Breaking Down the Chargeback Process: A Step-By-Step Guide
The chargeback process can be confusing and time consuming. It’s also costly for everyone involved. That said, it has the greatest financial impact on merchants by a considerable margin.
If the odds are already stacked against you, then is it even worth it to try and fight chargebacks? If so, what’s the best strategy to win a dispute?
In this post, we'll examine the chargeback dispute process from beginning to end. We’ll look at some of the roadblocks and challenges you might encounter along the way, and how you can overcome them.
Recommended reading
- 3 Types of Payment Reversals: What’s the Difference?
- Provisional Credits: Here’s Everything You Need to Know.
- Here are the 5 Valid Reasons to Dispute a Charge
- 14 Chargeback Facts Exposing the Threat of Fraud in 2024
- How are Partial Chargeback Different From Other Disputes?
- Late Presentment: Why You MUST Submit Transactions on Time
What is the Chargeback Process?
- Chargeback Process
The chargeback process encompasses all the steps that take place between a cardholder contacting the issuing bank to dispute a charge, and the resolution of that dispute. Multiple parties, including issuers, acquirers, merchants, vendors, and card networks may be involved in this process.
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The idea behind the chargeback process is simple. If a cardholder has a problem with a transaction, and they can’t resolve that problem by dealing directly with the merchant, then the cardholder can appeal directly to the bank for help. Easy…right?
In reality, the chargeback process is much more involved than it seems at first glance. Even a straight-forward case involves multiple interactions. Check out the chargeback process flow diagram below for a basic rundown on the process:
That's an illustration of the chargeback process in its most clear, simple form. There are a lot of details that get skimmed over, though.
In the next section, we'll go over these steps in more detail. We’ll also point out some of the roadblocks that may complicate the chargeback flow.
What Makes the Chargeback Process So Difficult?
A chargeback involves input at every stage of the interaction. There are strict timelines, and the progression is anything but linear.
Requirements can vary a lot depending on which bank or card network is involved. This complicates things even further. Plus, there are several key players involved, 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 who issued the card to the cardholder.
The Acquirer
The bank tasked with acquiring payment on the merchant’s behalf.
The Card Network
The card brands (Visa, Mastercard, etc.) that oversee the process.
Each player introduced into the process can add additional layers of bureaucracy and paperwork. Plus, depending how things go, the process may drag out into extra steps, taking weeks or even months to resolve.
Navigating the chargeback process is difficult. One click can make it simple.
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.
STEP #1: Initial Dispute
The chargeback flow begins when the cardholder challenges a transaction by contacting the issuing bank. Each individual transaction presents a separate potential chargeback. So, if more than one transaction is in question, multiple chargebacks may be filed.
Merchant Challenge
The main factor here is that you won’t know a chargeback is coming until you get notification of it. Plus, chargebacks can also be initiated by the issuer. This is referred to as a bank chargeback. The cardholder may never even know that a dispute occurred at all.
Pro Tip
Pay close attention to chargeback reason codes and ask the bank to clarify any details you discover that might not match your record of the transaction. Remember: if you choose to respond, you must respond to the claim as it was made.
STEP #2: The Provisional Refund
A conditional refund is issued to the cardholder. The issuer then recoups the money from your acquirer, who will then debit the amount of the original transaction, along with any applicable fees, from your merchant account.
Merchant Challenge
Again, you may have no knowledge of a pending chargeback until the funds are withdrawn. This can catch you off-guard, leading to financial strain and cash flow issues if funds suddenly and unexpectedly disappear from your account.
Pro Tip
Closely monitor incoming communications. You have a limited timeframe in which to respond to chargeback claims. Usually, it's only a few days. Time is of the essence, so get started as soon as you’re notified of a dispute.
STEP #3: The Reason Code
At this stage of the chargeback process, the issuing bank assigns a numeric reason code for the chargeback, then electronically transmits all the chargeback information to your acquirer. The acquirer will review the information, then forward it along to you.
Merchant Challenge
Chargeback reason codes are meant to help you understand the cause for the chargeback and determine the best way to validate the original transaction. However, banks assign reason codes based on cardholders’ claims. It’s easy for the bank to be tricked into allowing a friendly fraud chargeback. Without understanding the true chargeback trigger, you can’t deploy the proper dispute or prevention tactics.
Pro Tip
Pay close attention to chargeback reason codes and ask the bank to clarify any details you discover that might not match your record of the transaction. Remember: if you choose to respond, you must respond to the claim as it was made.
STEP #4: The Option to Re-Present
You have the option to accept the chargeback, or fight it if you think the claim is invalid. Take a look at the Chargeback Debit Advice Letter supplied by your acquirer, and decide if it’s worthwhile to engage in representment.
