How Does a Chargeback Work? A Simple Guide for Merchants
Every seller experiences a chargeback regularly. It’s not a comfortable experience, but it’s part of running a business, both online and offline. There have been credit card chargebacks and debit chargebacks for a long time, but eCommerce opens more chances for disputes.
A chargeback is the act of a client who files for the return of their funds directly with the bank. As a shopper buys something, they pay the charged amount of money for the purchase. However, the customer will ask the money back from the seller for some reasons, such as fraud and commercial disagreement.
Read on the article How Does a Chargeback Work? to learn more about chargebacks and how to avoid them.
Table of contents
- What is a chargeback?
- How does a chargeback work?
- How to avoid chargebacks for merchants and businesses?
What is a chargeback?
It’s hard and painful to navigate the chargeback process for every merchant.
As a client disputes an order and files a chargeback, the seller has a chance to contest that dispute. If a seller can dispute the chargeback, and lastly win, they’re asked to join a list of predetermined steps made by the card associations with the issuing and acquiring banks, who seem to be mediators between the shopper and the seller.
When consumer protections support the shopper, sellers often see themselves in a severe battle to gain the chargeback. To simply take part in challenging the chargeback, sellers must go through every step of the process under tighter timeframes with acceleration.
How does a chargeback work?
First chargeback: The initial chargeback dispute and pre-arbitration
Basic flow of a chargeback
Every chargeback dispute starts as a card owner files a dispute on a transaction with their issuing bank. A cardholder has from 45-180 days on average to dispute a charge according to the card association. He or she can sometimes dispute a charge 356 days ago if special situations are considered, such as natural catastrophe or family emergencies. Then, the issuing bank considers the claim and decides its validity, which takes between 2-6 weeks. Visa allows issuing banks no more than 30 days to review. If valid, they will send it to the seller’s acquiring bank or payment processor, who will inform the seller.
At the same time, the seller is informed that they’ve got a dispute from customers, and the acquiring bank has debited funds from the seller account to refund the cardholder for the transaction and to pay the fees for the chargeback investigation. (The refund exists as a temporary credit for the buyer and can be taken back to the seller if they win the chargeback dispute.
Sample chargeback notice
As the acquiring bank or payment processor informs the seller about the chargeback dispute, they also provide forms to the seller to finish and return to illustrate their side of the dispute. Sellers are often given a very close deadline to respond to the request, about 7-10 days on average.
The seller is also usually requested for specific evidence to price that they did handle the order to the shopper as described, which include documentation like:
- Proof of delivery (often in the form of a tracking number, shipping receipt, so on)
- Any conversations with the shopper, or any other evidence that the seller fulfilled the transaction
- Proof of shipping (often in the form of a shipping receipt from a shipping provider, a confirmation email, so on)
- Sales or transaction receipt
- Positive AVS response
- Matching bill-to and ship-to addresses.
The acquiring bank will get the forms they receive from the seller and bring them to the cardholder’s issuing bank. When the acquiring bank provides the evidence to the issuing bank, the acquiring bank sends a temporary credit back in the seller account for the chargeback. Now, there are two temporary credits - one to the cardholder and one to the seller. When the chargeback dispute is over, one of those credits becomes permanent, and one converts into a debit.
Next, the issuing bank considers the evidence sent by the seller to define whether the seller fulfilled the transaction as described, which lasts from 4-6 weeks, with Visa allowing the issuing bank to have 30 days for the evidence considered. It’s significant to notice that with Visa, sellers only have one shot (1 round of pre-arbitration) to collect and turn in their evidence to send to the issuing bank before the issue bank chooses to side with the seller or go to arbitration. One of three circumstances will happen:
- If the issuing bank claims that the seller has not offered persuasive evidence, they will support the cardholder and the chargeback stands. The provision credit to the cardholder becomes permanent, and the temporary credit of the seller is converted. The issuing bank can stimulate arbitration at this step if they want.
- If the issue bank claims that the evidence submitted by the seller has won the chargeback, they will support the seller, and the provision credit to the seller becomes permanent. The card owner will find a charge for the original transaction appearing again on their account.
The issuing bank claim, the seller succeeds in refuting chargeback, but decides to file a second chargeback or pre-arbitration, because of the new details from the cardholder, or due to a change in the chargeback code.
Second chargeback (Pre-arbitration): Fighting another round (not applicable for Visa)
Basic flow of the second chargeback (or pre-arbitration)
American Express, Masterclass and Discover accept a second round of pre-Arbitration while Visa allows only one round. A second chargeback, also known as pre-arbitration, happens as, after a seller disputes the first chargeback, the issuing bank creates another chargeback on the same disputed transaction for some below reasons:
- There is new data from the cardholder
- There is a change to chargeback season
- The documentation offered by the seller is not enough, invalid or was not compelling
As the issuing bank informs the acquiring bank about the second chargeback, and that information is brought to the seller, the seller is given a chance to accept or contest one more time.
If a seller defines to keep contesting the chargeback, the acquiring bank asks the seller to offer more compelling evidence from the seller that they did fulfill the order to the issuing bank’s card owner to win the dispute.
(As usual, the seller is requested to offer information they didn’t submit in the initial chargeback cycle, such as AVS response, matching bill-to and ship-to addresses, any conversations with the buyer, and so on)
When the seller offers more information to the acquiring bank, and it’s forwarded to the issuing bank, the issuing bank will consider the evidence and decide if:
- The seller has offered compelling evidence.
