Why this SME owner called it quits over a bad debt and is warning others about ‘merchant chargebacks’

Graphic designer Diane Kennedy is warning SME owners about the danger of ‘merchant chargebacks’ after a bad debt from an international client saw her call it quits and sell her small business.

Kennedy’s plea comes just weeks after another small business owner, Peter Borain, warned against unfair regulations on Australian SMEs that had caused him to consider throwing in the towel.

Kennedy told SmartCompany she wants to warn others about the dangers of selling goods or services to overseas customers, after a major client refused to pay for her design work and used a credit card ‘chargeback’ on a payment for her services.

A ‘chargeback‘ describes a bank’s process of debiting amerchant’sbank account with an amount of a transaction that had previously been credited.

Originally, chargebacks were created to protect consumers from dishonest merchants, but Kennedy is warning dishonest business customers are exploiting a method that always votes in their favour.

Kennedy says she had worked with a business client from the US for several months to design a website and logo, and had happily interacted with the client via phone and email during that time.

“She would call everyday while we worked on this,” Kennedy says.

Kennedy says during one exchange, days before the site went live, the client got upset as she explained how to use some of the back end features.

“She said the manner I used was rude and she wouldn’t pay a cent and wanted her money back. There had been no indication before this that she was unhappy. She’d said, ‘I love the concept, you’re doing a great job,” Kennedy says.

The client then put in a merchant chargeback on her Visa card through the US Paypal office for the $2500 deposit she had paid for Kennedy’s design. She also refused to pay a further $2500 they had agreed on for the work and another $2500 to Kennedy’s third party web developer.

Days later, Kennedy’s work and the work of her developer appeared on the clients’ website.

“She then pulled down the site, locked us out, and then copied the site with an offshore developer in a third world country keeping the code,” Kennedy says. “My developer checked, the entire source code is the same [on the new website].”

Upon approaching Visa about undoing the chargeback, the credit provider decided Kennedy’s client had never received any goods or services from her.

“Visa decides in the cardholder’s favour every time,” says Kennedy. “Merchants have no right with credit card transactions, even if you can show it’s legitimate.”

Kennedy says she has a full file documenting the work, her client’s postal and IP address, full credit card information and emails and screenshots proving the amount agreed upon for the work. She sent this documentation to Visa, but believes the credit provider has not looked at it.

Kennedy has since sold her business, Blossom Graphic Design, to an unrelated party to cover some of the costs incurred by the incident, but says the biggest price she had to pay was an emotional one.

“It’s been an absolute nightmare. It significantly eroded my business confidence. I lost faith and didn’t want to put family through the stress.”

“[The client] either just changed her mind unfairly at the last minute or she set me up,” Kennedy says.

Kennedy says she has since found online groups of merchants which have experienced similar issues with chargebacks and are petitioning banks to review and reform their practices.

She is now urging other small businesses that operate globally to beware of their limited rights when dealing with an overseas client.

“If [the client] was in Australia, I could have done more about it, I could have reasoned with her,” says Kennedy.

Her advice to other small businesses is to have payments transferred electronically to back accounts, rather than by credit cards.

“Try to get the money transferred electronically, don’t think once you’ve got the authorisation it’s your money because anyone can put in a chargeback and Visa will side with the cardholder every time because they know they can get away with it.”

“This is the story of modern business and it potentially affects everyone.”

SmartCompany contacted Visa but did not receive a response prior to publication.