Credit Cards & Merchant Rights

Table of Contents

  1. What Is a Credit Card Chargeback?
  2. Should Merchants Contest Chargebacks?
  3. What Are the Key Protections for Merchants?
  4. What Are Merchant Chargeback Representment Rights?
  5. What Are the Time Limits for Credit Card Chargebacks?
  6. Know Your Chargeback Rights
  7. What Is a Chargeback Ratio?
  8. Are All Chargebacks Bad?
  9. Which Chargebacks Are Considered Legitimate?

In 1974, the United States Congress passed the Fair Credit Billing Act, which gave credit card customers the right to dispute "billing errors" on their credit account, including unauthorized or incorrect charges and charges for products or services that were never delivered. The act also established that if an unauthorized user makes one or more purchases with a credit card, the cardholder can only be held liable for a maximum of $50.

The passage of the Fair Credit Billing Act led the major card networks to each create their own version of the chargeback process, following the general guidelines the law established.

These rights were intended to increase customer confidence in credit cards and protect customers from fraud, whether committed by merchants or by third parties. Unfortunately, those rights are often abused by customers who make false claims in order to get a chargeback. Merchants have rights too, however, and the chargeback process as it exists today isn't wholly one-sided. Let's take a look at what rights and protections merchants have when it comes to chargebacks.

What Is a Credit Card Chargeback?

A credit card chargeback is a reversal of a credit transaction by the issuing bank, usually at the request of the cardholder. Chargebacks are requested by cardholders without merchant input, often due to confusion or dissatisfaction with their purchase.

Manage Chargeback In-House Or OutshoreBecause chargebacks can be detrimental to any business, it's important that customers attempt to resolve any issue they have with a purchase by contacting the merchant directly before disputing a charge. Otherwise, they may be inadvertently committing fraud.

Merchants might feel like the chargeback process is weighted against them. It can seem as though a single call to their bank is enough for a customer to snatch back the money from a completely legitimate sale.

On top of that, some customers will file chargebacks simply because they feel like it's easier or more convenient than asking the merchant for a refund, and some people will explicitly attempt to leverage the workings of the chargeback process to defraud you. While consumer protections are undeniably important, merchants also have the right to fight back against false claims from customers.

Should Merchants Contest Chargebacks?

Merchants should endeavor to determine which chargebacks are legitimate and which are illegitimate. Illegitimate chargebacks should always be fought through the representment process.

Declining to contest chargebacks can have consequences beyond just the lost revenue. Customers who file a chargeback once are likely to do so again, especially if they win the dispute.

While blacklists can help prevent this to some extent, any merchant who gains a reputation for being an easy target for fraudulent chargebacks can find their chargeback rates skyrocketing before they know it, as fraudsters share tips and information online.

Knowing what procedures and policies you're obligated to follow, as well as what rights and protections you have in the chargeback process, can go a long way toward reducing the number of chargebacks that ultimately succeed against you.

What Are the Key Protections for Merchants?

Merchants do have some protections when it comes to chargebacks. For example, merchants can't receive chargebacks for a cash back transaction on a debit card, even if the customer claims fraud. Customers also can't file a chargeback for late delivery before attempting a return.

Chargebacks originated as a way to help consumers feel more confident about using credit cards to pay for goods and services. However, the process is designed to work fairly for cardholders and merchants alike. 

The major card networks define the rules for chargebacks, and they have a vested interest in making sure consumers and merchants—both of whom are their customers—are treated equitably.

With that in mind, there are several key protections in the chargeback process that apply to merchants.

  • Chargebacks cover the purchase price only. A bank can issue a chargeback for a full or partial amount of a transaction, and can even issue multiple partial chargebacks, but the total amount for all chargebacks related to a single transaction cannot exceed the original amount of the purchase. In some cases, relevant shipping costs and surcharges may be included in the chargeback total.
  • Cash back can't be charged back. Chargebacks on debit card transactions where the customer received cash back cannot include the cash back amount in the chargeback total.
  • For late deliveries, a return must be attempted first. If a customer disputes a transaction because the product they ordered was delivered late, they are required to attempt to return the product for a refund, before they can file a chargeback.
  • There's a fifteen-day waiting period for chargebacks on returned items. When a customer returns an item to the merchant, their bank cannot file a chargeback until fifteen days after the return. The purpose of this rule is to give the merchant plenty of time to issue a refund.

