Don’t Get Caught Off-Guard by Bank Chargebacks
We usually think of chargebacks as a dispute between a cardholder and a merchant, but in truth, not every chargeback happens at the cardholder’s initiation. Sometimes, they don’t even know a chargeback has been filed on their behalf. Issuing banks can and often do initiate chargebacks for their own reasons, and when merchants get hit with these chargebacks, they can be difficult or impossible to contest through the representment process.
As with true fraud chargebacks, the best thing to do about bank chargebacks is prevent them proactively. Why do issuing banks sometimes initiate chargebacks without the cardholder’s involvement, and how can merchants avoid these chargebacks?
A bank chargeback is any chargeback that is filed by the issuing bank without any underlying dispute or request from the cardholder. Typically, bank chargebacks occur because the issuer notices some kind of error or problem with the transaction that puts its validity into question.
When the issuer realizes that an invalid transaction has been processed, they can reverse it and restore the cardholder’s funds by following the same process that is used to remedy cardholder disputes: the chargeback process.
Chargebacks can be a very expensive problem for merchants, but the true cost of a chargeback is not always apparent at first glance. When a cardholder receives a chargeback, the disputed transaction amount is taken from the merchant account and given back to the cardholder.
In addition to this revenue loss, the merchant will incur chargeback fees from their acquiring bank or payment processor. When fees and overhead are included, the total cost of a chargeback can be up to two and a half times the original transaction amount.
Of even greater concern is the fact that the card networks require merchants to maintain a ratio of chargebacks to transactions that does not exceed a certain threshold, usually 1%. Every chargeback brings a merchant closer to the threshold, and merchants who go over it may find themselves subject to onerous mitigation programs.
In extreme cases, they may even lose their merchant accounts. To avoid this fate, a comprehensive chargeback prevention plan that factors in all types of chargebacks—including bank chargebacks—is essential.
What are Bank Chargebacks?
While the payments system is designed to catch and reject unauthorized or erroneous transactions, it is inevitable that some may slip through the cracks due to merchant error, software glitches, or a host of other issues.
When an issuing bank receives a transaction and detects something improper about it, they may attempt to fix the problem by reversing the transaction with a bank chargeback.
A bank chargeback is no different than any other chargeback. The only difference is that the cardholder did not request it—they might not even know about it until the funds are returned to their account.
Once initiated, it follows the same workflow and affects merchants in exactly the same way. An appropriate chargeback reason code will be assigned, chargeback fees will apply, and the merchant’s chargeback ratio will increase.
Bank chargebacks are usually filed due to processing or authorization errors. These chargebacks can be difficult or even impossible to represent successfully, as they are not based on subjective interpretations of fraud or merchant error, but on verifiable issues related to the transaction process.
Banks make mistakes too, and merchants should reach out to plead their case if they feel they have received a bank chargeback in error, but by and large the chargeback representment process is not an effective way of dealing with bank chargebacks. They must be avoided in the first place.
What are the Most Common Reasons for Bank Chargebacks?
Issuing banks have wide latitude to exercise their chargeback rights when they feel it appropriate, but they show up most often in association with processing error and authorization-related reason codes. The following is a list of generic chargeback reasons that frequently show up as bank chargebacks:
- Declined Authorization: authorization for the transaction was declined, but it was submitted anyway.
- No Authorization: no authorization approval was given for the transaction.
- Expired Card: the transaction was processed after the expiration date on the card.
- Incorrect Transaction Amount: the amount processed does not match the amount authorized.
- Incorrect Card Number: the transaction was processed against the wrong card or account number.
- Incorrect Currency Code: the transaction currency that was processed does not match the currency type approved by the cardholder.
- Duplicate Charge: a single authorized transaction was submitted more than once.
- Late Presentment: too much time elapsed between the initiation of the transaction and its completion.
- Merchant Fraud: the issuing bank has reason to suspect that the merchant is engaged in fraudulent conduct.
How Can Merchants Avoid Bank Chargebacks?
The good news for merchants is that most bank chargebacks can be avoided by carefully following the proper procedures for authorizing and submitting transactions.
Authorization-related chargebacks often happen because merchants are bending the rules or cutting corners in order to get a declined card to work; this is rarely a good idea.
Merchants can protect themselves by not “forcing” difficult transactions to go through and asking for alternate payment methods when cardholders are having a hard time with a particular card.
Other processing errors may occur when simple data entry mistakes are made, or procedures are not being followed correctly. Merchants should make sure their staff is well-trained on how to process credit card transactions, especially more complex ones that may involve currency conversion.
If the rules for handling certain transaction types seem unclear, reach out to your acquirer or payment processor for guidance.
Bank chargebacks may not be as thorny a problem for merchants as true fraud or friendly fraud chargebacks, but when it comes to revenue loss and your chargeback ratio, all chargebacks are equal in the end.
Analyzing your chargeback data can reveal whether or not you’re incurring a higher-than-normal rate of bank chargebacks, which can be a sign of problems with your transaction procedures. If bank chargebacks are impacting you, it’s important to take immediate steps to correct the issues that are leading to them.