Chargeback Prevention

Difference between Chargebacks and Disputes

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Table of Contents

  1. What's the difference between a dispute and a chargeback?
  2. How do payment card disputes work?
  3. What are chargeback reason codes?
  4. How do you fight a chargeback?
  5. What is a chargeback ratio?
  6. When should merchants accept chargebacks?
  7. Preventing disputes from becoming chargebacks
  8. Is a dispute a chargeback?
  9. Do all chargebacks hurt merchants?

When talking about chargebacks, you'll hear the terms "chargeback" and "dispute" thrown around a lot. Sometimes these terms are used interchangeably, but sometimes they're used to reference different parts of the chargeback process. To make things even more confusing, different card networks use different terminology for the various parts of the process.

What do people mean when they use these terms, and what do merchants need to know about them to protect their business?

What's the difference between a dispute and a chargeback?

Unfortunately, it depends on the context.

New call-to-actionThe most common chargeback-related context in which you'll see the word dispute used is when talking about a cardholder disputing a charge. This refers to the initial step of the chargeback process, when a cardholder calls their bank and asks for a particular charge to be reversed. Once the customer has given their explanation for the dispute and provided any supporting evidence they have available, the bank will decide whether or not that dispute will become a chargeback.

Banks will usually grant their customers' requests for chargebacks, but if the reason for the dispute clearly falls outside the list of legitimate reasons for which a chargeback may be filed, they may reject the request and tell the customer they must work things out with the merchant.

In this context, the term dispute simply refers to that initial customer request, which may or may not lead to a chargeback.

That's not the only way you'll see the term used, however. Sometimes the word dispute is used interchangeably with the word chargeback to refer to the entire process, from start to finish. For example, Visa's official documents usually use the word dispute instead of chargeback.

You may occasionally see someone refer to a merchant "disputing a chargeback." In this context, the word dispute isn't in reference to any sort of specific terminology, it's just being used as a plain English word to describe the process of fighting a chargeback through representment.

Now that we're clear on what these terms mean, let's see them in action. A brief summary of the process for handling disputes and chargebacks should serve to clarify any remaining confusion, as well as to give those who are new to the world of chargebacks some valuable info.

How do payment card disputes work?

Most disputes begin when a cardholder looks at their statement and sees a charge that they don't recognize. These charges will have identifying information included on their line in the credit card statement so that cardholders can contact the merchant with questions if they don’t recognize or agree with the charge.

Cardholders are always supposed to try to contact the merchant before disputing the charge with their issuing bank.

Oftentimes these disputes are a result of simple confusion. The purchase may have been made by another authorized user such as a family member, or the customer may have forgotten about a recurring charge they signed up for. A merchant descriptor that doesn't match the customer-facing name of the business can also result in this kind of confusion.

In other cases, the customer may have been a victim of true fraud. When this happens, the merchant has no choice but to accept the chargeback. After all, that's the exact situation the process was created for.

Some disputes instead begin with a customer who feels, accurately or not, that they didn't get what they paid for. Products being lost or damaged during shipping are a common cause here, but these situations can almost always be resolved by contacting the merchant to request a refund.

If the cardholder can't get in contact or come to an agreement with the merchant, their next step is to contact their issuing bank. The bank will try to help them obtain more details about the source of the charge and ask if they were able to contact the merchant to resolve things. If the cardholder maintains that they were unable to do so and wish to dispute the charge, the issuing bank will give the cardholder a temporary credit and send the dispute information to the card network to pass along to the acquirer associated with that merchant. This is the point at which the dispute becomes a chargeback.

What are chargeback reason codes?

Most of the rules governing chargebacks have been developed by the four major card networks: Visa, Mastercard, American Express, and Discover. Once a chargeback has been initiated, banks and merchants must follow these rules carefully in order to ensure a fair and correct decision.

The first thing that happens when a dispute becomes a chargeback is that it will be assigned a reason code. Each card network has different reason codes, but they all amount to a simple numeric indicator that explains the reason for the chargeback. While these reasons can get quite specific, many of them can be categorized as either fraud (charges made against stolen cards or credentials), or authorization and processing errors. The rest, which Visa calls “consumer disputes,” deal with disagreements and confusion between the cardholder and the merchant, and tend to be less straightforward to resolve than disputes originating from the other two categories.

When a dispute becomes a chargeback, the merchant is held liable by default.

