CHARGEBACKS 101 – Everything You Need to Know (but was afraid to ask)
November 28, 2018
ANY kind of dispute with a customer is something you want to avoid, and this is especially true when it comes to chargebacks. The following information is designed to help you better understand chargebacks and provides some steps you can take to prevent them from happening.
What is a Chargeback?
A chargeback is a transaction that has been disputed by the cardholder or card issuer and returned to us, your card processor. A chargeback is also known as a ‘dispute’.
This also includes violations incurred by a merchant against the card processing procedure leaving the cardholder/Issuer in a financial loss as a direct result of the violation. This could include, but not limited to, fraudulent credits processed, mismatching details on authorization and clearing records, and authorization approval received after a declined response.
Why Does a Chargeback Happen?
A chargeback is a transaction that has been disputed by the cardholder or card issuer, and returned to us, your card processor. A chargeback is also known as a ‘dispute’.
There are several predominant reasons a consumer or its issuing bank initiates a chargeback. These include, but are not limited to, the following scenarios:
- Clerical errors — Where the cardholder claims an incorrect amount was billed to their account, or they were double-billed for a single purchase, or disputes where cardholders claim they paid for a transaction using one form of payment and were subsequently debited for the same transaction using another form of payment (cash, other credit or debit card, check, etc.)
- Fraudulent disputes — This occurs when a customer is charged for a transaction, which they claim they did not authorize nor participate in. This may take place either on a card present (face-to-face sale) or a card-absent environment (Mail Order/Telephone Order, E-commerce, Recurring charges, No Show).
- Customer dissatisfaction — This includes disputes due to delays/non-receipt of purchased goods/services, quality related concerns, and/or defective or not as described merchandise/services. Canceled/returned orders for which the cardholder failed to receive a refund is also another cause of a dispute.
process involved in the chargeback settlement as well as the associated timelines and fees.
- The consumer doesn’t recognize the name of the business — This would most likely happen if the name on the customer’s statement doesn’t match the business name from which they purchased an item or paid for a service.
- Authorization-related disputes — These disputes are initiated by the Issuing bank if the merchant fails to capture proper, full and valid authorization following the correct authorization procedure before settling a sale.
- Late settlement of charges — This, on the other hand, includes reprocessed transactions that were settled past the required timeframes by Card Schemes.
Process involved in the chargeback settlement as well as the associated timelines and fees.
Why Does the Chargeback Process Look Like?
The basic cycle of chargeback filing to resolution:
- The consumer requests a chargeback from their bank (issuer). In some cases, disputes are initiated by the issuers themselves.
- The issuer reviews the chargeback request and stages an investigation.
- The acquiring bank (acquirer) reviews the chargeback and relays information to the merchant, along with the required documentation to defend the dispute in adherence with card brand’s regulations. The situation details are discussed within a specified time limit based on the rules set by the card brand.
- The merchant may either accept or reject the chargeback. Should they reject it, based on the dispute condition where the chargeback filing was submitted, the acquirer will now present the chargeback response to the issuing bank, including all the viable information and documentation gathered from the merchant.
- The issuer reviews the information and makes a decision on the chargeback validity. This will be the card issuer’s discretion to pursue or escalate this to the merchant.
- If the issuer decides to pursue the case, Step 4 will be repeated wherein the acquiring bank (acquirer) will review their progressive chargeback’s validity and relay to the merchant should new information was provided. If the acquirer retains their decision to defend the case, this may be escalated to Card Schemes (Arbitration), where a ruling will be issued.
Is There a Time Limit on Initiating a Chargeback?
Generally, consumers have 120 days from either the purchase date, or the date they first discovered a problem, to file a chargeback. However, time limits can vary based on the nature of the dispute or the card brand where the dispute was filed.
What Fees Pertain to a Chargeback?
