What is a Chargeback?
Chargebacks are an important protection that increases public confidence in credit and debit card payments, especially in online transactions. However, they can also be a huge headache for the merchants that have to deal with them. Many customers dispute transactions that don’t fall under the narrow list of problems chargebacks are intended to address or file a dispute without first contacting the merchant.
The overall number of chargebacks is increasing every year, and the coronavirus pandemic caused a huge spike in disputes in 2020 and 2021. As chargebacks have increased, more and more businesses are taking action to prevent and fight them. What are chargebacks, and what do merchants need to know in order to prevent and fight them as effectively as possible?
If you have any questions about how to protect your business from chargebacks, please feel free to reach out to us directly.
Table of Contents
- What is a chargeback?
- How do chargebacks work?
- What is the chargeback process?
- What do chargebacks mean for merchants?
- How many chargebacks occur annually?
- How do you file a chargeback?
- Why do customers file chargebacks?
- When can a cardholder legitimately dispute a charge?
- What are chargeback reason codes?
- American Express Chargeback Reason Codes
- Visa Chargeback Reason Codes
- Mastercard Chargeback Reason Codes
- Discover Chargeback Reason Codes
- What are the three types of chargebacks?
- What is the EMV Liability Shift?
- Who is liable for chargebacks?
- Should merchants fight chargebacks?
- How do you write a chargeback rebuttal letter?
- Can you prevent all chargebacks?
- How much are chargeback fees?
- Know the facts about chargebacks
- What’s the difference between a chargeback and a refund?
- How long do you have to fight a chargeback?
- What is a chargeback threshold?
What is a chargeback?
The meaning of the word chargeback is fairly straightforward. The bank will charge back the amount of the disputed transaction to the merchant, returning the money to the cardholder without needing the merchant’s approval.
When a cardholder disputes a charge, banks typically review the transaction, and if the reason for the dispute is valid, provide a provisional credit to the customer’s account while the chargeback claim is resolved.
Chargebacks for credit cards were first implemented in the 1974 Fair Credit Billing Act (§ 161. Correction of billing errors), an amendment to the Truth in Lending Act.
Debit card chargebacks were implemented later by the Electronic Fund Transfer Act in 1978. These acts were intended to outline protective measures for consumers.
Chargebacks were a direct response to widespread abuse by fraudsters who could use and abuse stolen credit information without much the cardholder could do about it.
Think about it this way: A credit card is lost or stolen and used to make fraudulent purchases. Before the Fair Credit Billing Act, the cardholder would most likely have little or no recourse to get their money back once the merchant had been paid.
The chargeback process allows consumers to get their refunds from their banks, and to let banks (rather than cardholders and merchants) make decisions on how to handle the situation. While the process was not yet called a chargeback, it would become the foundation for the dispute system we know today.
How do chargebacks work?
Chargebacks are initiated by cardholders, evaluated by banks, and paid for by merchants. A single chargeback, from initiation to resolution, can last months or even years.
While banks will sometimes file chargebacks for things like authorization or processing errors, most chargebacks occur when a cardholder contacts their bank to dispute a charge on their account. Usually, they do this because they don’t recognize the charge and believe it to be fraudulent.
In some cases, however, a cardholder might dispute a charge because they feel they didn’t get what they paid for and the merchant has refused to resolve the issue.
Once a chargeback has been initiated, it will essentially go back and forth between the issuing bank and the merchant until either one of them agrees to accept liability or until the card network must be called in to resolve the dispute.
What is the chargeback process?
- When a cardholder disputes a transaction with their issuing bank, the bank decides whether or not the customer has grounds to file a chargeback.
- If a chargeback is granted, the bank will notify the acquiring bank—AKA the merchant’s bank—and debit the funds from the merchant’s account.
- The merchant can either accept the chargeback or fight it by resubmitting the charge along with a rebuttal letter and the necessary evidence to disprove the claim. This process is called representment.
- The issuing bank will review the new evidence and make a decision. If they find in favor of the merchant, the funds will be returned.
