A Merchant’s Chargeback Rights

merchant rights

How Merchants Can Uphold their Chargeback Rights

When people hear the phrase, “chargeback rights,” they think of consumers. Consumers have the right to file a chargeback against unscrupulous merchants and in instances of fraud. But what about merchant chargeback rights?

Merchants Have Rights Too

According to the card networks’ policies and guidelines, merchants have rights too. The rights and liabilities for merchants depend on the chargeback rules and reason code associated with the transaction dispute. Each individual case will affect merchants differently, but chargeback rights generally include the following stipulations:

  • The issuer can file a chargeback for the full transaction amount, a chargeback for a portion of the transaction amount, or several partial amount chargebacks. However, the chargeback (or all the partial amount chargebacks added together) cannot exceed the original transaction amount. The chargeback can include any shipping or handling fees for an item not received and any surcharges in connection with the disputed transaction.
  • A chargeback cannot be filed for the cash-back portion of a cash-back transaction.
  • If a purchased item arrives after the agreed-upon delivery date, the customer must first try to return the merchandise before seeking a chargeback.
  • If a customer returns an item, the issuer cannot process a chargeback until 15 calendar days have passed from the time the return was made. This gives the merchant plenty of time to offer a refund. However, the issuer can make an exception and file a chargeback early if waiting 15 days will exceed the chargeback filing deadline.
  • Several reason codes require that the cardholder attempt to resolve any issues related to the transaction with the merchant before filing a chargeback. The issuer is supposed to verify this action.
  • The chargeback time limit will depend on the reason code. Usually, the consumer must file a chargeback within 45, 60, 90, 120, or 540 calendar days. The clock starts ticking on the day the transaction was posted, the day the credit card statement was issued, the date the problem was discovered, or other applicable dates depending on the reason code.
  • In most cases, all steps of the chargeback process (including pre-arbitration) must be completed before either party can proceed to the arbitration process.

When Merchant Chargeback Rights Get Violated

Unfortunately, there are several instances where merchants’ chargeback rights get violated.

Misplaced Incentives

Nearly all businesses operate under the slogan the customer is always right. The card networks are no exception. Ultimately, both the banks and the cardholder are the networks’ “customers.” Since these two entities can do no wrong, everyone tends to turn a blind eye when merchants are overrun by illegitimate chargebacks.

A traditional wholesale model marks-up the cost of an item as it passes from one entity to another, normally passing through just a few mark-up channels. Chargebacks also follow a wholesale mark-up pattern, but the broker layers are much more significant. A chargeback can go through five or more re-pricing structures before it is dealt to the merchant. What starts out as a $5 fee could end up being a $45 cost for the merchant (a mark-up that is almost 10 times the original price on a single item).

Because of the wholesale model, chargebacks become a significant profit source for independent sales organizations (ISOs) and processors.

Likewise, issuers are enticed by chargebacks too. They are a no-hassle solution that can reduce expenses and rarely come with consequences.

Network Loopholes

Because each network has such an extensive list of chargeback reason codes, it is easy to assume those codes cover every potential cardholder dispute possible. However, there are actually several situations where a cardholder has a legitimate dispute, but there isn’t a corresponding chargeback reason code.

In these situations, a pre-compliance chargeback is filed. Pre-compliance chargebacks are known as “exceptions.” As their name implies, a lot of chargeback rights are exempt too.

While a pre-compliance chargeback won’t negatively affect the merchant’s chargeback ratio, there aren’t proper representment rights available in these situations. The traditional chargeback process offers merchants the right to recoup lost profits; an exception threatens that right.

Friendly Fraud

Friendly fraud, or chargeback fraud, is one of the most significant examples of merchants’ chargeback rights being violated. Sadly, in our rush to protect consumers, we’ve inadvertently given them a powerful weapon to wield against the merchant.

Credit card fraud cost online merchants more than $100 billion in 2013. Of that, experts estimate $4 billion was tied to chargeback fraud. In reality, the number is far greater.

More than half of all chargebacks are filed with reason codes related to fraud or unauthorized transactions. However, a recent study revealed more than 81% of consumers admit the chargeback was filed out of convenience (they didn’t have time to contact the merchant for a refund).

Even worse, nearly half of the survey respondents didn’t know they were filing a chargeback. The consumer mistakenly thought the bank could terminate a subscription or simply asked about the source of a confusing transaction on the card statement. These consumers didn’t report the transaction as unauthorized; they inaccurately thought the bank was communicating with the merchant on their behalf.

The chargeback rules established by the networks clearly state the cardholder must attempt to resolve the issue with the merchant before filing a chargeback. Issuers are supposed to make this action a chargeback prerequisite. Few banks, however, take the time to follow up on technicalities. As such, consumers have learned they can exploit the system and seek a no-hassle chargeback instead of a traditional refund.

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The Most Important Chargeback Right

Of all the rights a merchant has earned through the chargeback process, representment is the most important. However, fighting illegitimate chargebacks is more than a right; it is a responsibility.

Issuers file fewer chargebacks against merchants who consistently dispute them, but unless merchants unite and fight the unjust system, banks will continue on their current path.

cycle of friendly fraud

Disputing chargebacks sends a powerful message to banks. Changing the currently unjust chargeback system could effectuate long-term change for all card-not-present merchants. If banks accepted fewer chargebacks, processors would need to manage less risk, merchants would have fewer costs, consumers wouldn’t have buyer’s remorse and less chargeback fraud would be committed.

Fight for Your Rights!

If you’re one of the merchants who assumes chargebacks are just a part of life, it is time to stand up for your rights. Fight back!

Chargebacks911® offers the industry’s best chargeback dispute services. We fight chargebacks on your behalf, offering a guaranteed ROI. Contact us today and we’ll show you exactly how much you can save.

Recoup more profits and send a valuable message to the credit card industry at the same time. You do have chargeback rights; it’s time you use them to defend yourself.

Prevent Chargebacks.

Fight Fraud.

Recover Revenue.