We've seen a wave of chargebacks hit merchants across the country, and we don't see any reason why that will change at the beginning of 2021. With that in mind, we wanted to provide the ultimate chargeback guide to help merchants with chargebacks: how to define chargebacks, how to manage and recover chargebacks, and how to prevent chargebacks in the future.
We've seen an astronomical rise in the frequency chargebacks are requested since the beginning of the pandemic and while chargebacks can be convoluted, they don't have to be.
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?
- What is the difference between a dispute and a refund?
- Why were chargebacks created?
- When were chargebacks created?
- How do chargebacks work?
- What is the chargeback process?
- What timeframe do merchants have to dispute chargebacks?
- How many chargebacks occur annually?
- Are chargebacks growing?
- How do I file a chargeback?
- Why do consumers file chargebacks?
- Why did I get a chargeback?
- When can a cardholder legitimately use a chargeback?
- What are chargeback reason codes?
- American Express Chargeback Reason Codes
- Visa Chargeback Reason Codes
- Mastercard Chargeback Reason Codes
- Discover Chargeback Reason Codes
- What are True Fraud chargebacks?
- What are Friendly Fraud chargebacks?
- What are Merchant Error chargebacks?
- Who is liable for chargebacks?
- How do EMV chips impact chargebacks?
- What is EMV Liability Shift?
- Are retail merchants liable for chargebacks?
- Are Card-Not-Present Merchants liable for chargebacks?
- What is the chargeback threshold?
- Should I dispute chargebacks?
- How do I write a chargeback rebuttal letter?
- What is Chargeback Representment?
- Can you prevent all chargebacks?
- How long do I have to fight a chargeback?
- How much are chargeback fees?
What is a chargeback?
Chargebacks are a forced payment reversal process where consumers can contact their bank and dispute a transaction for a refund. Banks typically review the transaction and issue provisional credit in the consumer’s favor.
What is the difference between a dispute and a refund?
A dispute or chargeback is when the cardholder specifically approaches their issuing bank to instigate a forced reversal of the transaction, whereas a refund is a direct refund between a merchant and a cardholder. The latter can be good for the merchant, in that it can satisfy an unhappy customer and avoid chargebacks on their record. The former is a problem because it involves the banks, the credit network, and could potentially impact the merchant's standing with all parties.
Why were chargebacks created?
Chargebacks were created to protect consumers from various fraud schemes during the adoption of modern electronic payment systems. In more recent years, chargebacks have become a strong indicator for a company’s health.
When were chargebacks created?
Chargebacks were first implemented in the 1978 Fair Credit Billing amendment (§ 161. Correction of billing errors) to the Truth in Lending Act. Originally included in the act 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 giving the cardholder much to do about it.
Think about it this way: a cardholder accidentally loses their card, or the card is stolen, and used to make fraudulent purchases. Before the Fair Credit Billing Amendment, the cardholder would most likely have little or no recourse to get their money back once the merchant had been paid. The chargeback process allowed consumers to get their refunds from their banks, and to let banks (rather than consumers and merchants) make decisions.
The dispute process laid out in the law wasn't called a "chargeback", but it laid out the process that would become the chargeback process. While the process was not yet called a chargeback, it would become the foundation for the dispute system we know today.
The dispute process laid out in the law wasn't called a "chargeback", but it laid out the process that would become the chargeback process. 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 consumers, evaluated by banks and paid for by merchants with limited to no recourse. A single chargeback, from initiation to resolution, can last months and even years.
What is the chargeback process?
Customers dispute a purchase with their issuing bank and request a transaction reversal or chargeback, the bank provides provisional credit while the merchant, issuing bank and acquiring bank validate the claim.
- Cardholder disputes a transaction with their issuing bank who then extends provisional credit.
- Issuing bank sends a retrieval request to the acquiring bank to obtain additional information.
- Acquiring and issuing banks resolve the dispute if possible, otherwise the acquiring bank transmits a chargeback notification to the merchant.
- Merchant either accepts the chargeback or fights it by resubmitting the charge along with the necessary evidence to disprove the claim through representment. *Note: A rebuttal letter summary must always be included.
- Issuing bank will review the new evidence and make a final decision. If they find in favor of the merchant, the provisional credit will be reversed and returned to the merchant.