That means that if the merchant wants to fight the chargeback and get their money back, they have to provide evidence that the charge was legitimate and the customer's claims are false. If they ignore the chargeback, it will automatically be decided in favor of the cardholder, and they may have to pay an additional non-response fee.

Although banks will sometimes exchange information that allows them to resolve chargebacks in the merchant’s favor very early in the process, by the time the merchant receives notice of the chargeback it's too late for that. The merchant must either acknowledge and accept it or make an affirmative choice to fight the chargeback (which, confusingly, might be referred to as “disputing” the chargeback itself).

 

How do you fight a chargeback?

If a merchant chooses to fight a chargeback, it will proceed to the next stage of the chargeback process: Representment.

Representment refers to the merchant fighting the chargeback by “re-presenting” the disputed charge, along with their argument and evidence that the charge was valid in the first place. The issuing bank will review the evidence and make a decision based on the merits of the claim.

While representment is the generally accepted industry term, some card networks have different names to refer to this part of the process, such as "second presentment" or "dispute response."

After a decision has been made on the representment, that might be an end to the dispute, but there’s still an opportunity for any of the affected parties to appeal it further to the judgment of the card networks.

The first step in this appeals process is called “pre-arbitration,” in which the banks get one more attempt to work things out on their own. If this fails, the case proceeds to arbitration. The card network will review the evidence and make a final decision, and whoever loses in arbitration will have to pay hundreds of dollars in fees.

What is a chargeback ratio?

As merchants who've had to deal with them are all too familiar, there are many costs associated with a chargeback. There's the lost revenue of the transaction itself, the chargeback fee, and the cost of any merchandise purchased by the customer. However, chargebacks also have less visible costs.

Download the eGuide, 4 Reasons to Hire a Chargeback Management CompanySince chargebacks usually indicate a lost customer as well, you may have sunk costs in marketing, sales, and customer service to account for. There’s also another aspect of chargebacks that can have a significant impact on your bottom line: Your chargeback ratio.

Merchants who get a lot of disputes are risky customers for payment processors to take on. To encourage good business practices that prevent chargebacks, all reputable payment processors have a “chargeback threshold" that their merchants are not to exceed. Usually, it’s about a 1% ratio of chargebacks to total transactions. Merchants who go over that threshold may face higher fees, fines, and may even have their accounts terminated. At that point, the only way for them to continue processing credit card payments is to sign up with an expensive “high risk” payment processor.

When should merchants accept chargebacks?

Not every dispute or chargeback is fraudulent, and merchants don't always have to fight them. There are several scenarios where a merchant might choose to accept a chargeback.

The one universal reason to accept a chargeback is if it's the result of true fraud. The entire reason that chargebacks exist is to protect customers from fraud. If the cardholder clearly has suffered from identity theft or card theft, then the merchant is required to accept the chargeback.

Another common reason to accept a chargeback is when the transaction amount is small enough that it doesn't justify the cost. Fighting a chargeback takes time, and time is money. While there are additional costs to chargebacks, it may not be worth fighting them when the revenue that would be recovered is minimal.

There's also a cheaper alternative to accepting chargebacks for merchants who sign up for chargeback prevention alerts. When a cardholder disputes a charge, a chargeback prevention alert can notify the merchant immediately, giving them the chance to issue a refund to avoid the chargeback. That way the merchant won't have to pay a chargeback fee, and their chargeback ratio won't increase.

Preventing disputes from becoming chargebacks

Anytime you have a conflict with a customer over a transaction that has already occurred, you’re in the middle of a dispute. The good news is, not every dispute will impact your revenue. When customers come to you first, before contacting their bank, you have a golden opportunity to resolve the situation in an amicable way that will make the customer happy. That benefits your relationship with that customer, your overall reputation, and best of all, it prevents a nasty chargeback from occurring.

When disputes do turn into chargebacks, remember that it's usually in your best interests to fight them to the best of your ability. Fighting chargebacks helps you learn about why they’re happening, what pain points your customers are experiencing, and what you can do better in the future to stop similar disputes from happening again.

FAQ

Is a dispute a chargeback?

No, but it can become one. A customer can dispute a charge, and it becomes a chargeback if they work with their bank to force a reversal of the transaction. However, some organizations use the terms interchangeably.
 

Do all chargebacks hurt merchants?

In some ways, yes. Chargebacks come with fees and count against the merchant’s chargeback ratio regardless of a win or loss. Likewise, they can cost a lot of money in terms of lost revenue and overhead.
 

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