Merchant Challenge
Disputing a chargeback requires specific documentation in compliance with representment requirements. This may include a copy of the return policy, signed receipt from delivery, or one of dozens of other pieces of documentation. Unless you’ve organized every document in meticulous order for each transaction, collecting evidence could be a struggle.
Pro Tip
Once you’ve decided to fight the chargeback, make sure that the evidence you supply corresponds with the supplied reason code. Be thorough, and provide enough evidence to make your case clear.
STEP #5: Compile Your Documents
You need to move fast and put together all the documentation necessary to respond to the cardholder's claim. This includes the Chargeback Debit Advice Letter mentioned above, as well as a rebuttal letter and a reversal request. You must also include compelling evidence to support your claim.
Merchant Challenge
In most cases, you’ll only have a few days between learning about a chargeback and your deadline to submit a representment. You have to move fast. Many merchants lack the bandwidth and the expertise to build compelling cases in the window of time allowed.
Pro Tip
Given the time constraints, it’s extremely important that you keep all necessary documentation organized. Transaction records, customer information…all this data needs to be stored in a way that lets you recall it quickly, and at will.
STEP #6: Submit the Representment Package
You will submit your response, along with supporting evidence, to your acquiring bank. The acquirer reviews the case for completion, then transmits it to the issuer. This is what’s called “representment,” because you’re literally re-presenting the transaction to the issuer.
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.
Pro Tip
Do your homework about each card network’s requirements. Use chargeback response templates to stay on track (when it makes sense to do so).
STEP #7: Bank Review & Decisioning
The issuing bank reviews the information. One of three things will happen:
- The issuer rules in your favor: Your representment case validates the original transaction. The transaction amount is re-charged to the cardholder’s account, and the funds go back into your bank account.
- The issuer rules in favor of the cardholder: Your evidence didn’t convince the bank to reverse the chargeback. The issuer’s decision stands.
- You win, but the issuer files a second chargeback: The issuer has the right to file a second chargeback for the same transaction. Reasons for a second filing might include the discovery of new information or a change of the reason code.
Merchant Challenge
If there is one thing worse than a chargeback, it's a second chargeback. No matter the card scheme, subsequent responses increase your costs and eat into your resources, driving down your ROI.
Pro Tip
Maintain an open dialogue with the bank throughout the chargeback process. Always be willing to reach a settlement with the cardholder wherever necessary. The chargeback arbitration process is a last resort for a reason.
STEP #8: Arbitration
This is where the stakes get very high. With arbitration, you’re appealing to the card network to issue an impartial decision. The card brand’s decision will be final, and the party responsible for the dispute could be hit with hefty, punitive fees.
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 might assess a fee totaling hundreds, or even thousands of dollars.
Pro Tip
Only proceed to this stage if the dollar value of the goods or services justify the risk. Then, ask for advice from your acquirer as to the best way to proceed.
Other Complications to Consider
As we’ve seen, the chargeback process is complex and convoluted. There are a lot of stakeholders, and each can have their own impression of the truth. It’s a real financial Rashomon scenario.
As a result, the chargeback process is:
- Subjective: Ultimately, the outcome of each chargeback dispute is determined by humans, who are free to interpret regulations and issue judgments as they see fit.
- Outdated: Chargebacks were devised in a pre-internet era. Regulations don’t adequately address modern threats, technologies, and capabilities.
- Fallible: Banks operate under the assumption that the customer is always right. This turned chargebacks into a “no-hassle” solution for consumers; one that's falsely viewed as being easier and quicker than dealing with the merchant.
- Vulnerable: In theory, chargebacks are filed by otherwise valuable customers. Fraudsters leverage this fact to commit “cyber shoplifting.”
- Selective: For most merchants, the sheer amount of resources needed to fight chargebacks leads to minimal ROI. With no other recourse, merchants feel they must accept chargebacks as a “cost of doing business.”
None of this appears especially favorable for merchants. Remember, though: knowledge is power.
Revealing the many flaws built into the chargeback process can increase your ability to overcome them.
Get Help With the Chargeback Process
The credit card chargeback process follows a labyrinthine path. It rarely, if ever, goes the same way twice.
Plus, chargeback regulations are constantly changing. It's easy to see how just staying current on the networks’ expectations is a full-time job.
Thankfully, it’s not a job that you have to do alone.
Hiring a chargeback expert can make a huge difference in your win-rates and keeping chargeback ratios low. In fact, depending on your monthly chargeback issuances, a service provider who can provide end-to-end management of the chargeback process on your behalf might be exactly what you need.
