Survive the Chargeback Process: A Few Simple Steps

Chargebacks process lost revenue

You may do everything in your company’s power to minimize the amount of chargebacks that occur, but you might not be able to fully eliminate the problem. When chargebacks strike, your company needs to be prepared to handle it. The chargeback process isn't fun to go through, and is universally lengthy, costly, and frustrating. However, it will only get worse if you don’t know the proper way to handle it when the time comes.

Make sure you educate yourself about merchant rights and responsibilities regarding chargebacks.

What Is a Chargeback?

Simply put, a chargeback happens when a consumer disputes a charge on their credit card bill. Some chargebacks are legitimate, but some are friendly fraud. In the case of a legitimate chargeback, a customer may have been incorrectly billed, customer is not happy with the product or services, or may not have received the product they paid for. Occasionally, the customer has been a victim of identity theft or simply had their credit card information stolen, which definitely can provide cause for a chargeback.

New call-to-actionHowever, sometimes it’s hard to tell whether a claim is legitimate. For example, if the customer claims the charge was unauthorized, this may or may not reflect the truth. In many cases, a customer might not recognize the merchant or may have simply forgotten about a purchase.

How Chargebacks Are Initiated

The problem with chargebacks is that they almost universally operate under the faulty assumption that the customer is always right. The first thing that happens is that the cardholder – your customer – will initiate a dispute. In certain cases, there may be more than one chargeback due to multiple different transactions.

Sometimes, instead of the consumer, the credit card issuer will initiate the chargeback process. This is called a bank chargeback. Oftentimes, the cardholder won’t know that a chargeback has been filed in the first place. The bank may instigate the process due to perceived merchant fraud, use of an expired card, duplicate processing, or another reason.

What Happens at the Bank

After the bank reviews the dispute, it will either decline or accept the chargeback. If the bank decides the claim is unwarranted, they will not file a chargeback and the matter will be dropped. However, if any small factor indicates potential merchant error, the chargeback process will continue.

At this point, the bank will issue a refund to the cardholder – which will automatically debit the merchant account for the cost of the original transaction. You will also have to pay certain chargeback fees. Small businesses and startups often have the most trouble with this, because a sudden lack of funds can have dire consequences on company finances.

Reason Codes

Fortunately, the aforementioned refund is only provisional, which means you still have a chance to contest it. The bank will send you a reason code describing why the chargeback has been filed. Each code matches a different type of chargeback claim. However, there are still major challenges around handling reason codes.

Although these codes purportedly describe the original cause of the chargeback, they can be complicated to understand and may be entirely incorrect.

The issuer’s bank will send the transaction back to the merchant’s bank. When your bank receives the chargeback, it will either resolve the problem on its own or it will send the claim to you, at which point you can either accept or dispute the chargeback.

Steps Merchants Need to Take

At this juncture, stress and pressure can sometimes cause merchants to accept chargebacks, even when they know the claims are illegitimate. It’s important to know your rights so you can submit correct information to resolve the problem. Here are the steps to take when this happens.

  1. If the chargeback is friendly fraud or for a valid transaction, dispute it. This is critical.
  2. Submit proper documentation. Certain transactions call for different evidence, but it’s a good idea to have anything that could legitimately show the consumer either engaged in the transaction or fault on hand - they did not honor a contract. These documents could include all interactions with the customer (email, phone, chat, etc), a signed delivery receipt, or your return policy. This is especially important when a consumer has their own documentation, such as invoices or sales slips.
  3. Don’t wait around. Banks usually allow no more than 10 days for merchants to dispute the chargeback, and sometimes the timeframe is even smaller. If you don’t respond within the allotted time, it will result in an automatic loss with no further option to continue the disputation process.
  4. Receive the acquiring banks decision, and then reassess, depending upon the outcome.

Big Problems for Merchants

Manage Chargeback In-House Or OutshoreOne of the biggest problems merchants face with chargebacks are fines, which must be paid whether or not you win the dispute. Merchants have to pay a small fee to their acquiring bank to retrieve information about the charge. If the issuer or customer is unsatisfied with the documentation, the dispute progresses further, and, in some cases the merchants will have to pay an additional chargeback fee. The process can become even more costly if the chargeback progresses to arbitration.

Unfortunately, issuing banks tend to hold the cardholder’s best interests at heart, even when the customer isn’t in the right. In the bank’s perspective, the merchant is at fault for charging the customer incorrectly. To add insult to injury, one chargeback often leads to many more. When an issuing bank believes you to be guilty of wrongdoing, there’s nothing much you can do in the aftermath – aside from damage control. But it’s highly likely that issuers will handle your cases with less care after one chargeback is filed.

This is especially problematic because multiple chargebacks could land you in a chargeback monitoring program, requiring you to pay hefty fines upwards of several thousand dollars per month. Unfortunately, there’s little recourse for businesses at this juncture; many end up terminated by their banks.

What Can Merchants Do?

As a merchant, navigating the complex system of chargeback disputes can be tricky. Whether you’re dealing with a recurring problem or you’ve been blindsided by your first chargeback, you don’t have to go it alone.

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