Learn how chargeback rules differ for merchants and consumers, what laws govern the chargeback process, and what responsibilities, time limits, and fees you might face as a merchant.
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If you’re a merchant dealing with chargebacks, it can feel like the cards are stacked against you.
The rules that govern the payment dispute process are difficult to understand. They're also constantly evolving, and can vary between the different banks and card schemes. It’s easy to understand how merchants can feel overwhelmed.
Today, we’re going to help clear things up by breaking down some of the most important chargeback rules, including chargeback fees, time limits, and reason codes. We will provide insight into how these regulations differ between card networks and help you better understand the dispute process from all sides.
Let’s start with a basic question: where does the cardholder’s right to file chargebacks come from?
Some of the mandates categorized as “chargeback rules” are actually laws. In fact, the chargeback system was originally rolled out in response to legislation created by the US federal government.
The key pieces of legislation shaping chargeback policy include:
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Those are the most important US laws covering chargebacks. If we look beyond the US, we see other legislative acts that have helped shape chargeback rules and regulations in different jurisdictions:
Currently, The GDPR only affects merchants doing business in the EU. However, other countries and jurisdictions are already exploring similar mandates, like the California Consumer Privacy Act (CCPA).
Legislation governing the payments space can change quickly. New laws and procedures may impact the chargeback process as well, like the revised Payment Service Directive.
The chargeback system was designed as a last resort, only to be used in specific situations. Each of these situations was given an alphanumeric identification code called a chargeback reason code meant to explain the reason for the dispute.
A chargeback reason code is a 2-to-4-digit alphanumeric code provided by the issuing bank involved in a chargeback, which is meant to identify the reason for the dispute. Each of the major card brands, including Visa, Mastercard, and others, have their own system of reason codes. Reason codes are important to help merchants address recurring chargeback triggers, as well as identify frivolous chargebacks, against which the merchant will need to fight back.
Each reason code has its own set of regulations regarding:
Another important set of dispute rules revolves around chargeback time limits.
Chargeback time limits are not legal requirements. Instead, they’re imposed by card networks like Visa and Mastercard. However, they are as strict and immovable as if they were legally mandated.
Each card network has rigid deadlines for all phases of the chargeback response process (commonly known as representment). Missing even one of those deadlines can cause you to lose a reversal, no questions asked.
The deadlines can vary based on the reason code, processor, and card scheme. Generally speaking, however, cardholders will have more time available file chargebacks than you have to fight them.
Rule variations from one card network to the next are typically minor. However, just one day’s difference can cause you to miss a deadline. Here’s a breakdown of the time limit rules for several card schemes:
Chargebacks are expensive, even under the best of circumstances. You lose the purchase price, the merchandise, and any ancillary costs like shipping and interchange fees. It gets worse, though.
According to general chargeback rules, there is a fee attached to each transaction dispute. This fee is to be paid by you, the merchant, to cover chargeback administration costs. The acquiring bank has a lot of influence in determining the fee amount, as does your processor. The type of goods or services you offer can also affect the price tag and several other factors.
Your merchant processing agreement will outline all applicable chargeback fees. On average, though, you can expect to pay $20 to $50 per chargeback. Merchants labeled “high risk” will usually be charged considerably more. And remember, the fees will apply even if a chargeback is successfully reversed.Learn more about chargeback fees
Some chargeback rules apply to your chargeback ratio, also known as a chargeback rate.
In simple terms, this is the percentage of chargebacks you receive as compared to your total sales. While we can refer to them as chargeback ratio “rules,” the truth is the decisions in this process can be highly subjective. Each card network measures your chargeback ratio differently, and has different guidelines for what is considered “acceptable.”
Each card network also has predetermined thresholds, establishing what should be considered an “excessive” number of chargeback or fraud incidents. Breaching these limits can result in penalties from both the card network and the acquirer. But, as we mentioned, each entity evaluates and addresses risk differently. Most banks don’t have firm mandates regarding when action is taken against your account.
At their discretion, acquirers might tell you to reduce chargebacks on your own. You may be required to enroll in a chargeback monitoring program. In worst-case scenarios, the bank could simply terminate your processing agreement and place you on the MATCH List.
Violating fraud and chargeback thresholds set by Visa and Mastercard can lead to serious consequences for merchants.
Both credit card networks have established specific programs to monitor and manage fraud and chargeback activities. Whether or not you’re required to enter one of these programs is determined based on your chargeback-to-transaction ratio (as outlined above).
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The consequences of violations are often similar, but with some nuances specific to each network. Here’s a brief breakdown of how these programs work:
For both Visa and Mastercard, chargeback and fraud thresholds are monitored on a monthly basis. Exceeding them can trigger enrollment in one of these monitoring programs. Consistent violation of these thresholds may also result in:
According to the chargeback rules, you have the right to refute any chargeback filed against you through a process called representment.
The bank won’t just take your word that the chargeback is invalid, though. You must provide proof. As a result, representment requires a lot of work on your end, including gathering compelling evidence to support your claim.
Each network and reason code has its own requirements as to what constitutes compelling evidence. The requirements can be very complex. In many cases, they are not very intuitive or easy to interpret.
Plus, cardholders sometimes provide incorrect information to justify their dispute. This can happen by innocent mistake or due to outright dishonesty. In either case, you could end up wasting a lot of time and energy putting together evidence that has nothing to do with the actual dispute.
If representment fails, you do still have some recourse. You can appeal the case to the card network; this is a practice known as arbitration.
Depending on the stakes, you could even appeal to the courts directly; merchants have been known to take cardholders to small claims court to try and recover sales revenue and additional damages. However, this should only be considered under the most extreme circumstances.
Understanding applicable chargeback rules is just the beginning. You must also be able to implement them wherever you’re confronted with a transaction dispute. You have to gather all the evidence and take every step purposefully. Anything less is just preparing to fail.
We know you didn’t go into business to spend all your resources fighting chargebacks, though.
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A chargeback is a credit or debit card charge that is forcibly reversed by an issuing bank. This typically happens after a cardholder claims a transaction was the result of fraud or abuse.
Chargebacks typically result from a cardholder claiming a transaction was the result of criminal fraud (identity theft, account takeover, etc.). The cardholder may also claim merchant abuse; being billed twice for the same item, for example.
The transaction amount will be temporarily taken from the merchant’s account and returned to the cardholder. The merchant can either contest or accept the claim.
For cardholders, the official answer is “no.” However, if there is an ongoing pattern of abuse, the merchant may refuse to do future business with you. Your bank could also suspend your account, which would hurt your credit.
No. However, deliberate chargeback fraud may be considered a form of credit card fraud or wire fraud. Legally speaking, that could theoretically result in jail time, although such incidents are rare.
No. Although the two are often used interchangeably, a refund is an equitable exchange; the customer returns the purchase in exchange for a price paid. With a chargeback, however, the merchant is likely to lose the purchase price, the wholesale cost of the item, shipping expenses, and other revenue.
Consumer chargebacks only apply to cases that involve criminal fraud (unauthorized purchases or identity theft), defective products (orders that come opened, or with parts missing; items that were significantly different advertised), or merchant misbehavior (incorrect or repeated charges on the account, or charges added to the bill after processing).