Chargebacks 101: A merchant’s guide

• Unauthorized charges and fraud
• Incorrect charges, wrong amounts
• Goods/services not received
• Goods/services received not as described
• Receiving damaged goods
• Processing errors
• Fulfillment errors

Not all disputes become chargebacks. The chargeback is a common result of a dispute, especially when a cardholder takes their dispute to their issuing bank. In this case the dispute is the cause, and the chargeback is often the outcome. But, if the merchant can resolve a dispute through a refund or credit, the chargeback can be avoided.

It should also be noted that the payments industry is trying to move away from the term “chargebacks”. Visa for example classifies any post-transactional discrepancies as “disputes” and has created a workflow to automatically assign liability for the dispute. In the end, some disputes will end up in a debiting of the merchant account to the cardholder – a chargeback in all intents and purposes. However, you will notice in Visa correspondence they have replaced “chargeback” with “dispute.” We are currently in a transitional moment; whether this sticks or not, only time will tell.

The United States Congress created the chargeback as part of a raft of consumer protections under the 1974 Fair Credit Billing Act (FCBA). At the time, credit cards were fairly new tech, consumers were initially apprehensive to adopt them, and needed some assurances. The chargeback was created to give them recourse against card theft, getting over-charged, or when they didn’t get what they paid for, among other errors.

This legislation defined what reasons chargebacks could be applied to, and how consumers could obtain them. The FCBA stated that consumers would have to submit their dispute in writing to their issuer, who would then investigate the claim. This has evolved into de facto procedures as simple as calling or emailing the issuer with a complaint. In some cases, issuers allow for submitting disputes online.

The cardholder contacts their issuing bank with a disputed transaction. The issuer investigates, and almost always grants their customer the chargeback they seek. The issuer remits the chargeback with a reason code back to the merchant’s acquiring bank. The acquiring bank takes the transaction funds from the merchant’s account and sends them back to the issuer, then on back to the cardholder.

The short answer is: avoid them at all costs! There are three steps merchants should take to avoid chargebacks: prevention. reduction, and recovery.

1. Prevention

Chargebacks can be prevented by reducing merchant processing errors. You should also proactively inform your customers about their purchases and whom to contact with any issues. Keep effective lines of communications open, so if a customer contacts you to cancel an order or subscription, that cancellation happens. For more detail on prevention, see “How can merchants prevent chargebacks?”

2. Reduction

If the merchant subscribes to dispute alerts, they can receive notification of the dispute and refund it before it becomes a chargeback. This is typically done for fraudulent transactions. You ultimately have to return the revenue from these transactions, but it’s best to do it on your own terms and not with a chargeback, where fees and penalties get assessed.

3. Recovery

If the chargeback is unwarranted, the merchant can fight it, but only after the chargeback goes through. Fighting a chargeback is called “representment,” where the merchant re-presents their transaction with additional “compelling evidence” that proves the purchase was legit. Even when the representment is successful, the fees and penalties of the chargeback stand, unfortunately. Still, the revenue is recovered, which is a win.

Also known as a chargeback alert or simply “alerts,” these are notifications a merchant can receive that a dispute is being investigated and a chargeback is pending. To receive alerts, merchants must subscribe to either Ethoca or Verifi (or both – ChargebackHelp Plus integrates both services.). Ethoca and Verifi have partnerships with issuing banks that allows them to get notified when a transaction is being disputed. Ethoca and Verifi then issue alerts to subscribed merchants. From there, the merchant can take action to resolve the dispute.

Once the merchant receives an alert from a legitimate dispute, a refund must be issued. Merchants can issue refunds through their usual channels, typically through the gateway where the purchase was initially made. To ensure the refund prevents a chargeback, the merchant must mark the alert as refunded. With ChargebackHelp Plus, this is done in the CBH+Resolve module.

For Visa transactions, merchants can configure Verifi’s Rapid Dispute Resolution tool. RDR automates the resolution process. The merchant creates rules that qualify certain disputes. Qualified disputes are credited automatically.

Representment is also known as “second presentment” — the first presentment being when the merchant first presents the transaction for payment. A re-presentment responds to a chargeback, where the merchant presents the transaction a second time along with any “compelling evidence” that refutes the chargeback. Representment is submitted as a rebuttal letter. Compelling evidence can be payment authorizations, deliver confirmations, order IP addresses, ordering device IDs, etc. Anything that can tie the cardholder to the transaction can and should be submitted in a representment.

