Chargeback Process

What is a chargeback?

A chargeback is when a customer disputes a transaction.

How does the chargeback process work?

1. First, the cardholder contacts the issuing bank (i.e. the bank that issued the card) to dispute the charge.
2. Second, the issuing bank informs the acquiring bank regarding the disputed transaction. If you are an e-commerce merchant, the acquiring bank is the bank that holds your merchant account.
3. Next, the issuing bank notifies the payment service provider. A payment service provider is an entity that provides authorization and/or clearing and settlement services on behalf of a merchant or an acquirer.
4. The payment service provider then informs the merchant about the disputed transaction.
5. Funds are then held by the acquiring bank and only released when the chargeback has been resolved.

What types of chargeback exist?

• First chargeback: this is the chargeback submitted by the issuing bank to dispute a transaction.
• Second chargeback: this is the chargeback submitted by the acquirer to refute the first chargeback.
• Arbitration chargeback: this chargeback is submitted by the issuer when the evidence provided by the acquirer to dispute the chargeback is deemed insufficient.

What fees are applied if a chargeback is filed by a customer?

As soon as the chargeback is initiated, a merchant must reverse the cost of the transaction and pay a chargeback fine, which can vary from $25 to $100. Moreover, MDR and transaction processing fees are not refunded to the merchant.

Why would a customer initiate a chargeback?

A customer might initiate a chargeback for a number of reasons. Here are some of the most common ones:

• The product or service did not meet the customer's expectations.
• The customer asked for a refund, but the refund process was taking too long.
• A family member made a purchase which the cardholder does not want to pay.
• The cardholder forgot about the purchase.
• The cardholder did not recognize the purchase by billing descriptor. The billing descriptor is the description of the charge that shows up on the cardholder’s bank statement.
• The card details were stolen and used by a fraudster.

What is a payment gateway?

A merchant service that authorizes transaction processing is normally provided through an e-commerce application service provider.

What is a payment service provider or payment service processor?

An entity that provides authorization and/or clearing and settlement services on behalf of a merchant or an acquirer.

What is an acquiring bank?

An acquiring bank is a type of bank that offers merchant accounts for e-commerce businesses to accept, process, clear and settle transactions.

What is a merchant account?

A merchant account is a bank account that enables the holder to accept credit cards for payment.

Chargeback Ratio

What is the chargeback ratio and how is it calculated?

The chargeback ratio is the ratio between the number of chargeback transactions and the total amount of transactions. It is important to keep the chargeback ratio at less than 1 percent for Visa and less than 1.5 percent for Mastercard. There is also a count limit for chargeback transactions: 100 for Visa and 150 for Mastercard.

If I win a chargeback, will it still affect my chargeback ratio?

Yes. Whether a chargeback is won or lost doesn’t matter. It will still be counted as a chargeback and affect your chargeback ratio.

What will happen if the chargeback ratio or count exceeds the limits?

If the chargeback ratio or chargeback count is higher than normal, a merchant will fall under a chargeback monitoring program, which lasts 12 months and allows a merchant to fix the chargeback situation. However, while under the program, chargeback fees will be 2-3 times higher and additional review fees will also be applied.

If both the chargeback ratio and count exceed the normal limits, the merchant account will be closed and all funds will be frozen for 6 months.

Chargeback Issues

How will I know if I have received a chargeback?

Normally, your acquiring bank or payment service provider will notify you of each chargeback that needs to be presented.

What is a chargeback presentment?

Chargeback presentment is the way to "fight" the chargeback: to prove transaction legitimacy and purchase usage in order to win the chargeback.

Can I present chargebacks by myself?

Yes, a merchant can prepare resentment cases. However, it requires a lot of manual research—one chargeback presentment case can take up to 20 minutes to prepare. Therefore, many merchants outsource this work to professionals such as Chargeback Hero.

What is a chargeback fee?

A chargeback fee is a fine for a chargeback. It varies from $20 to $100.

What is a pre-compliance chargeback?

A pre-compliance chargeback is used when a transaction violates a network association rule. In such a case, a chargeback is initiated by the issuer or processor, usually due to technical issues. Chargeback management falls on your processor; however, you need to ensure your processor is responding in a timely manner.

What is a return item chargeback?

A return item chargeback can be used to represent either of the following:

• Money is withdrawn from a customer’s account for a purchase which they end up rejecting.
• A credit card provider is demanding a merchant make good on a fraudulent or disputed transaction.

How do chargebacks work with PayPal?

A customer dispute that occurs on PayPal's payment platform is called a PayPal dispute. All disputes are managed through the PayPal Dispute Resolution Center.

What is a Visa chargeback?

Any chargeback that is processed through the Visa card network.