- At this point, any party unhappy with the decision can contest the issue further by initiating pre-arbitration. This most often occurs when the issuing bank decides in the merchant’s favor, but then receives new evidence that puts that decision in question.
- If neither party accepts liability during pre-arbitration, the chargeback moves to arbitration. Here, the card network will examine the evidence and make a final decision. This decision can’t be appealed further, and the losing party will be required to pay hundreds of dollars in fees.
Time limits for merchants to respond to a dispute vary based on the credit card network and the reason code. Note that the timer begins when the chargeback is initiated, not when the merchant is notified, so the merchant’s deadline may not be the exact time frame outlined by the card network’s policies.
What do chargebacks mean for merchants?
If a merchant’s chargeback ratio exceeds certain thresholds established by the card networks and other financial institutions they do business with, they may face fines, additional chargeback fees, and even termination of their merchant account. The most common threshold is 1%, but Visa recently lowered theirs to 0.9%.
How many chargebacks occur annually?
We do have some data from a 2018 survey by Javelin Research showing that nearly half of all customers have disputed a charge, and a majority of those have disputed more than one.
We also know that chargebacks continue to grow year after year. A 2018 study by Aite Group predicted that the total value of chargebacks would climb to $35 billion by 2021, and given the increase in disputes that accompanied the COVID-19 pandemic, it wouldn’t be surprising to find we’ve already far exceeded that number.
How do you file a chargeback?
The bank will typically give you a provisional credit for the amount of the charge while they investigate the validity of the claim. Be prepared to describe the problems you’ve had with the merchant and the steps you’ve taken to resolve the matter.
Why do customers file chargebacks?
In order to identify the reason a customer disputed a charge, it can be helpful to examine the reason code on the chargeback.
Every chargeback has a reason code associated with it. The major card networks (Visa, Mastercard, Discover, and American Express) established these codes to clearly identify the reason a chargeback was requested.
What are chargeback reason codes?
While the reason code will tell you the reason that the cardholder gave to the bank for why they wanted to dispute the charge, it’s important to keep in mind that this isn’t always the real reason for the chargeback.
Some customers may incorrectly think that a charge on their account was unauthorized because they don’t recognize the name of the business listed in their account. Others may have forgotten a recurring charge they agreed to.
There are also some customers who want to file a chargeback because of a negative experience they had with the merchant, but know that the reason they have isn’t legitimate. In order to get the chargeback, they lie to the bank about their reason for requesting one. In some cases, a customer may have made a purchase with the intention of fraudulently disputing the charge later in an effort to get their money back.
When can a cardholder legitimately dispute a charge?
If a cardholder is a victim of true fraud (card theft, identity theft, etc.) then a chargeback is not only legitimate, but is the ethical solution for the issuing bank and the merchant to resolve the issue.
Customers can also file chargebacks when they didn’t receive the product or service they paid for, whether because of a lost or damaged shipment or an incorrect item being sent. Being double-charged or overcharged the agreed purchase amount is another legitimate reason for a dispute.
However, problems like these are usually resolved more quickly and easily when the customer contacts the merchant, and a chargeback should only be used when the merchant is uncooperative.
There are multiple meanings to the word "chargeback", based on the cardholder's actions. The primary legitimate use of the word is for true fraud chargebacks, but some customers commit "friendly fraud" by filing a chargeback without a legitimate reason.
Customers can’t dispute a charge simply because they are dissatisfied with the product or service they received. These issues must always be resolved with the merchant directly.
