The chargeback process is similar across most credit card networks and issuing banks, with specific differences for each bank or network. A chargeback works its way from the issuing bank through the card network and to the merchant's acquiring bank. The merchant can decide to dispute the chargeback or accept it.
A chargeback may begin simply enough when a cardholder contacts their bank to dispute a charge, but the merchant can fight the chargeback, banks can challenge each other’s decisions, the card networks can get dragged in to adjudicate—things can get messy. What do merchants need to know about navigating the chargeback process?
A chargeback isn’t just a single event. It’s a process, one that can be lengthy and convoluted for all parties involved. For merchants, chargebacks are especially troublesome, because the lion’s share of the liability for chargebacks falls on them.
It doesn’t help that the chargeback process is largely defined by regulations that were written out long before the age of e-commerce, and that each card network creates its own rules based on their interpretation of those regulations.
Understanding how the chargeback process works isn’t just for personal edification. Knowing the ins and outs of the process can help you avoid costly mistakes, fight fraudulent chargebacks more effectively, and get a better ROI on the time and labor you spend on dealing with disputes.
Here’s what you need to know about the chargeback process.
Other companies that service merchant accounts, such as payment processors and payment gateways, may also become involved in the chargeback process.
When a chargeback is accepted, the cardholder keeps the returned funds and the case is closed. If the merchant chooses to fight back with representment, the issuing bank will review any evidence that the merchant sends along and decide whether or not to reverse the chargeback. If the issuer upholds the chargeback, the case can be appealed to the card network.
Merchants must be aware of the responses required of them and the deadlines for those responses, which will differ from network to network, and can be complicated further by factors such as chargeback alert or deflection services. However, a basic chargeback process can easily be outlined. Just be aware that some chargebacks will deviate from this formula:
Merchants should also note that if they fail to either fight or accept a chargeback by the deadline, they may be charged an additional non-response fee on top of the regular chargeback fee. Thus, every chargeback requires a response of some sort, even if the merchant doesn't want to fight it.
A represented charge will only be accepted by the issuing bank if the merchant includes compelling evidence that refutes the cardholder’s dispute claims. The right evidence will depend entirely on the substance of the claims, but for typical chargebacks relevant evidence may include:
The merchant’s evidence will be passed along from the acquirer to the network to the issuer, who will review it and make a decision. If the issuer finds the merchant’s evidence valid and compelling, they will reverse the chargeback by taking away the cardholder’s provisional credit.
The acquirer will then return the merchant’s funds to their account. However, the chargeback fee will not be refunded, and the chargeback will still count toward the merchant's chargeback ratio. That's why prevention is always the best cure for chargebacks.
If the issuer does not believe that the merchant’s evidence disproves the cardholder’s claim, the chargeback will stand. While merchants can appeal the case by requesting arbitration from the card network, it isn’t usually a good idea to do so. The card network will often evaluate the evidence similarly to the issuer, and when a case goes to arbitration, the losing party will have to pay hundreds of dollars in fees.
If the merchant fails to submit a response by the deadline, the merchant will accept the chargeback by default.
Merchants may decide to accept chargebacks for several reasons. Sometimes the chargeback is based on true fraud or some other valid and inarguable reason, and there is no point in trying to fight it. If the chargeback is the result of merchant error, for example, then by the time the chargeback has been initiated it's already too late to go back and fix the problem. If the cardholder's claims are true, the merchant won't be able to disprove them.
Many merchants, however, accept chargebacks because they’re too busy to deal with them, or they’ve become convinced that chargebacks are just an unavoidable cost of doing business.
In truth, few merchants can actually afford to passively absorb chargebacks and ignore their underlying causes. In many cases, they don’t even realize how much damage chargebacks are doing to their business until it’s too late.
With fees and overhead added, chargebacks can cost more than double the original transaction, making them a tremendous drain on a merchant’s revenue.
Once you factor in fees, marketing, and lost overhead, the total cost of a chargeback can be as much as 250% of the disputed purchase amount. Additionally, the chargeback will count against a merchant's chargeback ratio regardless of whether they win or lose.
Fighting chargebacks—especially fraudulent ones—helps merchants recover revenue, discourage repeat offenders, and preserve their reputation with issuing banks, making them less likely to reflexively side against them in future disputes.
The best way to stop chargebacks from taking away your revenue is to prevent them from happening in the first place.
As the saying goes, an ounce of prevention is worth a pound of cure, and that's especially true of chargebacks. Not only do chargebacks cost businesses time and money, they also increase a merchant's chargeback ratio, win or lose. If that ration gets to high, merchants can face higher fees and even account termination and blacklisting if the problem goes on too long.
Fortunately, banks don't want to deal with chargebacks either, and they do make some small efforts to encourage cardholders to address any problems by contacting the merchant.
Even Capital One, a major issuing bank, has a chargeback guide for cardholders that emphasizes working with merchants to resolve problems before requesting a chargeback.
What does this mean for merchants?
Practice honesty and transparency with your customers. If they have a complaint about their purchase, your service, or a transaction, make sure that you respond promptly to their concerns and stay in touch until you can work out an acceptable solution. Keep them informed about the refund process if they are going to be receiving one, and make sure that customer service makes it easy for them to resolve problems with you.
Also, take advantage of the fraud prevention tools available to you. Don't wait for fraud to reach a crisis point. Fraud prevention tools can help automate responses to red flags in the purchase process, blocking fraud attempts before they can be completed. By preventing true fraud, you can avoid future chargebacks.
While many merchants are familiar with the initial representment stage, fewer fully understand what happens when a dispute escalates into pre-arbitration or a second chargeback.
Pre-arbitration occurs when the issuing bank, after reviewing the merchant’s representment evidence, decides to re-open the case because the cardholder has provided additional information or new claims. This step can catch merchants off guard because it reintroduces a dispute they believed was already resolved.
If the merchant disagrees with the pre-arbitration decision, they can take the case to arbitration, where the card network makes a final ruling. Arbitration comes with significant fees, so merchants often weigh the transaction value against the potential cost of losing before proceeding.
The merchant should carefully review the updated information submitted by the issuer. Going to arbitration with the same documents from the first representment round is rarely enough—new evidence or additional context may be needed to address the cardholder’s revised claims.
For example, if the dispute reason code changes from “merchandise not received” to “merchandise not as described,” the merchant might need to include a product description that proves the item was described accurately.
In cases where the reason for the claim hasn't changed, the merchant may not have any additional relevant evidence to submit. In these cases, it's often best to accept the pre-arbitration decision to avoid incurring further fees. However, if the chargeback is of a particularly high value and the merchant feels the issuer disregarded strong evidence, it may still be worth pursuing arbitration.
The chargeback process can be a long and winding road indeed, and the best way to deal with chargebacks is to avoid them in the first place.
Aside from the constant threat of lost revenue, chargebacks can endanger merchants by putting their merchant accounts at risk. If you carry an excessive chargeback rate for too long, you might not be able to find any reputable payment processors willing to work with you.
Brick-and-mortar merchants can avoid many chargebacks simply by using payment terminals with EMV chip readers. For e-commerce merchants, prevention can be more of a challenge, but standardizing the procedures and protocols for credit card payments can be an important first step in avoiding authorization and fraud chargebacks. Anti-fraud software tools can be a big help too.
To protect themselves, merchants must always be vigilant about reviewing their operations, policies, and even their marketing materials for potential chargeback vulnerabilities. Investing in the services of chargeback management specialists can assure merchants of greater success in these tricky endeavors.