- At this point, any party unhappy with the decision can request further review, which puts the chargeback process into the pre-arbitration phase. *Note: The back-and-forth of the pre-arbitration and arbitration phases can last for months, and arbitration fees adding up to hundreds of dollars must be paid to the card networks.
- If banks cannot come to an agreement during pre-arbitration, the process enters arbitration. The card network will examine the evidence and make a final decision.
What timeframe do merchants have to dispute chargebacks?
Time limits 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 your timeframe may not be the exact limit provided by the card network.
How many chargebacks annually?
Chargebacks are incredibly common. Each year, approximately half of consumers (globally) will initiate a chargeback through their issuing bank.
Are chargebacks growing?
Chargebacks have grown 179 percent in the last 2 years, costing merchant’s 1.9% of their total annual revenue. They are anticipated to exceed 40 billion dollars before 2025. As of early 2020, this number is expected to increase exponentially due to COVID-19.
How do I file a chargeback?
Filing a chargeback without first consulting the merchant is not advised and in some cases unlawful. If you’ve attempted to reconcile the issue with the merchant, simply call your bank and request to dispute the transaction.
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 consumers file chargebacks?
Consumers file chargeback disputes when they don’t recognize a transaction or are somehow dissatisfied with their purchase. As Friendly Fraud becomes more prevalent, it is important to note that the consumer may simply be trying to get their product or service for free.
Why did I get a 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.
When can a cardholder legitimately use a chargeback?
Chargebacks are not something that cardholders can just use whenever they don't like an item they purchased. There is usually only one condition that a cardholder should reach out to a bank first for chargebacks: True fraud. 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 route for the issuing bank and the merchant to take.
Their 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, or when a cardholder's account has been used fraudulently.
In other cases, you might see Friendly Fraud. In many cases, a cardholder may claim fraud simply because they cannot recognize the transaction on their bill. However, they CANNOT claim a chargeback for the stated purpose of experiencing bad customer service or dissatisfaction with their product. In these cases, the cardholder should contact the merchant first to see if a refund is in order.
What are chargeback reason codes?
Each reason code has certain standards of proof and evidence associated with it that determine whether the chargeback is valid or not. Generally speaking, the reason codes fall into one of three broad categories:
• True fraud
• Friendly fraud
• Merchant error
• True fraud
• Friendly fraud
• Merchant error
American Express Chargeback Reason Codes
| Chargeback Code | Authorization Errors |
|---|---|
| A01 | Charge Amount Exceeds Authorization Amount |
| A02 | No Valid Authorization |
| A08 | Authorization Approval Expired |
| Chargeback Code | Type: Fraud |
| F10* | Missing Imprint |
| F14* | Missing Signature |
| F22 | Expired or Not Yet Valid Card |
| F24* | No Card Member Authorization |
| F29 | Card Not Present |
| Chargeback Code | Type: Card Member Dispute |
| C02 | Credit (or Partial Credit) Not Processed |
| C04 | Goods/Services Returned or Refused |
| C05 | Goods/Services Cancelled |
| C08 | Goods/Services Not Received |
| C14 | Paid by Other Means |
| C18 | “No Show” or Card Deposit Cancelled |
| C28 | Cancelled Recurring Billing |
| C31 | Goods/Services Not as Described |
| C32 | Goods/Services Damaged or Defective |
| M10 | Vehicle Rental - Capital Damages |
| M49 | Vehicle Rental - Theft or Loss of Use |
| Chargeback Code | Type: Processing Error |
| P01 | Unassigned Card Number |
| P03 | Credit Processed as Charge |
| P04 | Charge Processed as Credit |
| P05 | Incorrect Charge Amount |
| P07 | Late Submission |
| P08 | Duplicate Charge |
| P22 | Nonmatching Card Number |
| P23 | Currency Discrepancy |
| Chargeback Code | Type: Inquiry Related Chargeback |
| R03* | Insufficient Reply |
| R13* | No Reply |
