The Chargeback Process Explained
Navigating through the chargeback process is a time consuming, costly, and confusing task. There are challenges for everyone involved, especially merchants. Let's take a moment to create a workable and realistic chargeback definition.
Challenges Merchants Face
Understanding the life cycle of a chargeback is one thing; knowing how to excel at each stage is another. Merchants are often at a disadvantage; there are several factors that contribute to a merchant’s inability to emerge from the chargeback process as a victor.
- The chargeback process is subjective. The outcome of each chargeback dispute is determined by humans. Humans have the ability to interpret regulations and issue judgements as they see fit.
- The chargeback process is outdated. Chargebacks were devised in a pre-internet era. Regulations don’t adequately address modern technologies and threats.
- The chargeback process is a no-hassle solution. Banks operate under the assumption the customer is always right. Rather than jeopardize relationships with customers, issuers end up facilitating chargebacks without adequate due diligence. This means filing a chargeback is easier and quicker than forcing the consumer to deal directly with the merchant.
- The chargeback process robs merchants of valuable resources. Implementing sufficient DIY prevention strategies and disputing illegitimate chargebacks takes significant amounts of time and money. For most merchants, those resources are in limited supply, meaning merchants simply have to accept chargebacks as a cost of doing business.
The State of Chargebacks 2018
Launched as a way of collecting and analyzing industry findings, the State of Chargebacks survey reflects the experiences of more than one thousand respondents in the card-not-present space. Download to learn the latest insights on fraud and chargeback management.Free Download
Roadblocks at Each Stage of the Chargeback Cycle
Merchants face specific challenges at each stage of the chargeback process.
STEP #1: The cardholder will contact the credit card company (or issuing bank) to dispute a transaction. Each individual transaction presents a separate potential chargeback. If more than one transaction is in question, multiple chargebacks will be filed against the merchant.
Alternately, the issuer will initiate the chargeback. During a bank chargeback, the cardholder is generally unaware of the dispute. The issuer files the chargeback, and the acquirer handles the representment. Typical reasons for bank chargebacks may include late presentment, duplicate processing, an expired card or merchant fraud.
Learn about our advanced chargeback prevention methodology and our ROI guarantee.
Acting as the cardholder’s representative in the card association, the issuing bank naturally views the cardholder’s best interests as a primary concern. As such, each chargeback filed implies the merchant is guilty of wronging the consumer. Because of the merchant’s assumed guilt, the business can expect more future chargebacks with less due diligence because of the merchant’s damaged reputation.
STEP #2: The issuing bank will review the request. If the bank finds the claim to be invalid, the chargeback will simply be declined. If there is an indication that an error occurred, the issuing bank will proceed on through the chargeback lifecycle.
STEP #3: A provisional refund will be issued to the cardholder. The merchant account will be debited for the amount of the original transaction, along with any applicable fees.
Chargebacks often catch a merchant off guard. The unexpected withdrawal of funds from the merchant’s account can cause unforeseen financial strain and cash flow issues.
STEP #4: The issuing bank will electronically send the transaction back to the merchant’s bank. Before doing so, the issuing bank will select and assign a numeric reason code for the chargeback.
Supposedly, these chargeback reason codes can help the merchant understand the cause for the chargeback and determine the best way to validate the original transaction.
The bank assigns reason codes based on the cardholder’s claims. Without proper due diligence, it is easy for the bank to be deceived by the consumer and facilitate friendly fraud chargebacks.
Reason code intelligence isn’t as helpful as it should be. Without a proper understanding of the true chargeback trigger, inadequate dispute and prevention tactics will be used.
If merchants want to know the real reason behind the reason code, they’ll need Chargebacks911’s patent-pending technology, Intelligent Source Detection™.
STEP #5: The merchant’s bank will review the refund request. The bank will either resolve the issue or forward the claim to the merchant.
STEP #6: The merchant will have the option to accept or dispute the chargeback. Disputing the chargeback requires the merchant to submit documentation in compliance with representment requirements. Examples of documentation that might be required for representment include a copy of the return policy, signed receipt from delivery, or email communications.
Disputing illegitimate chargebacks is an essential task. It is the only way to repair the merchant’s reputation with the issuing bank and ensure fewer future chargebacks.
However, representment isn’t a simple task.
- The time limits for representment are short. Merchants usually only have 5-10 days to locate necessary paperwork and draft a compelling argument.
- Disputing chargebacks means the merchant is constantly fixing old problems. Successful merchants focus on future growth, not addressing issues of the past.
- Chargeback regulations are constantly changing. Staying current on the networks’ expectations is challenging. Plus, the nomenclature differs from one network to another.
- Without the proper tools and techniques, inadequate representment efforts will be used. This will actually increase risk and costs.
STEP #7: The merchant will submit the dispute, along with supporting evidence, to the bank.
STEP #8: The acquiring bank will electronically re-present the chargeback dispute information to the issuing bank.
STEP #9: The issuing bank will review the re-presented information. One of three things will happen:
- The issuer rules in favor of the merchant. The merchant’s representment case sufficiently validates the original transaction. The transaction amount is charged to the consumer’s account once again. The funds are deposited into the merchant’s bank account.
- The issuer rules in favor of the cardholder. The merchant’s compelling evidence didn’t compel the bank to reverse the chargeback. The issuer’s decision is final, unless the merchant chooses to pursue arbitration.
- The merchant successfully disputes the chargeback, but the issuer chooses to file a second chargeback (pre-arbitration chargeback) for the same transaction. Reasons for filing a second chargeback could include the discovery of new information or a change of the reason code.
Second chargebacks increase costs and rob merchants of their valuable time. That’s why it is absolutely essential for a merchant to craft the most efficient, persuasive, air-tight representment possible. Chargebacks911® is known as the industry’s gold-standard for representment. If you’d like to learn more about our tactics, contact us today. Our guaranteed ROI ensures you have nothing to lose.
This flowchart offers a visual representation of the chargeback life cycle.
Beyond the Chargeback Life Cycle
If either the consumer or the merchant is unhappy with the outcome of the chargeback process, the dissatisfied party has the option to pursue chargeback arbitration.
The arbitration process is handled by a representative at the applicable card network. Additional fees, regulations, and responsibilities are included in this process.
Arbitration needlessly extends the chargeback process. To ensure the most efficient use of the business’s resources, it is best for merchants to avoid arbitration whenever possible. Successful chargeback prevention and representment efforts reduce the risk of draining valuable resources.
Do You Need Help?
Because of the complexity of the chargeback cycle, there are a myriad of places where a merchant might stumble. Without the right management techniques, merchants can actually increase risks, costs, and liability.
Chargebacks911® offers the most comprehensive chargeback management services and products available on the market today. Whether you are looking for on-demand services when issues arise or want to fully outsource the task to a professional, we can help. Contact us today.