Chargeback Process: Initiation to Arbitration

Table of Contents

1. What is the chargeback process?
2. The initial transaction
3. Initiating a chargeback
4. Chargeback representment
5. Chargeback arbitration
6. How long does the chargeback process take?
7. Is arbitration the final stage of a chargeback?
8. Who is responsible for a chargeback?

The chargeback process is one of those things that seems fairly straightforward at first glance, but the more you learn, the more complicated you realize it is. When they first start receiving chargebacks, many merchants treat them as just an unavoidable cost of doing business.

Eventually, they might look into fighting fraudulent chargebacks, and discover that the process is a lot more complicated than they thought. While some simply go back to ignoring them, learning how the chargeback process works and how to fight illegitimate chargebacks can be a valuable tool for any merchant, but especially those in eCommerce.

The major credit card networks set regulations for how chargebacks are processed to ensure that a strict and transparent set of procedures is followed for every chargeback on their network. Unfortunately, the fine details of these procedures can vary from one network to another

If you're looking for specific information, you can take a look at our chargeback guides for Visa, Mastercard, and American Express. If you're just beginning your journey on the road to understanding chargebacks, however, this guide will provide an overview of the basic process, which is largely similar between card networks.

That's a bit of an oversimplification, and there are more steps of the chargeback process that could come into play in some cases, which we'll cover later. One of the primary challenges of the process for merchants is that there are several places where, if they fail to respond correctly or in time, they can lose the chargeback automatically and even be charged additional fees.

The key stages of the chargeback process are as follows:

1. The initial transaction
2. The chargeback
3. Representment
4. Arbitration

The issuing bank has most of the power during a chargeback. When the cardholder goes to their bank, they decide whether or not to file the chargeback. Likewise, when the merchant represents the transaction with new evidence, the issuing bank also decides whether or not to overturn that chargeback. While credit card networks and acquiring banks play a role, the issuing bank and the merchant are the primary actors involved in a chargeback.

The initial transaction

The groundwork for a potential chargeback is laid when a transaction is completed. In most eCommerce 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 merchant's acquiring bank. This is nearly instantaneous and is almost entirely automated.

This is the crucial step to head off any potential chargebacks that may occur. Robust authentication of the customer's identity can prevent chargebacks due to fraud. Ensuring the purchase is processed and fulfilled correctly prevents chargebacks due to merchant error. Proper documentation of the details of the transaction and the order associated with it is key to being able to fight illegitimate  chargebacks.

Initiating a chargeback

A cardholder or the cardholder’s issuing bank can initiate a bank chargeback. This is sometimes preceded by a retrieval request, which is a request by the issuing bank for more information about the transaction.

Most often, chargebacks begin with the customer contacting the issuing bank. There is usually a time limit for how long after the initial transaction a chargeback can be filed.

These time limits vary depending on the reason for the chargeback and depending on the issuing bank, but the most common rule is that the dispute must be made within 120 days of the initial transaction.

The bank can reject a request for a chargeback if it's past the deadline or if the reason the customer wants a chargeback isn't a legitimate one. However, they'll usually err on the side of the customer.

Chargeback representment

Once a credit card chargeback has been initiated, the merchant must decide to either accept the chargeback or fight it. If the merchant doesn't respond at all, they will default to accepting the chargeback. For Visa disputes, the merchant will also be charged an additional non-response fee.

If the merchant chooses to fight the chargeback, the next stage of the process is called representment.

In the representment process, either the merchant or a chargeback management company acting on their behalf needs to gather all applicable information related to the transaction to present to the issuing bank. The evidence provided must be tailored to the reason code of the chargeback.

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: Even after you’ve provided sufficient evidence that the charge was valid, the cardholder may present new evidence supporting their claim or change the reason for the chargeback. If the issuing bank is convinced, they can initiate the next stage of the process.

Chargeback arbitration

If the bank decided in the merchant's favor and then changes that decision based on new information from the cardholder, they can take the dispute to pre-arbitration, which is essentially filing a second chargeback.

At this point, the merchant has a tough decision to make. They can accept the second chargeback, or they can continue to contest it. If they make the latter choice, the bank can technically give in and reverse the chargeback again, but more often they will take the case to arbitration.

Note that the merchant can also initiate arbitration for a chargeback that's decided against them, but it's usually incorrect to do so except in rare circumstances.

In arbitration, the card network itself steps in to make a final judgment on the case. This ruling can't be appealed, and the losing party will be charged several hundred dollars in fees. Any procedural mistakes the merchant makes can result in additional fees, even if they win the case.

Because chargeback arbitration is so costly, the decision to go that route shouldn't be made lightly. Arbitration is typically only the right option when the chargeback is very high-value and the merchant is confident the bank didn't evaluate the evidence they presented properly.

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.

FAQ

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