Chargeback Process: Initiation to Arbitration
The rules for and process by which a credit card chargeback is handled may seem deceptively straightforward. They are not; in reality, there’s a lot of back and forth that e-commerce merchants would benefit from understanding.
A customer disputes a transaction with the card issuing company, the card issuing company refunds money to the customer, and the card issuing company takes refunded money from the seller, right? If this was your answer, you got partial credit. It’s actually more complicated than this. Read on for the full answer!
The primary issuing companies (MasterCard, Visa, etc.) that set regulations for how chargebacks are processed ensure that a strict and transparent set of procedures is followed to ensure that all bases are covered before proceeding with a final decision.
The Initial Transaction
The potential groundwork for a chargeback is laid when a transaction is completed. In most e-commerce transactions, it appears that a customer is sending funds directly to a seller, but this is not the case. What actually occurs is that the customer sends a request to the issuing bank for a transfer of funds to the acquiring bank, or the bank of the merchant. This is nearly instantaneous and is almost entirely automated.
As a reminder, this is the crucial step to head off any potential chargebacks that may occur. Proper documentation during the initial transaction will fuel further steps and lead to the recovery of lost revenue.
Initiating a Chargeback
A cardholder or the cardholder’s issuing bank can initiate a bank chargeback. This is sometimes done via a retrieval request, which is a request by the issuing bank for a copy of a transaction receipt. This should determine the validity of potential chargeback claims.
Most often, chargebacks initiate from the customer to the issuing bank. Chargebacks do have time limits, after which requests for chargebacks are neither valid nor processed. These time constraints vary depending on the reason for the chargeback and depending on the issuing bank, but they typically must occur within 120 days of the initial transaction.
The rules for both primary issuing organizations (MasterCard and Visa) dictate that they will, upon starting a chargeback, debit a merchant’s account and automatically credit the cardholder the amount of the transaction in question.
Investigating and Representing a Chargeback
Issuing banks enforce strict rules for handling chargebacks. Once a credit card chargeback has been initiated, the second presentation (or representment) stage occurs and is handled either directly by you (the merchant) or by a chargeback specialist.
In the representment process, the merchant needs to gather all applicable information related to the transaction to present to the issuing bank. Again, depending on the type of chargeback being investigated, the documentation provided by the merchant or the chargeback management company may vary.
Assuming that you meet the requirements and prove that the transaction is valid by the standards of the issuing bank, then the amount of the transaction will be credited back to your account.
Here’s where it can get tricky, though: the customer may, even after you’ve provided sufficient evidence that it’s valid, still dispute the transaction, at which point we enter the second chargeback stage.
Arbitrating a Chargeback
If a customer disputes a merchant’s successful re-presentment, the merchant and cardholder engage in a second chargeback round. This time, the process differs between the primary issuing companies: for MasterCard, a second chargeback results in a second debit of funds from the merchant account; but for Visa, the merchant retains the funds until the issue is settled.
At this point, you have a tough decision to make. You can let the second chargeback stand, or you can continue to prove your case through chargeback arbitration. While re-presentment involves presenting predefined criteria to make your case, arbitration involves an analyst from the issuing bank taking a look at all the collected evidence.
Chargeback arbitration is costly, and so a decision to go into arbitration cannot be made lightly. Issuing banks assess filing fees, review fees, and even violation fees for each error finding. It’s entirely possible that one party could win a chargeback arbitration and still be forced to pay significant fines if errors are found.
These are a few of the rules and process steps involved in the chargeback cycle: first transaction, chargeback, re-presentment, second chargeback, arbitration.
It always bears repeating that the most important step in the process is the first step, during which all potential evidence is generated as the transaction is completed. Proper preparation and documentation should ensure that the odds are in the merchant’s favor during what can be a tedious, time-consuming, and expensive process.