Here’s video on how representment works:

If you’ve received an unwarranted chargeback, you’ll have to prove it with a representment, which includes submitting a rebuttal letter with compelling evidence. That evidence is anything that can tie a cardholder to the sale they charged back. It can vary by each transaction, but each rebuttal letter must contain the following information at minimum:

• Merchant name and location
• Transaction date
• Merchant location/website
• Description of goods or services
• Payment Card last 4 and card brand
• Transaction amount, with applicable transaction currency symbol
• Authorization code
• Space for cardholder signature, if applicable
• Merchant return/refund policy

The response time frame for merchants varies by payment network and reason code. However it’s important to note that the clock starts ticking once the acquirer receives the chargeback. Merchants will often only know this process is underway when they see the chargeback on their statement. By then, the clock is already started. Merchants should respond immediately.

Merchants must strike a balance between preventing fraud as much as possible without encumbering legitimate transactions.

Ensure you’re processing with a PCI-compliant gateway. This means you’re authenticating billing addresses with AVS verification, requiring the CVC code off the back of payment cards, and validating the cardholder’s email address, among other authentications.

You can tick all these boxes by processing using 3D Secure protocol.

You can also use fraud detection software that checks for common patterns of fraud; but again you have to be weary of over-protecting your transactions and declining legitimate cardholders.

You can prevent friendly fraud chargebacks through Verifi Order Insight and Ethoca Consumer Clarity (formerly Eliminator). These services enhance your statement descriptors to help cardholders recognize their purchases, and helps issuers tie their cardholders to their purchases. Both tools are integrated into ChargebackHelp Plus.

There are two main categories for chargeback causes: fraud and merchant error. The cardholder either suspects a transaction was fraudulent or something went wrong in its execution.Fraud is comprised of true criminal fraud and friendly fraud. Merchant error can be any variety of mistakes that draws a complaint from the customer.

True fraud is where the cardholder is victimized in some way; a third party steals cardholder information to make transactions in their name. There are number of ways to commit friendly fraud. True fraud chargebacks should not be disputed. They should either be prevented or the dispute should be refunded to avoid the chargeback.

Friendly fraud is when the cardholder commits the fraud, either intentionally or unintentionally. They either do not recognize the transaction (unintentional), or they are intentionally claiming a transaction was true fraud to get the chargeback and keep what they purchased. Intentional friendly fraud is also known as chargeback fraud.

Merchant error can be a number of things:
• The cardholder was double charged, or charged the wrong amount
• They canceled an order with the merchant and were charged.
• Order never arrived, or arrived late.
• Qualitative – Customer did not receive purchase as described.
• An item was returned but the refund was not processed.

Issuers send chargebacks to the merchant’s acquiring bank with a reason code to communicate what caused it. Each card network maintains reason codes to cover all the disputes that qualify for chargebacks. The numbers and reasons vary by network, but basically fall under three main groups: fraud, authorization/processing errors, and qualitative disputes.

The merchant is ultimately liable for chargebacks. The money returned to the cardholder comes from the merchant. The merchant pays any and all fees for each chargeback, and penalties are assessed against them. If a chargeback is unwarranted, the burden of proof falls on the merchant. And even if the merchant proves a chargeback was unwarranted, they get the revenue back but the chargeback still stands on their transaction record.

EMV chips are those little golden squares on your credit and debit cards. They are little computer chips that prevent your card from being counterfeited. EMV chips have made card-present fraud much more difficult. This has pushed fraud into the online space, where the EMV chip is taken out of the equation. As a result, most chargebacks come from card-not-present transactions.

The implementation of EMV chips is also known as a “liability shift” because any merchant processing card-present transactions with EMV terminals are no longer liable for fraud. The liability for fraud shifts to the issuer in card-present transactions. Read more here.

Chargeback thresholds are set by each card network to limit how many chargebacks a merchant may process. The threshold is set as a ratio of monthly chargebacks divided by total monthly transactions. Typically, if the chargeback ratio approached 1% of total sales, the merchant is put into a monitoring program by the card network. Chargeback fees increase and additional penalties are assessed on the merchant until they are able to get their ratio down below the threshold. If the merchant fails to get under the threshold within a given period, they get terminated from processing on that card network.

While there are solutions to significantly reduce your chargebacks, there’s no guarantee you can prevent all chargebacks. Under the current system, you may not even want to. You can absolutely eliminate chargebacks due to merchant error. By using alert services Ethoca and Verifi, you can preempt most chargebacks by refunding disputes. However, if you can’t prevent friendly fraud from becoming chargebacks, you need to take the chargeback in order to fight them through representment.

While you may not be able to stop 100% of the chargebacks you potentially face, there is still much you can do to prevent the vast majority.

That is literally the million-dollar question for many companies. The cost of chargebacks varies greatly. Lots of factors can tip the scales on your bottom line. Things like the processing network used, chargeback volume, whether your selling digital or physical goods, fulfillment costs and more can influence the monetary impact of chargebacks. But if you want a ballpark idea, we’ve provided this calculator to give you an idea. For an more accurate picture, contact us for a free chargeback analysis of your particular business.