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. This definitive (and frequently updated) chargeback guide will help you and your team navigate many of the basics during this difficult time. 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?
- Why were chargebacks created?
- When were chargebacks created?
- How do chargebacks work?
- What is the chargeback process?
- How many chargebacks annually?
- Are chargebacks growing?
- How do I file a chargeback?
- Why do consumers file chargebacks?
- Why did I get 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?
- 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.
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.
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.
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.
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.
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.
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.
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.