The card networks and banks all have processes in place to review chargeback attempts for validity before they proceed. They may, for instance, review the purchase and claim history of the customer requesting the chargeback to look for signs of possible fraudulent activity.

Customers attempting to dispute a charge for an invalid reason may be turned away before the merchant receives any notification about them. Some banks also have limits on the number of chargebacks customers can file in a given period of time.

Most banks will make an effort to ensure the cardholder has attempted to resolve the issue with the merchant for claims other than fraud. Unfortunately, the bank has no way to verify this, and cardholders are often dishonest about their efforts to reach out to the merchant.

Another important component of merchants' rights is the reason codes attached to chargeback notifications. A reason code specifies the justification for the chargeback and can provide guidance on how the merchant can effectively challenge it. A code may also direct the customer to first try to work with the merchant to resolve their complaint, which the issuing bank is supposed to verify, before proceeding with the chargeback

What Are Merchant Chargeback Representment Rights?

The protections listed above mostly involve constraints on chargebacks and methods of weeding out invalid ones. When a chargeback that appears valid to the bank has been filed, your most important right as a merchant is your right to fight it.

From a practical standpoint, fighting chargebacks gives you a chance to recover lost revenue, but there's a moral element to it as well. When merchants roll over and accept fraudulent or illegitimate chargebacks because they don't want to bother with the hassle of contesting them, it only encourages more unscrupulous consumers and scammers to see chargebacks as a way of getting free money or merchandise.

Learn How To Fight Them The Smart WayFighting a chargeback can take time and effort.  You're required to present compelling evidence to show that the original transaction was legitimate. Maintaining, organizing, and locating the documents you need to fight a claim can be difficult.

Having the assistance of knowledgeable experts can give you a tremendous advantage in succeeding at chargeback representation. Be sure whoever you work with has knowledge of the various chargeback reason codes, as well as the arguments and evidence that can be used to dispute them. By allowing experts to take on the task of fighting chargebacks, you can focus on running your business.

What Are the Time Limits for Credit Card Chargebacks?

On average, a customer can file a chargeback on a transaction within 60 or 120 days, depending on the card network and the chargeback reason code. Following that, merchants have 30-45 days to respond to the chargeback, again depending on network and reason code.

Merchants must remember that a chargeback sent to their acquiring bank is considered legitimate until challenged and overturned. If you miss your window of opportunity, then you will automatically lose out, and may be charged an additional fee for failing to respond.

Know Your Chargeback Rights

Rights only help you if you exercise them. Don't get pushed around by fraudsters—know your rights as a merchant and use them to fight illegitimate chargebacks and keep the revenue you've earned.

In order to fight chargebacks and recover your lost revenue, you must first understand how chargebacks are filed and how the dispute process works. Our newest guide, The Smart Way to Fight & Recover Chargebacks, will help you to fight and recover your chargebacks the "smart" way.


What Is a Chargeback Ratio?

Your chargeback ratio is the ratio of total chargebacks against your total transactions. The higher the ratio, the greater the chance you will be deemed a high-risk merchant, which comes with significant costs and consequences.

Are All Chargebacks Bad?

Once a chargeback is filed, it counts against your chargeback ratio and you will have to pay a fee, even if you win the dispute. However, chargebacks can also indicate issues with your business that need to be addressed, providing valuable information.

Which Chargebacks Are Considered Legitimate?

The primary legitimate cause for chargebacks is true fraud. Undelivered or damaged products can also be legitimate reasons for a chargeback, but only if the merchant refuses to issue a refund. Product dissatisfaction and bad customer service aren’t legal reasons for chargebacks.

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