What is a Mastercard chargeback?

Any chargeback that is processed through the Mastercard network.

Friendly Fraud

What is a friendly fraud?

With friendly fraud chargebacks, the customer is a real buyer who, in most cases, used the merchant’s product or service, but was dissatisfied with its quality or performance. They did not get money back, but instead disputed the transaction on their card.

What is the difference between friendly fraud and chargeback fraud?

Chargeback fraud occurs when a customer intends to commit fraud against a merchant. Friendly fraud, on the other hand, occurs because of a misunderstanding or because the purchase did not meet the customer's expectations. In both cases, the initial transaction was authorized by the customer, even if they later disputed the transaction.

What is the difference between friendly/chargeback fraud and real fraud?

Real fraud happens when the card details of the customer have been stolen, so the transaction was not authorized by the real cardholder. For both friendly and chargeback fraud, the transaction was authorized by the cardholder. Again, the difference between friendly and chargeback fraud is that chargeback fraud involves an intention to defraud the merchant.

How can I prevent friendly fraud?

It is quite hard to identify and prevent friendly fraud before a chargeback occurs. However, these tips can be useful:

• Have a clear product description. This is a very important part of any e-commerce business. Merchants have to make sure that all features and specifications are described properly and clearly to avoid any misunderstanding with customers.
• Track delivery and product usage online. This can be done with an email confirmation regarding the purchase, a license key to download the products, login details, and so on.
• Have a refund policy. Whether you ship an actual physical object to customers, or your product is downloaded online, your website should have a clear refund policy. A refund policy lets your customer feel more secure about the purchase and avoids unnecessary disputes of charges.
• Have a clear billing descriptor. It is always better to have a direct merchant account. A direct merchant account allows you to have a customized billing descriptor which includes the URL of your website and a customer support number.
• Use a customer support team. If possible, customer support should be available 24/7 for global markets and during business hours for local markets. This gives customers confidence and allows you to discuss any payment related issues in a timely manner.
• Remind customers of recurring charges. If you operate a recurring business model, make this as clear as possible to your customers. Remind them about each upcoming charge in a timely manner and make the unsubscribe process as easy as possible.

How can I prevent real fraud?

Here are some tips and suggestions to help you prevent real fraud:

• Have a fraud prevention system. In previous chapters, we mentioned that it is quite difficult to choose a fraud prevention system that will combine all fraud verification parameters, such as GeoIP verification, device-based fraud prevention, or shipping and billing details matching. But even if a fraud prevention system does not combine all these parameters, it will still work to identify some fraudulent transactions.
• Use 3DS verification. 3DS is a free tool offered by most banks and payment service providers. It helps increase the number of authorized transactions significantly. Though it affects conversion rates and does not work for recurring transactions, it is a worthy tool which a merchant should take into consideration.
• Make sure your business is PCI DSS compliant, your bank or payment service provider offers tokenization and your payment page is end-to-end encrypted.
• Don’t forget about alternative payment methods. Most of these—especially mobile payments—can increase conversion rates and decrease the number of chargebacks. In fact, chargebacks are not possible for most of the alternative payment methods.

Do I need to "fight" both friendly and real fraud chargebacks?

Yes. It is important to show your acquiring bank that you deal with all types of chargebacks received. If you win a chargeback, it will not improve your chargeback ratio. On the other hand, you will be able to prove the legitimacy of a purchase and receive back the cost of the transaction and all associated chargeback fees.

What is the chargeback scheme?

A chargeback scheme is another name for chargeback fraud: it is the misuse of a customer's chargeback rights to retain both the goods or services rendered as well as the transaction amount.

High-Risk Merchant

What is the definition of high-risk and low-risk businesses?

A company is considered a high-risk business based on two conditions: whether it operates within a high-risk industry and whether the risk of financial failure exists. The following businesses are normally considered high-risk:

• Online gambling and casinos.
• VOIP or telemarketing.
• Pharmaceuticals or drug stores.
• Adult materials, products or services.
• Airline tickets.
• Bitcoins or forex trading.
• Dating services.
• Magazine subscriptions.
• E-cigarettes.
• Timeshares.
• Computer software or hardware.

What is the Merchant Category Code (MCC)?

The MCC is a four-digit number used to classify the business by the type of goods or services it provides.

What is a chargeback reason code?

A chargeback reason code is a special code that differs by card network and describes the chargeback reason.

What is the MATCH list?

The information for all terminated merchant accounts is put into a common database, which is called the MATCH (Member Alert to Control High-Risk) list or Terminated Merchant File (TMF).

What is the Visa High Brand Risk Chargeback Monitoring Program (HBRCMP)?