| M01* | Chargeback Authorization |
| Code | Type: Chargeback Programs |
| FR2 | Fraud Full Recourse Program |
| FR4 | Immediate Chargeback Program |
| FR6 | Partial Immediate Chargeback Program |
Visa Chargeback Reason Codes
| Chargeback Code | Chargeback Reason |
|---|---|
| 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 |
| 11.2 | Declined Authorization |
| 11.3 | No Authorization |
| 12.1 | Late Presentment |
| 12.2 | Incorrect Transaction Code |
| 12.3 | Incorrect Currency |
| 12.4 | Incorrect Account Number |
| 12.5 | Incorrect Amount |
| 12.6 | Duplicate Processing/Paid by Other Means |
| 12.7 | Invalid Data |
| 13.1 | Merchandise/Services Not Received |
| 13.2 | Cancelled Recurring |
| 13.3 | Not as Described or Defective Merchandise/Services |
| 13.4 | Counterfeit Merchandise |
| 13.5 | Misrepresentation |
| 13.6 | Credit Not Processed |
| 13.7 | Cancelled Merchandise/Services |
| 13.8 | Original Credit Transaction Not Accepted |
| 13.9 | Non-Receipt of Cash or Load Transaction Value |
Mastercard Chargeback Reason Codes
| Chargeback Code | Chargeback Reason |
|---|---|
| 4801 | Requested Transaction Data Not Received |
| 4802 | Requested / Required Information Illegible or Missing |
| 4807 | Warning Bulletin File |
| 4808 | Requested / Required Authorization Not Obtained |
| 4812 | Account Number Not on File |
| 4831 | Transaction Amount Differs |
| 4834 | Duplicate Processing |
| 4835 | Card Not Valid or Expired |
| 4837 | No Cardholder Authorization |
| 4840 | Fraudulent Processing of Transaction |
| 4841 | Cancelled Recurring Transaction |
| 4842 | Late Presentment |
| 4846 | Correct Transaction Currency Code Not Provided |
| 4847 | Requested / Required Authorization Not Obtained and Fraudulent Transaction |
| 4849 | Questionable Merchant Activity |
| 4850 | Credit Posted as Purchase |
| 4853 | Cardholder Dispute – Defective / Not as Described |
| 4854 | Cardholder Dispute – Not Elsewhere Classified (U.S. Region Only) |
| 4855 | Non-receipt of Merchandise |
| 4857 | Card-Activated Telephone Transaction |
| 4859 | Services Not Rendered |
| 4860 | Credit Not Processed |
| 4862 | Counterfeit Transaction Magnetic Stripe POS Fraud |
| 4863 | Cardholder Does Not Recognize — Potential Fraud |
| 4870 | Chip Liability Shift |
| 4871 | Chip / PIN Liability Shift |
| Code | Description |
| UA01 | Fraud – Card Present Transaction |
| UA02 | Fraud – Card Not Present Transaction |
| UA05 | Fraud – Chip Counterfeit Transaction |
| UA06 | Fraud – Chip and PIN Transaction |
| AT | Authorization Noncompliance |
| IN | Invalid Card Number |
| LP | Late Presentation |
| 5 | Good Faith Investigation |
| AA | Does Not Recognize |
| AP | Recurring Payments |
| AW | Altered Amount |
| CD | Credit/Debit Posted Incorrectly |
| DP | Duplicate Processing |
| 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 |
| DC | Dispute Compliance |
What are True Fraud 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.
What are Friendly Fraud chargebacks?
Friendly Fraud chargebacks refer to customers reporting valid charges as fraudulent to have request a payment reversal. They might do this deliberately, with malicious or criminal intent, or they might do it out of impatience or confusion about how the chargeback process is supposed to work.
Several surveys have shown that friendly fraud chargebacks are a double-edged sword.
What are Merchant Error chargebacks?
Merchant Error chargebacks occur when the merchant is truly at fault for one or many different things. Disputes like this can be fought effectively but the revealed flaws in merchant operations must be remedied to prevent similar future chargebacks.
What is the EMV Liability Shift and how does it impact chargebacks?
October 1st, 2015 Liability Shift went into effect meaning, Merchants swiping cards where EMV chips were available, would be held liable for fraud arising out of the transaction.
Before EMV liability shift, merchants became responsible for fraudulent charges made with EMV-enabled cards under certain circumstances. 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, they would be responsible for fraudulent losses.
EMV Liability Shift may have caused a rise in chargebacks because savvy fraudsters have learned that if they dispute a charge with an EMV card at a merchant without the right equipment, the merchant will lose the dispute.
Who is liable for chargebacks?
