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Understanding Chargebacks

There are two types of chargebacks that you might encounter, a Retrieval Request (also known as a Copy Request) or a Chargeback Request.

A Retrieval Request is a non-financial request, it occurs when the credit card issuer contacts you to confirm information about a transaction. The reason for the request can be for a variety of reasons ranging from a customer question, incomplete transaction information, a processing error, or the suspicion of potential fraud. This type of request does not immediately result in a financial penalty and is just a request for information.

A Chargeback Request, on the other hand, is a financial request, meaning that your business will be debited because of the request. This occurs when the cardholder contacts their financial institution to dispute a specific transaction and requests a refund for a transaction. This could occur because the goods purchased never arrived, the goods arrived but varied from the customer’s expectation, or the credit card was used without the cardholder’s knowledge.
There are three reasons why a chargeback could be filed against your business:

  1. CARDHOLDER DISPUTE - A cardholder might decide to dispute a transaction for a number of reasons including:
  • Because it was fraudulent
  • Because they want a refund and don’t see another way to get it
  • If they are dissatisfied with the product or service
  • If they did not receive the merchandise
  • If they don’t recognize the transaction on their statement
  • If they’re trying to cancel a recurring transaction but aren’t sure how to do it
  • If they were unaware they were being billed for something
  1. ISSUER DISPUTE - An issuer dispute will be initiated by the institution that issued the credit card, not by the cardholder. This will occur if the cardholder account is in collection status and you did not obtain valid authorization for the transaction.
  2. TECHNICAL ISSUE - This occurs when there is something that is technically wrong with the transaction, this could be on either the issuer or the acquirer side, such as forcing a fake approval code.

Chargeback Process

Here is an overview of how the chargeback process works from beginning to end if a chargeback is initiated by a customer of yours.

  1. The chargeback process begins when your customer looks at their statement and notices a transaction that they do not remember, that they did not authorize, or that they believe has been processed in error. Once the cardholder notices the transaction of concern, if they do not contact your business first, they will contact their card issuer to dispute the transaction.
  2. The card issuer reviews the dispute filed by the customer, determines if the claim is valid, and ultimately decides if the chargeback will be taken forward. If they determine the claim to be invalid, then the process would end here, and the cardholder would be notified. Keep in mind that the ability to file a chargeback is part of consumer protections that your customer benefits from by using their credit card, so the card issuer is likely to side with the consumer (who is also their customer).
  3. If the chargeback was determined to be valid by the card issuer, they will then submit the chargeback to the card network involved for reimbursement. The card network will instruct your acquiring bank or processor to immediately withdraw the funds for the original purchase, along with a chargeback fee (usually around $15 to $25), from your account which will be used to refund the customer. This ultimately means that your business has reimbursed your customer the funds for the purchase and you will no longer have the proceeds from the transaction, along with the product sold or services rendered.
  4. When you receive notice of the chargeback, you’ll also receive instructions on how to dispute the claim if you wish to do so. If you know that the chargeback has been filed in error and that the transaction is valid, you can provide supporting details and documentation to dispute the chargeback and make your case.
  5. After you have submitted your supporting documentation to prove the transaction was valid, the acquirer takes your documentation and submits it to the card network, who will then give it to the issuer to review.
  6. Once the card issuer reviews the documentation for the dispute, they will determine whether the documentation you provided was enough to disprove the cardholder’s initial dispute, or if the customer was correct, and the chargeback will be upheld.
  7. If you lose the dispute, you can file for arbitration with the card network, but this will cost you upwards of $500 or more. If you win the dispute, the refund is reversed, and you are reimbursed the funds for the initial transaction by the processor. Some processors will also refund the chargeback fee to you, but most will not, as it is usually a fee that they, themselves, need to pay to their backend acquirer. There is still a chance that the cardholder will dispute this outcome with a second chargeback and the process would begin again.

Dealing with a chargeback is likely the most unpleasant part of accepting credit cards for most business owners. Luckily the chances of receiving one are low, and understanding how chargebacks work and what your options are for disputing illegitimate claims will help you protect your business from additional costs.

Fighting a Chargeback

If a customer files a chargeback against your business that you do not believe is valid, you have 30 days to be able to submit a response to the chargeback. To be able to fight a chargeback you will need to compile relevant documentation that supports the validity of the transaction and write a response letter that speaks to the chargeback reason code. Be sure to look up the card brand’s reason codes before writing the letter so that you can speak to the specific situation noted for the chargeback. Once all the information and the letter are compiled, you will submit them to your payment processor for review by the card network.

Each chargeback type and reason code will warrant different information to contest it. Some of the information and documentation that can assist in proving your case are listed below.

  • Date/time stamp for the transaction
  • The device used
  • Shipping verification
  • CVV match for the transaction
  • Device fingerprinting
  • Geolocation
  • Past transaction history
  • Subsequent transactions from the customer
  • if applicable
  • Any email communications or interactions
  • with the customer
  • Phone call transcripts
  • Live chat transcripts
  • Social media interactions and shares

Protecting Your Business from a Chargeback

As payment processing technology advances, new card security features, online security options, and secure software all help protect your business while still allowing you to freely accept credit cards. As a merchant, there are steps you can also take to protect your business from the risk associated with chargebacks.

Listed below are some responsible measures you should be taking for your business.

  • Have a comprehensive and clearly stated return policy.
  • Ensure all product descriptions are accurate and clear to set appropriate customer expectations.
  • Make it clear to customers how they can contact customer service if there ever is an issue. Be sure to respond
  • quickly and professionally to any issues that may arise.
  • Ensure any and all records of all transactions and communications with customers are stored. The more
  • relevant information you gather, the easier it will be to defend yourself against false claims.
  • Provide tracking numbers and require customers to sign for the delivery of ordered goods.
  • Have a clear description of your company show up on customer bills and statements so customers can
  • easily and clearly reconcile their purchases with your business.

Related Articles

Understanding the Risks
Fraud
Evaluating the Legitimacy of a Transaction
PCI Compliance
Myths About PCI Compliance

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