Breaking Down the Chargeback Process: A Step-By-Step Guide
The chargeback process can be confusing, time consuming, and costly for everyone involved. That said, it will be you — the merchant — who’ll bear most of the cost.
But, what are the steps involved in the chargeback process? If the odds are already stacked against you, is fighting chargebacks even worth effort? And if so, then what’s the best strategy to win?
In this post, we'll examine the credit card chargeback process from beginning to end. We’ll look at some of the roadblocks and challenges you’ll likely encounter along the way, and provide a few tips to overcome them.
Recommended reading
- Debit Card Chargebacks: Everything You Need to Know in 2024
- Provisional Credits: Here’s Everything You Need to Know.
- Here are the 7 Valid Reasons to Dispute a Charge
- Provisional Credit Reversal: Steps to Recover Lost Revenue
- Chargeback Reasons: 25 Reasons Why Customers File Disputes
- Chargeback Life Cycle: How Do Card Disputes Work in 2024?
What is the Chargeback Process?
- Chargeback Process
The chargeback process encompasses all the steps that take place between a cardholder's initial inquiry (or dispute), all the way through the resolution of that claim. Multiple parties may be involved, such as issuers, acquirers, merchants, vendors, and card networks.
[noun]/charj • bak • prä • ses/
The idea behind the chargeback process is simple. A cardholder has a problem with a transaction, and they can’t resolve that problem by dealing directly with you. As a last resort, the cardholder can appeal directly to the bank for help. Logical and easy… at least in theory.
In reality, the chargeback process is much more involved than it seems at first glance. Even a straightforward case involves multiple parties and interactions. Check out this chargeback process flow diagram for a basic look at how things work:
The above diagram illustrates the chargeback process in its most clear, simple form. There are a lot of details that we skimmed over, though.
In the next section, we'll take a closer look at each step. We’ll also point out some of the roadblocks that may complicate the chargeback flow.
Who Are the Players in the Chargeback Process?
Chargebacks are essentially disagreements between a cardholder and a merchant, with the cardholder’s issuing bank being involved, too. That’s just the start, though; there are multiple key players here, including:
- The Cardholder: The owner of the card involved in a transaction.
- The Merchant: The party who sold the goods or services being disputed.
- The Issuer: The bank which issued the card to the cardholder.
- The Acquirer: The bank which acquires payment on the merchant’s behalf.
- The Processor: The mediator transferring data between buyers, sellers, and banks.
- Card Network: The card brands (Visa, Mastercard, etc.) that oversee the process.
While all are affected, the amount of direct involvement each party has can vary from case to case. In most situations, the card networks won’t get directly involved at all. And in cases where the bank initiates the chargeback, the cardholder may not even know it happened.
Requirements will change depending on which bank or card network is attached to the claim. Each time a player is introduced into the process, there will be additional layers of cost, bureaucracy, and paperwork. There will be more input at each stage, as well.
This matters because it will all take time, potentially extending the process across weeks (or even months) of time. The funds being disputed will be inaccessible until the claim is resolved. In some cases, other parties may be taking up time you need to meet strict chargeback deadlines.
The Chargeback Process: A Step-by-Step Guide
Every stage of the chargeback dispute process offers specific challenges that can make the process more dense and complex. Let’s dive into each step and try to clear things up.
Merchant Challenge
Unfortunately, you probably won’t know a chargeback is coming until it happens. Plus, some chargebacks can be initiated by the issuer. And since the cardholder isn’t involved in those claims, bank chargebacks are very rarely reversed.
Chargeback Process Pro Tip
Pay close attention to chargeback reason codes aand ask the bank to clarify any details you discover that might not match your transaction records. Remember: you must respond to the claim as it was made, even if the reason code in question is bogus.
Merchant Challenge
Again, you may have no knowledge of a pending chargeback until the money has already been withdrawn. Funds unexpectedly disappearing from your account can catch you off-guard and create cash flow issues.
Chargeback Process Pro Tip
Closely monitor incoming communications. You have a limited window in which to respond to chargeback claims; usually, it's only a few days in practical terms. Timing is critical, so get started as soon as you learn of a dispute.
Merchant Challenge
Reason codes theoretically show the cause for the chargeback, but they’re assigned based on the cardholder's complaint. That means banks can be tricked into filing friendly fraud chargebacks. Plus, without knowing the true chargeback trigger, you can’t determine which dispute prevention tactics you really need.
Chargeback Process Pro Tip
While you must respond to the reason code assigned by the bank, you’ll want to identify the true source of the chargeback. Reason codes are often inaccurate or misleading; it’s important to know the true trigger to plan future prevention strategies.
Merchant Challenge
Contesting a chargeback requires specific documentation, which can vary by bank or by reason code. This may include a copy of the return policy, a signed receipt for delivery, or one of dozens of other documents. You need to be able to provide all this info under a very strict deadline.
Chargeback Process Pro Tip
Given the time constraints, it’s important to file everything you’ll potentially need for a represement before a chargeback hits. Transaction records, customer data, and more should be kept and organized so that you can recall it quickly, and at will.
Merchant Challenge
Deadlines. In most cases, you’ll only have a few days between learning about a chargeback and your deadline to submit a representment. That allows little time for collecting documentation. Many merchants lack the bandwidth and expertise to build compelling rebuttals in a timely manner.
Chargeback Process Pro Tip
As we saw in Step 4, being able to quickly access your evidence is critical. You’ll also need a concise, non-emotional rebuttal letter that argues your case. Using chargeback response templates can help speed things along, but the most important thing is having a response strategy in place before you need it.
Merchant Challenge
In addition to the quick turnaround time, the requirements for how to submit your case can be complicated. The exact process and nomenclature is different for each card network. Banks have different requirements for how to submit documents as well.
