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Chargeback Help - What is a chargeback?

Chargeback

The world of chargebacks can be convoluted but it doesn't have to be, that's why we've prepared this definitive (and frequently updated) guide for you and your team. Whether you're new to payments or a seasoned veteran, this guide will shed light on the chargeback process...

Table of Contents

  1. What is a chargeback?
  2. Why were chargebacks created?
  3. When were chargebacks created?
  4. How do chargebacks work?
  5. What is the chargeback process?
  6. How many chargebacks annually?
  7. Are chargebacks growing?
  8. How do I file a chargeback?
  9. Why do consumers file chargebacks?
  10. Why did I get a chargeback?
  11. What are chargeback reason codes?
  12. American Express Chargeback Reason Codes
  13. Visa Chargeback Reason Codes
  14. Mastercard Chargeback Reason Codes
  15. Discover Chargeback Reason Codes
  16. What are True Fraud chargebacks?
  17. What are Friendly Fraud chargebacks?
  18. What are Merchant Error chargebacks?
  19. Who is liable for chargebacks?
  20. How do EMV chips impact chargebacks?
  21. What is EMV Liability Shift?
  22. Are retail merchants liable for chargebacks?
  23. Are Card-Not-Present Merchants liable for chargebacks?
  24. What is the chargeback threshold?
  25. Should I dispute chargebacks?
  26. Can you prevent all chargebacks?
  27. How long do I have to fight a chargeback?
  28. How much are chargeback fees?


What is a chargeback?

A chargeback is a protective payment reversal process where consumers contact their bank and dispute a transaction requesting a forced-refund. Banks typically review the transaction and issue a provisional credit in the consumer’s favor.

 


 

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. 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.

Chargeback Process


 

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.

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  1. Cardholder disputes a transaction with their issuing bank who then extends provisional credit.
  2. Issuing bank sends a retrieval request to the acquiring bank to obtain additional information.
  3. Acquiring and issuing banks resolve the dispute if possible, otherwise the acquiring bank transmits a chargeback notification to the merchant.
  4. 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.
  5. 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.
  6. 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.
  7. 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.

 

How many chargebacks annually?

Chargebacks are incredibly common. Each year, approximately half of consumers (globally) will initiate a chargeback through their issuing bank.
 

Chargeback Rate


 

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.

 


 

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.

 


 

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

Chargeback Reason Codes

Download the Chargeback Reason Codes Encyclopedia Now

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

 

Discover chargeback Reason Codes

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.

 


 

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?

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.


 

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.

chargeback threshold


 

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.

 


 

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.

Chargeback Fee

 


 

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.

Get the guide, Chargebacks 101: Understanding Chargebacks & Their Root Causes