this case is the cardholder’s bank, not the merchant’s bank. Rulings tend to be fair, but lean towards the consumer.
Why Credit Card Chargebacks Matter
The ability for consumers to dispute charges they believe to be incorrect is an important right. With online payments dominating the market and ecommerce on the rise, protections must be in place for consumers. No one’s denying that.
On the flip side, however, scammers, those with bad intentions, or people who are misinformed can also unjustly dispute charges made to their credit card. Even if the charge is completely justified and the merchant took all of the correct steps to verify the transaction, it’s not that uncommon for a fraudulent dispute to go in favor of the consumer.
The last thing you want is to lose out on money that you’re rightfully owed because someone unfairly disputed a charge and won.
What Credit Card Chargebacks Mean for Landlords
There are many benefits of accepting rent with credit cards, which is why we continue to see more and more landlords switching to online rent collection. With that, however, comes the chance of chargebacks. There are a few primary instances in which landlords might be pulled into a chargeback dispute.
Rental Applications. The most commonly seen chargeback dispute relating to property managers comes from rejected applicants. Too often, applicants who have paid an application fee, but were later denied housing, feel entitled to their money back. In such cases, rejected applicants will often file a chargeback dispute if they paid the fee using a credit card. They might do so as a way of recouping losses for being rejected or out of ignorance because they were simply confused about the charge.
Tenants unable to make rent. If a tenant is in a tight financial bind, they may turn to their credit card to make their rental payment on time and avoid late fees (or eviction). This can be good as it extends a line of credit to tenants, but if they don’t get their finances in shape before their credit card bill is due, it can go south. In an effort to lower the amount they owe, a savvy – although dishonest – tenant may issue a dispute on the rental payment they made.
Unknown charges. In some cases, the person renting from you is not the person paying rent. This is often seen among younger renters, college students the most common example. A parent, grandparent, guardian, etc. reviews their credit card, sees an unexpected and abnormally large charge and doesn’t realize what it’s for. In these cases, they might unknowingly file a fraudulent chargeback claim simply because they’re unaware of the reason for the charge.
How to Combat Unjust Chargebacks
Dealing with chargeback claims can be messy and a headache. Fortunately, there are a few steps landlords can take in order to be prepared in the case of a chargeback or to avoid them entirely.
Choose the right software partner. A good rent collection or property management software platform will perform or make it easy for you to perform all of the suggestions below. Some, like Innago, will even assist you in fighting a chargeback when needed.
Keep detailed transaction records. We’ve mentioned it before, but it bears repeating: keep consistent, detailed, and accurate records of every financial transaction related to your real estate business. This is useful not just when you’re trying for a new loan, during tax season, or in reconciling your accounts. It can also help you fend off an unjust chargeback.
Be prepared with the proper documents. In the case that a chargeback is filed against you, you must be prepared with the proper documents. This not only helps the investigation end quickly, but also increases your chances of winning the dispute. You should have the following prepared:
- Rental applications
- Credit reports
- Lease agreements
- Resident ledgers
- Copies of driver’s licenses and/or pay stubs
- A signed letter from the resident authorizing that they made the payment
Be clear about fees. In order to avoid chargebacks from rejected applicants, make it clear that application fees are nonrefundable. If they choose to file a dispute anyways, be sure to require signatures verifying that applicants are aware that the fee was nonrefundable.
Screen tenants thoroughly. The best way to avoid tenants who might fraudulently file chargebacks is to screen applicants thoroughly and require background checks. As long as you have an effective screening system in place, you should be able to weed out potentially problematic tenants.
Remain vigilant for signs of potential chargebacks. It’s surprisingly not too difficult to predict when a tenant might fraudulently report a charge to their credit card. Some signs include paying late, paying via multiple payments methods, and bounced ACH payments or checks. You can usually trust your gut feeling about potential fraud.
Include online payment authorization in your lease. Requiring that tenants sign a clause in their leases authorizing online payments acts as an added layer of protection against fraudulent chargebacks. It’s just one more insurance policy that would increase your chances of winning a dispute.
Require signatures. To avoid losing out on money due to roommate disputes, be sure to require signatures from everyone living in your units, even those staying “temporarily.” Even better, acquire those signatures digitally from the same platform the tenant will use to pay rent. This will make a dispute even easier to resolve.
Don’t Worry About Chargebacks on Rent
Less than .05% of all transactions in Innago in the last year experienced a credit card chargeback, so chances are you’ll never even see one.
And most of those were due to ill-informed parents on student housing transactions – an easily resolved dispute. The upside of permitting your tenants to pay with a credit card far outweighs the risk. That being said, understanding the chargeback process and preparing yourself for the unlikely event that that a chargeback does occur will give you piece of mind as you begin to collect rent online.