Card networks decreed that merchants hold the liability and full burden of proof for chargebacks. A merchant must make their case for why chargebacks should be struck down and provisional credits reversed. If no action is taken by the merchant, the consumer wins by default.
How do EMV chips impact chargebacks?
EMV chip-based credit cards made true fraud substantially more difficult during card-present transactions. If a customer uses an EMV chip card in a retail store, the liability automatically goes to the issuing bank (not the acquirer), as long as the merchant uses an EMV chip terminal for the transaction.
Are retail merchants liable for chargebacks?
Not in the case of True Fraud but they are liable for chargebacks arising due to other issues such as customer service and merchant errors. If the merchant is cannot process EMV chip transactions, and the customer has an EMV card, the merchant is liable for the chargeback.
Are Card-Not-Present Merchants liable for chargebacks?
For card-not-present (CNP) transactions, like those made online or over the phone, the merchant is liable for all disputes. But, if a merchant uses 3D Secure and the transaction is verified, the issuing bank is liable for all chargebacks claimed as not-authorized or fraud.
The merchant will still be responsible for chargebacks arising due to customer service or merchant errors. 3D Secure Technology cannot be used by phone-order or mail-order merchants since the customer is not entering the order details in the system.
What is the chargeback threshold?
A chargeback threshold threshold is typically calculated as a ratio (chargeback amounts to total revenue) with 1% being the most common limit. Merchants exceeding the chargeback threshold may have their accounts terminated.
Should I dispute chargebacks?
In the event a chargeback seems illegitimate, it’s important merchants fight back whenever possible. Though a customer might claim a transaction was fraudulent or demand a refund, merchants very often have the evidence they need to support otherwise – and that could allow them to recover their losses and fight back.
Merchants should always look carefully at their chargebacks and represent as many as possible. It’s important to know where your chargebacks are coming from, and to be in the habit of responding and fighting them.
If you receive a chargeback that you believe is unfounded, you as a merchant have the right to dispute the chargeback. To do so, you’ll first need to submit a rebuttal letter to argue your case, along with a number of supporting documents and pieces of evidence.
Exactly what evidence you’ll need will depend on the exact reason code associated with your chargeback.
How do I write a chargeback rebuttal letter?
Depending on the credit or payment provider, you can write a letter or submit a form containing your dispute information package. This letter can outline your case and address the customers complaint.
A prompt rebuttal later can help you better address fraudulent chargebacks.
What is Chargeback Representment?
When a merchant disputes a cardholder chargeback (essentially disputes the dispute), then it enters representment. During this process, the merchant provides information regarding the transaction and why they believe that transaction was legitimate.
During this process, the merchant works with their sales department and/or their chargeback management company to build a dispute package. This package typically outlines the evidence and speaks to the issuing bank in a way that makes sense within their usually chargeback guidelines and frameworks.
Following this, the acquiring bank sends the information back through the credit card network to the issuing bank who makes the final decision and informs the involved parties.
Can you prevent all chargebacks?
Not every chargeback can be stopped. Some are the result of genuine criminal activity, and some come about because of mistakes or oversights on the merchant’s behalf. When appropriate measures are taken, merchants can reduce their chargebacks by about 70%.
Studying and fighting your chargebacks 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 long do I have to fight a chargeback?
Dependent on the card network, merchants have between 7 and 30 days to dispute a consumer chargeback. If the merchant takes no action, the consumer’s provisional credit will be made permanent and the merchant will lose roughly 2.5 times the transaction value in fees and added cost.
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 and every chargeback is different.
Having a chargeback representment team at your disposal can help you act swiftly and efficiently, no matter what the time frame may be.
How much are chargeback fees?
Chargeback fees range from $20-$100 depending on your acquiring bank. The true cost of a chargeback is approximately 2.5 times the transaction value. So, for a $100 chargeback, a merchant would pay $250 in fees, fines, customer acquisition costs and more.
Chargebacks can often threaten your cash flow and put your merchant accounts at risk, too. They could even increase your merchant account costs or cause your accounts to be shut down, preventing you from accepting payments altogether.
Conclusion
When you understand what chargebacks are, you can fight them more effectively, learn from them, and take steps to reduce the chances that they will keep afflicting you. 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 chargeback experience level with, Chargeback Gurus can guide you to the best possible outcomes for your company. For topic requests, questions or advice, please email us directly: win@chargebackgurus.com
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.