American Express Chargeback Reason Codes
Learn how to fight each of these American Express Chargeback Codes >>>
|A01||Charge Amount Exceeds Authorization Amount|
|A02||No Valid Authorization|
|A08||Authorization Approval Expired|
|F24||No Card Member Authorization|
|F29||Card Not Present|
|Card Member Dispute|
|C02||Credit Not Processed|
|C04||Goods/Services Returned or Refused|
|C08||Goods/Services Not Received|
|C14||Paid by Other Means|
|C18||“No Show” or CARDeposit Cancelled|
|C28||Cancelled Recurring Billing|
|C31||Goods/Services Not as Described|
|C32||Goods/Services Damaged or Defective|
|P01||Unassigned Card Number|
|P03||Credit Processed as Charge|
|P04||Charge Processed as Credit|
|P05||Incorrect Charge Amount|
|P22||Non-Matching Card Number|
|M10||Vehicle Rental - Capital Damages|
|M49||Vehicle Rental - Theft or Loss of Use|
|FR2||Fraud Full Recourse Program|
|FR4||Immediate Chargeback Program|
|FR6||Partial Immediate Chargeback Program|
Visa Chargeback Reason Codes
Learn how to fight each of these Visa Chargeback Codes >>>
|10.1||EMV Liability Shift Counterfeit Fraud|
|10.2||EMV Liability Shift Non-Counterfeit Fraud|
|10.3||Other Fraud — Card Present Environment|
|10.4||Other Fraud — Card Absent Environment|
|10.5||Visa Fraud Monitoring Program|
|11.1||Card Recovery Bulletin|
|12.2||Incorrect Transaction Code|
|12.4||Incorrect Account Number|
|12.6.2||Paid by Other Means|
|13.1||Merchandise/Services Not Received|
|13.3||Not as Described or Defective Merchandise/Services|
|13.6||Credit Not Processed|
|13.8||Original Credit Transaction Not Accepted|
|13.9||Non-Receipt of Cash or Load Transaction Value|
Mastercard Chargeback Reason Codes
Learn how to fight each of these Mastercard Chargeback Codes >>>
|4808||Required Authorization Not Obtained|
|4808||Expired Chargeback Protection Period|
|4808||Multiple Authorization Requests|
|4808||Cardholder-Activated Terminal (CAT) 3 Device|
|Point of Interaction Error|
|4834||Transaction Amount Differs|
|4834||Point-of-Interaction Currency Conversion|
|4834||Cardholder Debited More than Once for the Same Goods or Services|
|4834||Loss, Theft, or Damages|
|4837||No Cardholder Authorization|
|4849||Questionable Merchant Activity|
|4870||EMV Chip Liability Shift|
|4871||EMV Chip/PIN Liability Shift|
|4853||Cardholder Dispute of a Recurring Transaction|
|4853||Issuer Dispute of a Recurring Transaction|
|4853||Goods or Services Not Provided|
|4853||No-Show Hotel Charge|
|4853||Credit Not Processed|
|4853||Goods/Services not as Described or Defective|
|4853||Digital Goods $25 or less|
|4853||Transaction Did Not Complete|
|4853||Credit Posted as a Purchase|
|4854||Cardholder Dispute Not Classified Elsewhere|
|4850||Installment Billing Dispute (Participating Countries Only)|
|4999||Domestic Chargeback Dispute (Europe Region Only)|
Discover Chargeback Reason Codes
Learn how to fight each of these Discover Chargeback Codes >>>
|UA01||Fraud – Card Present Transaction|
|UA02||Fraud – Card Not Present Transaction|
|UA05||Fraud – Chip Counterfeit Transaction|
|UA06||Fraud – Chip and PIN Transaction|
|UA10||Request Transaction Receipt (swiped card transactions)|
|UA11||Cardholder Claims Fraud (swiped transaction, no signature)|
|IN||Invalid Card Number|
|5||Good Faith Investigation|
|AA||Does Not Recognize|
|CD||Credit/Debit Posted Incorrectly|
|IC||Illegible Sales Data|
|NF||Non-Receipt of Cash from ATM|
|PM||Paid by Other Means|
|RG||Non-Receipt of Goods, Services, or Cash|
|RM||Cardholder Disputes Quality of Goods or Services|
|RN2||Credit Not Processed|
What are the three types of chargebacks?
True fraud chargebacks are what chargebacks were invented for: unauthorized charges against a credit card by a scammer or identity thief. Merchants are strongly advised not to waste time or resources attempting to dispute these chargebacks.
True fraud chargebacks are best prevented through fraud prevention tools. AVS and CVV matching are the bare minimum, but many merchants also use 3-D Secure 2.0 or third-party tools that use machine learning to try to weed out fraudulent transactions.
