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The Chargeback Process

Chargebacks are one of the most frustrating aspects of credit card payment acceptance and something that nearly all businesses that take cards will have to deal with at one point or another.  If you are new to processing or rarely deal with chargebacks, you might be unfamiliar with how the process works.  We’ve outlined each of the steps below.

1. The Cardholder Disputes a Purchase with their Issuing Bank

Customers typically initiate a chargeback when they are unable to resolve an issue pertaining to the product/service they purchased with the business they purchased it from.  Disputes are often filed if the item was not received, did not match the description, or if the cardholder does not recognize the transaction.  The issuing bank is the financial institution behind the cardholder’s account (i.e. Capital One or Chase).  The issuing bank is responsible for transferring funds to the merchant when a cardholder purchase goods/services, managing the customer’s credit card account, and authorizing or declining transactions.  How quickly a dispute is resolved often depends on the issuing bank.

2. The Issuing Bank Reviews the Dispute

This issuing bank reviews the sales transaction to determine whether the dispute is valid or invalid.  If invalid, the issuing bank will end the chargeback process and notify the cardholder of their decision.  If there is reason to believe the transaction was fraudulent, or if it simply warrants further investigation, the issuing bank will immediately reimburse the cardholder for the disputed amount.

3. The Merchant Receives the Chargeback

The issuing bank submits the chargeback information to the card network, who passes it to the merchant’s acquiring bank (the processor).  The acquiring bank will thendebit the funds from the merchant’s bank account in order to reimburse the cardholder and cover the fees for investigating the chargeback.  This is in accordance with V/MC/D/A operating procedures.  At this point, the merchant will be sent a chargeback notification, which will contain instructions on how to respond to the dispute.

4. The Merchant’s Response

The merchant must now decide whether to respond – which is recommended To respond, the merchant must gather and submit compelling evidence relevant to the chargeback reason code outlined in the notification.  Typically, the maximum time allowed for a response is 30 days.  Failure to respond will end the chargeback process.  In some cases, that’s okay.  If the transaction amount is minimal, it may not be worth the effort.  But if the merchant does wish to take action, they will need to gather as much data about the transaction as they can before submitting their response letter to the acquirer.  Some examples include:

  • A summary of the circumstances to help the issuing bank understand
  • Receipt or Invoice
  • Date/Time Stamp
  • Cardholder’s Signature
  • AVS/CVV Match
  • Proof of Delivery
  • Matching Bill-To and Ship-To Addresses
  • Past or Subsequent Transactions from Customer
  • Email or Phone Communications / Transcripts
  • Any Other Evidence Showing that the Merchant Fulfilled the Transaction

5. The Issuing Bank Decides

The acquiring bank will pass along the response letter and compelling evidence to the card network, who passes it back to the cardholder’s issuing bank.  If the evidence is sufficient to disprove the cardholder’s dispute, the merchant wins.  The issuer will decline the chargeback, send funds to the acquirer, and the acquirer will return the funds to the merchant’s bank account.  If the evidence is determined to be insufficient, the cardholder wins and they will keep the refund.   It is important to remember the issuing bank is basically the judge and jury in the chargeback decision.

6. The Aftermath

Unfortunately, this might not be the end of the situation.  If the merchant wins the chargeback, the cardholder may dispute the outcome.  If the cardholder provides new information or there is a change to the chargeback reason, the issuer can revalidate the chargeback, and the process repeats again.  This time, the merchant may need to provide further compelling evidence in order to win the dispute.  After the 2nd chargeback decision is made, if either party still wishes to contest the outcome, the case will enter arbitration.

Arbitration functions similarly to a court trial, whereby the card association (i.e. VISA/MC/DISC/AMEX) acts as the judge.  If a case goes to arbitration, the merchant is automatically charged between $250-$500.  These fees are only returned to the merchant if they win the case.  Merchants are advised to avoid arbitration as the outcome is typically not in their favor – and the fees are costly.  Once the card association makes its final determination, the case is permanently closed.

As always, MSP Consulting is here to help.  If you have any questions regarding a chargeback issue, please let us know.  We encourage all businesses, especially those operating in card not present or ecommerce environments to adopt practices to reduce the risk of chargebacks and fraud.

For more information please refer to our website or call 913-890-4900 or email support@msp-consulting.net  anytime.

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