Credit cards came into the light in the early 1970s, but most people in the United States did not embrace them right away. They feared that the card might get lost, or someone else could use it to commit fraud or initiate unauthorized transactions. To overcome this credit card processing problem, chargebacks were introduced as a way of guaranteeing cardholder or consumer protection. So what is a chargeback?
A chargeback is a process that allows a consumer or a cardholder to request for reversal of a transaction they believe they did not initiate. Most of the time, the merchant will fight back to prove they are not involved in the said fraudulent transaction. A chargeback dispute involves different parties, including:
- Consumer, Buyer and/or Cardholder – files for the chargeback dispute for transaction reversal
- Merchant or Seller – accepts or fights against the reversal
- Issuer – the bank that credits money to the merchant’s account on behalf of the buyer
- Acquirer – the bank that receives money on behalf of the merchant
- Credit Card Company – the association that supervises the chargeback process
Sometimes, the consumer might be right to initiate a chargeback, especially if they are victims of identity theft, and unauthorized purchases are made using their credit card. However, in some cases, you will find consumers who are taking advantage of the whole process, whereby they want to evade paying for the purchases they made. For whatever reason, get to know how the process works to recognize when to fight back as a merchant or when to accept a transaction reversal.
The Chargeback Process
This process may involve one, two, or three steps depending on how far the merchant is willing to prove their innocence in the alleged fraudulent transaction.
First Step: Filing of Chargeback for the First Time Before Arbitration
This is where a consumer files a transaction dispute to the issuer requiring them to initiate a refund of a transaction that the issuer settled on their behalf. A cardholder has about 45 to 180 days to file this dispute, depending on the type of credit card in question. The issuer then is expected to investigate the claim within 30 to 45 days. If they find it valid, they should notify the acquirer, who, in turn, informs the merchant of the dispute. At this point, the acquirer has reimbursed the disputed funds together with the investigation fee from the merchant’s account to the cardholder’s as temporary credit. It is temporary, just in case, the merchant wins the dispute.
Once the merchant receives the details of the dispute, they are expected to provide substantiation to support their side of the conflict within 7 to 10 days. In case the merchant does not agree with the dispute, they are required to provide proof that they fully satisfied their obligations in the disputed transaction. This proof includes;
- A sales receipt
- Proof of delivery — a shipping receipt, tracking number, or confirmation email
- Matching billing and shipping-to address
- Dialogues with the customer
- An affirming AVS reply
The acquiring bank will send all this information to the issuer and also provide a temporary credit on behalf of the merchant’s account. This means that both the cardholder and the merchant has a provisional credit on their accounts. Once the dispute is resolved, one will be made permanent, and the other one will be reversed as a debit.
The issuing bank will, therefore, review the proof provided by the merchant to determine its validity. This will take about 30-45 days, depending on the credit card company. Three decisions are bound to happen.
1) If the issuer believes that the merchant did not provide convincing evidence, the cardholder has won the case, and the temporary credit will be made permanent. The acquirer may decide to push for arbitration at this point.
2) If the issuer accepts the evidence provided by the merchant, they will rule in their favor, and the temporary credit is made permanent. The consumer will see the original charge of this transaction on their card.
3) If the issuer rules in support of the merchant and the cardholder is not satisfied, whereby they provide new information, the issuer might initiate a second chargeback. Other reasons for the second chargeback can be a change of the reason for the dispute, or if the documents provided by the merchant are incomplete or invalid.
Second Step: The Second Round of Chargeback Before Arbitration
The second round of chargeback will be accepted, depending on the credit card company. For instance, Visa only allows one round of chargeback before arbitration, while Discover, Mastercard, and American Express allow for a second round.
The issuer will inform the acquirer who notifies the merchant about a second chargeback. The merchant can either accept or fight again. If they opt to fight back, they are required to provide additional evidence different from what they gave in the first round. The acquiring bank will forward this evidence to the issuer so as to decide whether it is compelling enough to win the dispute or not.
1) If the evidence is found to be satisfactory to the issuer, they will close the chargeback, and the temporary credit will be made permanent for the merchant.
2) If the evidence from the merchant is not satisfactory according to the issuer, then the merchant will lose the temporary credit, while it will be made permanent for the cardholder.
3) In case the acquirer and merchant do not agree with the decision made by the issuer, either of them can push for arbitration, whereby the credit card company is expected to make the final decision.
Third and Last Step: Arbitration
This is the final step, and the card association makes the final decision since the parties involved in the chargeback failed to agree. This step involves hefty fees ($500 to 900), and most acquirers will prefer not to go for it. A merchant may choose to avoid arbitration as well unless the amount involved in the disputed transaction is quite high.
In case they decide to embark on mediation, the acquiring bank will reach out to the credit card company and begin the arbitration process. The card association reviews the evidence from both sides and makes a final decision. This is where the chargeback dispute gets closed, and the bank that loses the case must pay the arbitration fee. Here are decisions to expect:
1) In case it is ruled in support of the consumer, the temporary credit becomes permanent for them, while the merchant loses both the chargeback amount and other fees involved.
2) In case it is ruled in support of the merchant, the temporary credit becomes permanent on the merchant’s account, and the cardholder receives the transaction amount back on their card.
The entire chargeback process is overwhelming, and it comes with the risk of losing money from the sale, the product involved, and also the fees suffered. However, since you never know when a customer will initiate a chargeback, it is essential to understand how the process works. A chargeback can sometimes be a nightmare scenario for merchants, but there are certain products on the market to assist with chargeback mitigation and merchants are encouraged to look into these solutions as part of their overall credit card processing strategy. Keep in mind that merchants who have high chargeback ratios tend to be considered high risk merchants by payment processing providers and may be subject to higher fees than a standard risk merchant.