Unfortunately, the process costs merchants money in the form of chargeback fees and most often these fees apply regardless of whether the merchant wins the arbitration process. Retrieval request fees range from $ 2.50 to $ 5 while chargeback fees vary per payment processor but are in the range of $ 15 to $ 25 per incident. If the dispute reaches arbitration stage, there may be fees of approximately $ 250 to $ 500 from the card brand to be shouldered by the losing party.
On top of the fees, the major card brands have strict limits - generally 1% of sales volume - that can trigger additional fines or account termination.
How merchants can help prevent chargebacks.
How Do I Prevent a Chargeback?
The best defense against a chargeback is to avoid it to begin with. How? Here are some tips:
- Communicate with your customers. Many chargebacks can be avoided through open, direct communication. Clearly describe your service to customers to avoid confusion. Make sure you are detailed in explaining your return, cancellation and refund policies or what the customer can expect in terms of service after the sale. Also, be sure to follow recommended proper disclosure of the terms and conditions. Per card brand rules, if the transaction took place in a card-absent environment, it is mandated that the full return and refund policies should be located on your website or application and should include one of the following:
- In the sequence of pages before final checkout, a "click to accept" or another acknowledgment button, checkbox, or location for an Electronic Signature.
- On the checkout screen near the "Submit" button (but not solely a link to a separate page). For card-present or face-to-face sale, full return and refund policies should be located on Transaction Receipt (all copies, near the Cardholder signature area or in an area easily seen by the Cardholder). If the disclosure is on the back of a Transaction receipt or in a separate contract, it must be accompanied by a space for the Cardholder's signature or initials. Also, make sure to respond to customers’ inquiries quickly and efficiently to avoid confusion on their end.
- Abide by Card Processing Protocols as following the basics will prevent many chargeback opportunities:
- If a swiped or dipped card transaction is denied, DO NOT try and run the transaction a second time. Multiple entries can trigger a chargeback.
- When obtaining an authorization and you have initially received a ‘Decline’ or ‘Do Not Honor’ response, do not settle the sale. Rather, ask for an alternate payment or another card that will obtain an approved authorization from the issuing bank instead of forcing a sale that did not receive a valid approval from the bank.
- Confirm the expiration dates on all credit and debit card transactions
- Get the customer’s signature on a magstripe-only transaction. The signature phase-out recently announced by the card brands applies only to EMV® (chip card) transactions. However, please note that PIN verified transactions do not serve as proof receipt of purchased goods/services and proof of proper disclosure of the merchant’s specific terms and conditions (e.g. ‘NO RETURN POLICY’, ‘ALL SALES ARE FINAL’). We, therefore, suggest merchants have the receipts/invoice signed by the cardholder at all times.
- Always swipe physical cards when possible and obtain CVV/CVC codes
- Use or enroll with a 3D security program, specifically Verified by Visa and MasterCard Secure Code if possible
- Follow the highest form of security on accepting payments by reading a card’s chip function and accepting it through PIN when possible
- To avoid duplicate transactions, completely void any incorrect transactions before reprocessing another sale
- If a recurring transaction was canceled, always ask for an alternate payment from the customer instead of billing them on the same card
- For addendum disputes, always ask for the cardholder’s authorization - specifically for the cardholder’s signature on the invoice detailing the breakdown of the charge before billing their card for delayed and amended charges. This could include, but not limited to, damage fees, smoking charges, parking fees, toll fees, etc.
- When a cardholder buys merchandise from a merchant, the merchant must not refer the cardholder to the manufacturer in lieu of attempting to resolve the problem. Since the merchant sold the merchandise to the cardholder, they are the “merchant of record”, and responsible for addressing the dispute.
- Pencil rubbing of a card or photocopy of a card is not considered proof of a valid Imprint
- Make sure that there is an offsetting sale transaction before issuing a credit transaction
Although sometimes unavoidable, chargebacks can be significantly reduced by following these basic tips and maintaining strict compliance with card processing rules and requirements.