- The seller has not offered compelling evidence.
If the seller offers compelling evidence, the chargeback will be closed by the issuing bank, the temporary credit to the seller for the transaction amount becomes permanent, and the card owner will see the transaction reuploaded to their account.
If the issuing bank decides that the seller has not offered compelling evidence, the temporary credit to the card owner for the transaction amount becomes permanent, and the seller loses the chargeback amount in addition to fees.
If the seller and acquiring bank disapproves of the issuing bank’s conclusion, or if the issuing bank requires it, either party may ask for arbitration by the card association to go to a final decision.
Arbitration: The last stand
Basic flow of arbitration
The last stage that a seller may face in the chargeback process is named arbitration. Arbitration consists of the relevant card association joining in to help deal with the dispute between the acquiring and issuing banks, and by extension, the seller and the card owner.
At this stage, the acquiring bank and the seller can define whether they’d like to go on or join arbitration. Acquiring banks and sellers often choose to avoid joining arbitration, due to the large fees, effort and time required. Fees are usually about $500-900 on average, and according to the card association, and the whole arbitration process adds, on average, about 10-45 days to the entire chargeback process. Sellers may decide to dodge joining arbitration for transactions below a specific amount, but see it worth the effort on transactions valued thousands of dollars.
If the acquiring bank and seller define to join arbitration, the relevant bank (who started the request for arbitration) will connect the applicable card association (American Express, Visa or MasterCard) and participate in their arbitration proceedings, which are various for every card network. Every bank that is part of a card association’s network approves with the terms and conditions of utilizing their brands and must obey all the regulations and associated fees for items such as arbitration.
The card associate will check all the evidence submitted by the acquiring and issuing banks and jump to a last conclusion on what party to win the chargeback dispute.
Once the card association has made their decision, they’ll close the chargeback dispute and ask the losing bank to pay the arbitration fees.
- If the card association supports the card owner, the provisional credit on their account will become permanent, and the acquiring bank will delete the temporary credit from the seller’s account to compensate for the issuing bank. The seller is facing difficulties of huge fees from the card association.
- If the card association supports the seller, the provisional credit on the seller account will become permanent, and the issuing bank will re-post the transaction on the account of the cardholder. The issuing bank takes responsibility for the fees related to arbitration. Note that the circumstance where a card association supports a seller during arbitration is significantly scarce.)
How to avoid chargebacks for merchants and businesses?
Recognizing that chargebacks can increase the stable flow of cash for your business from day to day, here are some recommendations that you can use to know more about chargebacks and can prevent them from occurring.
Even though chargeback cannot be 100% removed, there are some steps that sellers can do to decrease their occurrence considerably. The more a seller understands processing procedures, the less likely it is a seller will do something or not do something to cause a chargeback.
Procedures for all businesses
Firstly, ensure that the business name you offer to your processor is a name your clients will realize. This is the name that appears on their statement.
Respond to retrieval requests. Clients and card issuing banks may ask for copies of sales and credit drafts. When a request is raised a seller has to respond within 12 business says. Ensure your business is set up to submit this documentation fast and easily. Host Merchant Services suggests that sales drafts should be reachable to authorized staff for 180 days after the first chargeback notification after which they should be saved in a secure place in the long term.
Procedures for retail businesses
Retail sellers should ensure that they fully follow the transaction requirements issued every year by MasterCard, Discover and Visa network.
Prove the card was present by ensuring you swipe cards through your terminal and ensure to have a signature from the card owner and compare that signature to the back of the card. Review extra identification if necessary. If the card is not signed, ask for a photo ID that includes a signature and get the cardholder to sign the card. Or else, the card is not accepted.
Have an imprint any time a card has to be manually entered into a terminal. Ensure all of the transaction information shows up on the imprinted copy, which includes the amount, business address, business name and the signature of the cardholder.
If a card is not accepted as swiped through the terminal, do not keep trying and receive authorization. Instead, ask for a new method of payment from the card owner. Besides, identify that the number on the screen is similar to the embossed number on the card.
It’s crucial to pay attention to Partial Authorization. This is because that can make instances where a payment breaks into smaller amounts.
Procedures for Internet and mail order/telephone order businesses
Use the Address Verification System (AVS) to make sure that your client is offering the precise billing address. AVS is required on every card-not-present transaction by Discover Network.
Offer your processor a local or 800- number that they can add to your billing statement. Providing this number to your client will help avoid a chargeback from happening. Your client can reach out to you with questions and you will have an opportunity to explain misunderstandings fast and effectively.
As sending merchandise to a client, you should use a shipping service that can offer evidence of delivery to the full billing address. For extremely pricey items, ask for a signature for the merchandise to be given to the shopper.
In the circumstance of a chargeback, Host Merchant Services helps the seller go through the chargeback proceedings whereas fighting valiantly on behalf of them. HMS tries to reduce chargeback rates for all its clients and plays a proactive part in doing so.
The above post on How Does a Chargeback Work may undoubtedly help you understand more about chargebacks and can lower the number of disputes you have to face with. If you have anything unclear about this topic, leave your questions in the comment box. We’re happy to assist you.
Thank you all for reading!