Credit Card Chargebacks and Merchant Chargeback Rights

Chargebacks were created to protect consumers, but the process also grants merchants the right to challenge invalid disputes. Understanding those rights and knowing when and how to exercise them can help businesses recover revenue, reduce friendly fraud, and make the dispute process work as intended.

Table of Contents

1. What Is a Credit Card Chargeback?
2. What Are the Key Protections for Merchants?
3. What Are Merchant Chargeback Representment Rights?
4. What Are the Time Limits for Credit Card Chargebacks?
5. Know Your Chargeback Rights

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.

In cases where a third party has stolen a cardholder's credit card or its information and used it to make unauthorized purchases, chargebacks can be used to reclaim the illegally-spent funds from the merchant.

A chargeback may also be used when a merchant fails to uphold its end of the sales agreement and won't refund the cardholder for their purchase. Card network rules require customers to attempt to resolve any issue they have with a purchase by contacting the merchant directly before disputing a charge.

Some merchants 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 commit fraud. While consumer protections are undeniably important, merchants also have the right to fight back against false claims from customers.

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 must cover only the disputed amount. A bank can issue a chargeback for a full or partial amount of a transaction. If only a portion of the charge is disputed by the cardholder, the chargeback must be for that partial amount.
• 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.  For Visa disputes involving late delivery, the issuer generally must wait 15 calendar days from the date the cardholder returned or attempted to return the merchandise before initiating the dispute. 

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 may be 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.

From a practical standpoint, fighting chargebacks gives merchants a chance to recover lost revenue, but that's not the only reason to contest them. 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.

Fighting a chargeback can take time and effort. The merchant must present compelling evidence to show that the original transaction was legitimate. Maintaining, organizing, and locating the documents needed to fight a claim can be difficult in itself, but even more difficult is knowing what evidence is needed to give the merchant the best chance of success.

That's why many merchants partner with professional chargeback management companies. Experienced providers understand the requirements of each card network and have data showing which types of evidence are most persuasive for a given type of dispute.

These companies can leverage technology to improve the efficiency of chargeback management by automating certain parts of the process and conducting in-depth data analysis. By improving representment quality and reducing the operational burden of managing disputes, they can increase recovery rates while allowing merchants to focus on running their business. 

Merchants must remember that a chargeback sent to their acquiring bank is considered legitimate until challenged and overturned. If no response is submitted, the merchant 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.

Merchants that collect the right evidence and use it effectively are better positioned to protect their revenue over time. Whether chargebacks are managed internally or with the support of a specialized partner, treating representment as a business priority can reduce unnecessary losses and discourage repeat abuse. 

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