At Tern, we are committed to helping advisors build and protect their travel businesses. Many advisors we speak with spend a lot of time thinking about growing their business. What gets significantly less attention is protecting the business they’re working so hard to build. We get it. Understanding the nuances of chargebacks, and how this differs from PCI compliance, isn’t nearly as fun as crafting that next dream trip for your client. However, it still matters a lot.

This goal of this post is a starting point to help you understand this complex topic. It's not an all-encompassing guide. You should also note that it is meant for informational purposes only - we are not lawyers and aren’t giving legal advice.

The risks to travel advisors when using a client's credit card

As we built our new credit card authorization tool, we spent a lot of time understanding this topic. We invested heavily in conversations with travel industry lawyers and experts. As we launched the tool, what we quickly learned is that this is not a well-understood topic among travel advisors. With this blog post, we hope to help with that.

How do chargebacks happen in reality?

Let’s say a client calls you and says something along the lines of: “Oh, I’ll just give you my card details over the phone.” that sounds good to you, so you write down the card details in a secure spot. You make a cruise booking valued at $12,000. Life is good. You’re already dreaming of that commission check.

A few months later, shortly before the cruise, your client calls you. They have experienced a family tragedy and can no longer make the trip. Unfortunately, they declined the travel insurance you quoted them. The trip is non-refundable. They have no way to get the money back. You feel awful, they feel awful. It’s a mess.

Shortly after you hang up, the client comes up with an idea out of desperation.

They think, ‘I can just dispute the charge and my credit card will refund it’. They don’t know it, but they just triggered a chargeback putting you on the hook for the funds.

Their credit card company will automatically claw back the $12,000 from the cruise line. Since you entered the credit card on the cruise line's website you are (usually) on the hook in the eyes of the supplier.

The cruise line needs proof you had explicit approval from the cardholder to use their card with the cruise line for the amount charged. Unfortunately, you took the card details over the phone. There is no paper trail and now you may be on the hook for the $12,000.

That big commission check just turned into a nightmare.

Chargeback 101: Chargebacks protect cardholders from fraud

Before we get into how we can prevent this mess in the first place, let’s talk about why a chargeback exists. When I was living in London, I was going through my financial statements. I started noticing some weird charges. Five visits to McDonalds, 14 UberEats transactions in a week, several student bars. I hadn’t made any of these purchases.

I called American Express and said I thought someone had stolen my card. They took me through transaction by transaction and we figured out which ones were legitimate and which weren’t. I was refunded in full for the fraudulent transactions. Phew.

Now that money didn’t come out of American Express' pocket. They turned around and initiated chargebacks with the merchants that sold the goods and services to the fraudulent user of the card.

UberEats, McDonalds, and those bars lost that revenue. They essentially gave away those goods and services because they were sold to a fraudulent user. As a cardholder, this is great. It keeps you from being financially ruined if someone steals your credit card. However, as a business owner, it opens up a risk.

Now you may be thinking "well the travel companies are the suppliers so they are responsible for chargebacks, right?" In most cases they pass that responsibility on to you via their Terms and Conditions. When you give them the credit card information you're saying you have permission to use that card for that charge. So in the diagram above you're the merchant that is on the hook for the cost of any fraud. That's usually fine until there is a fraudulent claim of fraud (yes it happens, a lot).

Clients may ‘fraudulently’ chargeback charges when they no longer wish to travel

Most newer advisors we talk to say “oh I know my clients, they would never do that” when we talk about chargebacks. Most experienced advisors we talk to have a story (or many) about a client like in our example. In many cases, the client doesn’t realize that by charging back a trip they agreed to it hurts you. Chargebacks are misunderstood generally.

Still, they do it. Even if they knew full well they told you to book the vacation on the phone and agreed to the cancellation policy, when things go bad and desperation hits they look for any opportunity to get their money back.

You’re usually on the hook for proving to the supplier you had the right to use the client's card.

From the credit card company’s point of view, they deal with thousands of chargebacks a day. In 2021, the FTC received reports of 389,000 credit card fraud cases representing $32B in losses. That’s over 1,000 per day in the United States alone. According to Clearly Payments, travel is the second most common industry for chargebacks.

By default, credit card companies assume that their clients are telling the truth. So they usually initiate the withdrawal/withholding of funds immediately. The first person you’re likely to hear from is the supplier you used the card with asking you for proof of authorization so they can fight the chargeback. Unfortunately, fighting the chargeback isn’t as easy as just telling the credit card company what happened. Let’s dig into why.

To win a dispute you need to convince the credit card company their clients are fraudsters

What does that have to do with chargebacks? Well, if you read the American Express reference guide for merchants (aka companies who accept their cards), it says they can chargeback: “whenever Cardmembers bring Disputed Charges…” and that

“All judgments regarding resolution of Disputed Charges are at our sole discretion.” - American Express Merchant Reference Guide