The HBRCMP is a chargeback monitoring program designed by the Visa card network to identify merchants whose chargeback ratio is over 1 percent and who have more than 100 chargebacks per month. A merchant falls under this program after only 1 month of unusual chargeback activity. The program lasts for 12 months, or until a merchant recovers their chargeback situation. While under the program, chargeback fines are 2-3 times higher than normal and some review fees are applied.

What is a high-risk merchant account?

A high-risk merchant account is a type of account associated with higher chargeback and fraud ratios due to the business activity performed (this includes businesses with a subscription model, business where it is hard to prove that products have been delivered, dating/adult businesses, gambling, pharmacies and so on).

Normally high-risk MID MCCs are 5122, 5912, 5962, 5966, 5967, 5993, 7995. Other MCCs can be classified as high-risk based on the chargeback or fraud ratio.

How many chargebacks are allowed for a high-risk merchant account?

In accordance with the new Visa Chargeback Monitoring Program—implemented in June 2016—500 chargebacks and a 2 percent chargebacks-to-sales ratio are allowed per account.

Pre-Arbitration and Arbitration

What is pre-arbitration?

Before submitting a chargeback, a customer must file a pre-arbitration case in an attempt to resolve the dispute. A merchant has 10 days to respond before the arbitration case is filed. Pre-arbitration is also known as second chargeback or second presentment.

What is arbitration?

An arbitration chargeback is submitted by the issuer when the evidence provided by the acquirer in the second presentment is deemed insufficient. Merchants incur a $250 fee when a dispute escalates to arbitration.

How long does the pre-arbitration process take?

Normally, acquirers give a merchant 10 days to respond to pre-arbitration chargebacks. However, there may be some exceptions.

Chargeback Presentment

What is chargeback presentment?

Chargeback presentment is the process of proving the legitimacy of a purchase in order to close a chargeback in a merchant's favor.

How do you create a sophisticated chargeback presentment case?

It is important to include the following information in the chargeback presentment case: transaction data and amount; customer's billing information; purchase confirmation email; purchase delivery logs; customer's logs in a back office (if the merchant provides a back office); correspondence with a customer support team (if one exists); copy of a refund policy and a copy of the terms and conditions. If the chargeback is given a chargeback reason code, you will probably need to include AVS and CVV confirmation.

The chargeback presentment process is quite complicated and time-consuming. It can take up to 20 minutes to prepare one presentment case. Therefore, it is better to give this work to professionals such as Chargeback Hero.

Where do I need to send the chargeback presentment documentation?

Usually, chargeback presentment documentation is sent to the acquiring bank for review. However, if you have a payment service provider as an intermediary, you should send the documentation to your payment service provider first.

Responding to Chargebacks

Can I avoid a chargeback if I refund the customer who disputed the charge?

No, a chargeback will not be avoided. In addition, you may be charged double, because your account will be debited for both the chargeback and the refund.

How long does a chargeback presentment case take to be resolved?

It depends on how fast you submit the case, how fast the payment service provider takes to review it and pass it to an acquiring bank, and how long the issuing bank takes to consider the case. Usually, it takes 1-2 months to know the resolution of a chargeback.

How do I know if I won a chargeback?

Most acquiring banks and payment service providers do not provide reports or notifications on chargeback resolution, so you have to check your settlement statements in regards to the credited amount.

It is quite complicated to see which chargebacks were won and credited. However, Chargeback Hero allows you to track this information in a real-time.

What happens if I accept a chargeback?

If you accept a chargeback, it means you approve it and the chargeback will be automatically closed in the customer's favor.

What happens if I lose a chargeback?

If a chargeback is lost, the customer will get money back and the chargeback will be closed in the customer's favor.

What is a chargeback reversal?

A chargeback reversal means that the chargeback presentment documentation was approved by the issuing bank and funds have been credited to the merchant account. However, a customer has additional dispute rights: they may dispute the transaction a second time and funds will again be debited from the merchant account.

What is a reversal denial?

A reversal denial means that the merchant lost the chargeback.

Retrieval requests

What is a retrieval request?

The retrieval request is a request sent from an issuing bank to a merchant to provide specified transaction details within 10 days.

What happens if I do not respond to a retrieval request?

If you do not respond to a retrieval request, it will turn into a chargeback.

Time Limits

How much time do I have to present a chargeback?

Usually, the faster you present a chargeback, the better your chances of winning. Some banks offer up to 45 days to present a chargeback. However, it is best to present as soon as a chargeback is received.

How much time does a customer have to dispute a charge?

A customer typically has 180 days to dispute a charge. In some case, this limit can be extended.

How long does the whole chargeback process take?

It is a long, complicated process and usually takes 1-2 months. In some cases, it may take even longer.