Chargebacks 101

What is a Chargeback?

A credit card dispute, also known as a credit card chargeback, occurs when a customer disputes a payment transaction with their issuing bank. The issuing bank files the dispute on the cardholder’s behalf, overturns the sale, recaptures the funds from the merchant’s bank account, and credits the funds to the cardholder.

While certain circumstances warrant a dispute and are unavoidable, most chargebacks are preventable. As a merchant it is your responsibility to enact proper disclosures and take precautions to prevent disputes. 

What are the stages of the dispute process?

1. Presentment

2. Chargeback

3. Representment

4. Pre-Arbitration

5. Arbitration

Timeline to File a Dispute and Merchant Response

Card networks such as Visa and Mastercard, mandate strict time limits for the dispute process and there are no exceptions given. This is especially important for the merchant because if the deadline is not met to file, it will lead to a loss with no further recourse available.

Visa Chargeback Time Limits

Issuer/Cardholder: Visa cardholders can only file a chargeback within 120 days of the original transaction or delivery date, in most cases. Like Mastercard, Visa mandates shorter timeframes for certain disputes. In some cases, for instance, claims must be filed within 75 days of the transaction.

Acquirers/Merchants: For their part, acquirers and merchants must respond within 30 days of Day One for each phase. The one exception is the timeframe for arbitration, which has the tightest deadline of all. If a party wants to escalate a dispute to arbitration, they must do so within 10 days.

Mastercard Chargeback Time Limits

Issuer/Cardholder: Mastercard users have 120 calendar days from the day the original transaction was processed, or the date the order was delivered.

Acquirers/Merchants: Merchants and acquirers generally have 45 days to respond to each phase of a Mastercard chargeback. An important exception is a request for information concerning a dispute. Merchants only have 18 days to respond to this.

Amex Chargeback Time Limits

Issuer/Cardholder: Amex cardmembers have a 120-day limit for filing almost all chargebacks from the date of the original transaction. However, cardmembers are limited to two disputes per transaction.

Acquirers/Merchants: When a card member contacts American Express about a dispute, the bank side of the company will either file the chargeback or send the merchant an inquiry. They then have 20 days to respond to the inquiry, either accepting the dispute or offering evidence that the chargeback is invalid.

In most instances, Amex will simply escalate the case straight to a chargeback. The company doesn’t have the same complex mechanism for merchants to contest disputes. If the bank decides the chargeback is legitimate, the merchant can’t really appeal to the card network, as the two are one and the same.

Common Chargeback Reasons

There are a number of chargeback “reason codes” and can be a bit overwhelming. Here is a condensed list of the most common chargeback reasons:

1. Fraud 

2. Services/Merchandise Not Rendered/Received 

3. Credit Not Processed

4. Not as Described or Defective

Visa Chargeback Reason Codes

*For reason codes of other card brands, please reach out to [email protected] or the card brand

Merchant Best Practices

Chargebacks can be costly to merchants such as lost revenue, costly fees, increased interchange rates, and reputational risk. Card Network rules dictate merchant chargeback volume should not exceed 1% chargeback-to-transaction ratio. If the chargeback rate exceeds the 1% threshold, they will be considered a High-Risk merchant leading to a number of penalties.

• Higher transaction fees (interchange rates)

• Paying a Reserve

• Delayed Funding

• Termination

Mitigation

Chargebacks are unavoidable, but merchants can take steps to reduce the number of disputes and have better chances fighting a dispute. 

As a merchant, it is your responsibility and your business reputation so consider the following:

• Prioritize security program/processes for all transactions

• Make cancellations and/or returns easy as possible

• Manage Expectations

• Be Available to your customers

Clear Policies

Make sure your refund and cancellation policy is clear and precise. Post these policies conspicuously on your website. Include a “click-to” agreement of terms when submitting an order, capturing the date, time, and if possible, the IP address. 

Make sure to send a copy of agreed terms and if applicable, the process to initiate cancellation or return of product(s) to the customer via email. This captured information can be used as supporting documents to fight “services/product not received/rendered” and “credit not processed”.

Product Description

It is important to have transparent and honest description(s) of your products and services wherever advertised. “Not as Described” chargebacks are often lost because the description of the product/service was not clearly visible and overstated expectations of such.  

Communication

OVER COMMUNICATE! Whenever there is interaction with a customer, make sure to do so in writing as much as possible. If there are phone conversations, send a follow up email outlining the conversation, include the agreed to terms and conditions. You really can’t communicate enough to ensure the customer is fully aware of the service or product purchased and the policies agreed to.

Know your customers

Fraud is the number one reason for chargebacks and they are almost impossible to recoup. Did you know there are 2 types of Fraud chargebacks, “Friendly” and Criminal.

“Friendly” fraud is when a cardholder doesn’t recognize the charge. Usually due to incorrect or unclear descriptor merchant name, or when a friend, family, spouse, or significant other uses the card to make a purchase and did not disclose to the cardholder, or the cardholder forgot. These are fairly easy to handle by providing invoices or other documentation to support the charge to the cardholder or issuing bank. The chargeback can be reversed by the cardholder if they agree to the charge once the documentation has been provided.

Criminal fraud is more common and will result in a loss. To mitigate criminal fraud charges, it is important for merchants to have a robust security process in place. The technical lift can be handled by a processor with a robust fraud program in place, but as the merchant of record it is your responsibility to ensure you are doing everything possible to avoid fraudulent transactions from happening.

3D Secure

If your processor offers 3D Secure, use it!! To reduce fraud transactions regulatory statutes introduced this additional security measure requiring the cardholder to authenticate using secure methods. The best part is if the cardholder authenticates using 3D Secure and a fraud chargeback is filed, the liability is shifted to the card issuer, not the merchant! 

Alternative to using 3DS is to collect cardholder data at the time of the transaction:

• Card Holder Name

• Billing Address

• IP Address

• Phone Number

• Email Address 

• Shipping Address (if different from billing address)

• Purchaser Name (if different from billing address)

This does not prevent fraud and merchants are liable for the loss and fees associated. Collecting this data, however, lessens the chance of fraud. Processors with a robust fraud program will take the details collected and use machine learning systems to alert or flag risky transactions and work with the merchant to determine the best next steps to prevent a fraud dispute.

Exact Chargeback Support Process

Exact is notified of all chargeback cases filed for transactions processed with our services. In turn we will review each case, to obtain the reason for the dispute and determine the best next steps. 

1. Case is Initiated

   1. funds are recaptured from the merchants DDA on file (including fees)

   2. If the chargeback reason code is Fraudulent

2. Exact reviews and contacts merchant with chargeback details and provides. Exact will provide guidance of next steps and acceptable documents needed for counter filing.*

3. If the merchant chooses to counter dispute they will be required to provide supporting documents for Exact to submit as evidence supporting counter dispute. Once supporting documents are provided by the merchant, Exact will submit as evidence and wait for the issuing bank to review supporting documents.

4. Exact will be notified of the issuing bank ruling.

   1. If rule is in favour of the cardholder, Exact will notify the merchant and provide guidance if further dispute is warranted and likely chances of final outcome.†

   2. If rule is in favour of the merchant, chargeback amount will be disbursed to the merchant (minus the fees) via DDA on file.
      

* If the chargeback reason is fraud, Exact will review the supporting documents and the transaction details to determine if counter dispute is warranted. If determined counter dispute is not warranted, we will advise the merchant and close the case as lost.  

†  Reminder, arbitration is very costly, and many times the cost is more than the initial chargeback. Exact will not proceed if this is the case.