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Today, online businesses need to have a swift and painless payment process for customers. The drive is all in one direction: hassle-free payment with as few hurdles as possible. However, anyone trading online for any period of time online will be aware that an extra cost of card payments, and especially in a low friction process, is the pain of chargebacks. So it’s worth spending some time figuring out what these chargebacks are exactly and how to manage them.  

What is a chargeback?

Cardholders get their cards from their bank, referred to as the issuing bank. Chargeback protection is one of the services that the card issuer provides to its cardholders. Chargeback protection (sometimes called reversal) gives cardholders the right to file a complaint if they suspect any kind of unauthorised transaction on their bank statement. 

Once a dispute is filed, the bank will investigate the chargeback claim. If a transaction is found to be unpermitted, the bank will give the money back to the cardholder. Sounds very generous, until you realise that the bank will then recover these funds from the merchant where the transaction took place via their acquiring bank. In addition to the transaction cost, the bank will also charge an administration fee, which is usually somewhere between $10 and $20. 

Going on a MasterCard or Visa Excessive Chargeback Program

Chargebacks can be truly painful since the merchant stands to lose the payment, the goods or services sold, and the processing fee. Additionally, there can be a fine levied by the bank if they deem there to be poor procedures in place to either avoid or respond to chargebacks. 

If a merchant demonstrates consistent exposure to chargebacks - where the level of chargebacks over a three month period exceeds 1% of sales then the outlook can get even bleaker. At the very least the merchant will be deemed a high risk merchant and will consequently pay higher fees for payment processing and commissions, and may experience a lower acceptance rate on otherwise legitimate transactions. If the chargeback rate continues to be excessive the ultimate sanction of closing down the merchant account can and will take place. So without question, it's worth getting a handle on chargebacks; but how? 

The chargeback lifecycle

Dealing with chargebacks becomes much easier if you know how they work. It will make your reversal management easier and boost your efforts in fighting chargebacks.

It all begins when the cardholder decides to dispute suspicious transaction(s).

Once a dispute is filed, the issuer asks for a full clarification from the cardholder regarding the problem that she faced. The transaction cost is then sent, via the scheme (e.g. Visa, MasterCard, AmEx, etc), back to the merchant’s acquiring bank and at this point the cardholder is usually compensated for the full amount.

Now the acquiring bank has received the chargeback, it will conduct its own investigation and if deemed valid, it will charge the merchant’s account. Bear in mind these cases are extremely high volume so to the validation checks are by no means thorough investigations.

At this stage the merchant’s acquiring bank has two option: it can accept the chargeback, or it can dispute the chargeback and refer it back to the issuing bank.

If accepted by the bank and charged to the merchant, the merchant at this point faces the decision of whether  to accept the chargeback or re-present contradictory evidence to the merchant bank and defend the dispute; an onerous process indeed.

The acquiring bank assesses any information provided in defence by the merchant. If they accept the defence, the transaction is re-posted to the issuing bank and the merchant is not charged.

If the issuing bank disputes this further, it goes to Arbitration and the scheme (Visa, MasterCard, or Amex) will be the ultimate arbitrator, and their decision on who pays is final.

Why do chargebacks occur?

In order to prevent chargebacks, you first have to understand why they happen. In most cases, chargebacks are initiated by the cardholder. 

Here are some reasons why a chargebacks can happen:

Credit Not Processed
This type of chargeback occurs when the customer gives back the goods they purchased, but is yet to receive the refund back to their card account. 

Suspicious Transactions
If the card is used to purchase goods or services without the card owner’s knowledge, a chargeback is likely to occur. In such a case, the merchant will have to bear all responsibilities.  This is the most common fraud scenario, where the cardholder’s details have somehow become available on the dark web.

Item Not Delivered
This is another common reason for chargebacks in today’s market; we often hear cardholders paid for an item but never received it. This paves the way for a chargeback, and, as before, the merchant will have to compensate. This is also a common fraud attempt.

Technical Difficulties
Often chargebacks take place because of technical difficulties in the payment process. Chargebacks might take place if the cardholder is charged twice for the same purchase, due to technical issues between the issuing bank or gateway and the merchant. A failed authorisation can also result in deduction of an amount, even though the transaction was not processed.

These are the main reasons why chargebacks happen. Apart from these, card malfunction or human errors can also be some common reasons for chargebacks. 

How can I dispute chargebacks? 

Although merchants have the right to defend chargebacks, the time limit is short and the effort considerable for responding to an investigation. The merchant involved in the case will be given a deadline to tell their side of the story. Failure to respond within the timeframe will automatically award the dispute in the cardholder’s favour. 

As a merchant you should aim not just to deflect the dispute, but to win it. With proper preparation, and the correct evidence, it is possible to win disputes.

When the delivery of products and goods is involved, tracking numbers, invoices and tracking the deliverers via GPS should be recorded carefully. For shipped goods, every stage of the packing and delivery process that can be reasonably recorded should be - especially if there are high value goods involved. Photographing the package before it ships to show that all the goods are included is a great strategy to avoid someone claiming a delivery was incomplete. 

To sum it up, you must have an organised and reliable online record keeping system to fetch any required and related information instantly in order to resolve an issue. 

Top tips for avoiding chargebacks

  1. If at an early stage, set up some sensible checks especially for ’too good to be true’ orders to avoid at least the very basic fraudulent transactions
  2. Study chargebacks when they come in to see what lessons can be learned for the future. Developing specific knowledge of your own chargeback weakness can be be a fantastic head start when it comes to investing in a more sophisticated solution later.
  3. If you trade physical goods, outline your shipping policy and return policy in a clear manner. Be sure that the customer understands them properly, before making a transaction.
  4. If you are trading at volume, invest in a fraud prevention system that declines the transaction prior to the order being accepted. This avoids the whole issue of chargeback by never creating an order in the first place.
  5. Configure your merchant account and use dynamic descriptors on transactions to make sure customers know exactly who the transaction is from and what it was for.