Friendly fraud chargebacks are when customers report valid charges as fraudulent to get the charge reversed. They might do this deliberately, with malicious or criminal intent, or they might do it out of impatience or confusion. Friendly fraud chargebacks often masquerade as true fraud chargebacks, with the customer falsely claiming they never authorized the charge.
These chargebacks are difficult to prevent, but can be fought through representment to recover lost revenue. Customers who file friendly fraud chargebacks can also be blacklisted.
Merchant error chargebacks occur when the cause of the chargeback is an error made by the merchant, such as shipping the wrong item. Disputes like this can sometimes be fought effectively, but the flaws in merchant operations these chargebacks reveal must be remedied to prevent similar future chargebacks.
Merchant error chargebacks can be prevented by improving business operations, by having easily available and helpful customer service, and by having a generous refund policy.
What is the EMV Liability Shift?
The basic idea is that if an EMV card is used fraudulently and the merchant had not upgraded their processing equipment to EMV-compliant standards, the blame for that fraudulent transaction lies with the merchant.
The EMV Liability Shift caused most merchants to upgrade to EMV payment technology, which is much less vulnerable to fraud than traditional magnetic strips. However, it may also have resulted in an increase in fraudulent chargebacks. Savvy fraudsters have learned that if they convince a merchant to swipe a card with an EMV chip and later dispute that charge, the merchant will lose the dispute.
Who is liable for chargebacks?
For card-present merchants, if the purchase is made using an EMV chip and the transaction turns out to be fraudulent, the issuing bank is held liable instead of the merchant. The merchant is still responsible for chargebacks arising due to merchant errors.
Should merchants fight chargebacks?
Merchants who receive a chargeback that they believe is unfounded have the right to contest the case. To do so, they’ll first need to submit a rebuttal letter to argue their case, along with a number of supporting documents and pieces of evidence. Exactly what evidence they’ll need will depend on the exact reason code associated with the chargeback.
When a merchant contests a cardholder chargeback, it then enters representment. During this process, the merchant provides information regarding the transaction and why they believe that transaction was legitimate.
The merchant works with their sales department and/or their chargeback management company to build a dispute package that outlines the evidence and attempts to convince the issuing bank according to that bank’s guidelines.
Following this, the acquiring bank sends the information back through the credit card network to the issuing bank, who makes their decision and informs the involved parties.
If you plan to dispute a chargeback, it’s important to act quickly. Issuers often lag behind when notifying acquirers and merchants of chargebacks, so you may have a very small window in which to respond. Having a chargeback representment team at your disposal can help you act swiftly and efficiently, no matter what the deadline may be.
How do you write a chargeback rebuttal letter?
A prompt rebuttal letter can help you better address fraudulent chargebacks and win disputes. When done right, a rebuttal letter provides a simple overview of why the customer’s claims are false and what evidence you have to prove it. When disputing friendly fraud chargebacks, a good rebuttal letter combined with sufficient evidence will typically convince the issuing bank to rule in your favor and return your revenue.
Can you prevent all chargebacks?
Studying and fighting disputes will help you learn why they’re happening to you, and addressing those root causes is by far the best thing you can do to prevent future chargebacks.
How much are chargeback fees?
Digital Goods & Services
|Fraud Management Cost||$5||$5|
|Customer Service Cost||$2||$2|
|Total Revenue Loss||$522||$480|
Chargebacks can threaten your cash flow and put your merchant accounts at risk, too. They can increase your merchant account costs or cause your accounts to be shut down, preventing you from accepting payments altogether.
Know the facts about chargebacks
When you understand what chargebacks are, you can fight them more effectively, learn from them, and take steps to prevent them. Even when choosing a chargeback management firm to deal with them for you, having a solid grounding in the facts about chargebacks will help you know whether that firm is providing you with a good return on your investment.
Regardless of your level of experience with chargebacks, Chargeback Gurus can guide you to the best possible outcomes for your company. Download your copy of the Chargebacks 101 Guide to better help you understand the causes of chargebacks, and how the overall chargeback process works so you can fight customer chargebacks and prevent them in the first place.