Chargeback Process Pro Tip
Do your homework about each card network’s requirements. Consider keeping a notebook of what is needed for different scenarios. We can’t overstate the importance of meeting deadlines. The surest way to ensure a timely response is understanding what you’ll need ahead of time, and knowing where to find it.
Merchant Challenge
If there is one thing worse than a chargeback, it's a second-cycle chargeback. No matter the card network, subsequent responses increase your costs and eat into your resources, driving down your ROI.
Chargeback Process Pro Tip
Maintain an open dialogue with the bank throughout the chargeback process. Always be willing to reach a settlement with the cardholder if possible. There’s a reason why the chargeback arbitration process is considered a last resort: it’s a headache for everyone involved.
Merchant Challenge
Only 2% of disputes make it to arbitration. Even if you think you have an airtight case, there’s still no guarantee of success. And, if the card network rules in the cardholder’s favor, they (and the banks) might assess fees totaling hundreds, or even thousands of dollars.
Chargeback Process Pro Tip
With so much at stake, only consider arbitration if the dollar value of the transaction justifies the risk. Even then, talk to your acquirer before you proceed.
Some card brands won’t even hear an arbitration case unless you have new evidence to present.
What Happens After a Chargeback?
As we noted earlier, you may be able to take certain claims to arbitration, and have the card network issue a ruling. But what if they won’t hear your case? Or worse, what if you lose?
As far as banks, processors, and card networks are concerned, that’s the end of the story. But, you may have one option left: the courts.
The law may not view the claim through the same lens as the other players. If the loss is significant enough, you may want to consider bringing your customer to small claims court.
Before you go that route, though, you might want to send the other party a demand letter. Demand letters are less costly and time-consuming than a lawsuit, which is why businesses often try that first.
In your letter, you’ll need to tell the cardholder that you still consider them liable and expect them to reimburse you for the chargeback. Furthermore, if that doesn’t happen, you intend to escalate the problem to a lawsuit.
If the customer agrees to work with you to resolve the issue, great. If not, then small claims court might be your last chance to recoup your losses. Be sure to consult with your attorney first, of course.
Tips to Avoid Chargebacks
We’ve said it before, but it’s worth repeating: the dispute resolution process is complex and convoluted. There are a lot of stakeholders, and each can have their own impression of the truth.
The entire system is a half-century old, and was never designed for the eCommerce era. Fighting chargebacks involves a lot of time and money, and there’s a statistically low chance of success. That’s why preventing chargebacks is always a better option.
There are actions you can take to lower your risk of accepting an invalid payment or committing some error that will lead to a chargeback. Here are a few steps we recommend for chargeback prevention:
- Up Your Customer Service Game: Prompt responses, easy-to-find contact data, and active engagement on social media can resolve many issues prior to a chargeback.
- Make Billing Descriptors Obvious: Be sure your business name and contact information are clear and recognizable on customer statements to avoid confusion.
- Implement Alerts: Chargeback alerts notify you when a dispute is initiated, providing an opportunity to address the issue before the claim escalates.
- Use Tools From Visa & Mastercard: Data-based chargeback prevention tools like Order Insight and Consumer Clarity help resolve disputes at the inquiry stage to avoid chargebacks.
Not every customer billing inquiry has to result in a chargeback. If the cardholder simply has an inquiry about a charge, providing additional information through the use of platforms like Order Insight and Consumer Clarity may resolve the issue without progressing to a chargeback.
- Offer No-Hassle Refunds: A customer-friendly return policy that includes “no-questions-asked” returns and prepaid return labels will encourage refunds over chargebacks.
- Deploy Fraud Detection Tools: Requiring CVV, using the Address Verification Service, and deploying other fraud tools for all transactions helps validate buyers prior to purchase.
- Implement 3-D Secure: 3-D Secure compares over 100 data points to help verify the cardholder's identity before the transaction is completed.
Get Help With the Chargeback Process
As complicated as the credit card chargeback process can be, it’s also a moving target. Chargeback regulations are constantly changing, and updates happen on an ongoing basis. Just staying current on the networks’ expectations is a full-time job.
That’s where we come in.
Hiring a chargeback expert can make a huge difference in your win-rates and keeping chargeback ratios low. End-to-end management of the chargeback process on your behalf can take chargebacks completely off your plate and up your ROI.
Chargebacks911® can help you discover the true sources of all your chargebacks, and work with you to retain revenue and prevent future disputes. Contact us today to learn more.
FAQs
What are the stages of a chargeback?
While there are multiple different routes a chargeback can take, the main steps are customer dispute, the provisional refund, and the official filing of the chargeback. Representment and arbitration are also possible.
What happens during a chargeback?
Typically, the customer disputes a charge and a provisional refund is granted. The issuing bank will assign a reason code and file the chargeback. If the merchant decides to represent, they will need to compile documents and submit a rebuttal. The issuer will make a decision, although a second chargeback is also possible. Finally, an appeal for arbitration can be made to the card network, whose decision is final.
Is a chargeback a refund?
No, absolutely not. A refund is a simple exchange of returned merchandise for the original transaction amount. A chargeback is a forced bank payment reversal that leaves the merchant covering the cost of the item, any shipping or handling, the loss of the merchandise itself, and those assorted chargeback fees.
What is the time limit on chargebacks?
Typically around 90 days or less from the initial dispute. The time limit for chargebacks, set by card networks like Visa and Mastercard, usually gives cardholders up to 120 days from the transaction date or the discovery of an issue to dispute a charge. Merchants, on the other hand, are generally expected to respond to a chargeback between 20 and 45 days after the chargeback is initially filed.
