Chargebacks are a form of consumer protection. Chargebacks ensure cardholders don’t have to pay for credit or debit card transactions that are unauthorized or illegitimate. Rather, the merchant sacrifices revenue — funds are removed from the merchant’s account and returned to the cardholder.

Unlike a traditional refund, where the customer and merchant work together to resolve an issue, a chargeback bypasses the merchant entirely. The customer’s bank (issuer) communicates with the merchant’s bank (acquirer) via the card brand.

Bank Chargebacks vs. Cardholder Disputes

Chargebacks can be initiated by either the cardholder or the issuing bank.

Examples of situations in which the issuer might initiate a chargeback include:

  • The transaction was processed late, beyond the card brand’s allotted settlement time limit
  • The merchant didn’t request authorization before processing the transaction
  • The card was charged twice for a single transaction

Examples of situations in which the cardholder might initiate a chargeback include:

  • The goods or services weren’t delivered
  • A refund wasn’t provided as promised
  • The purchase was made by someone other than the cardholder

Chargeback Alternatives

Not all consumer grievances escalate to a dispute. Disputes are intended to be the final option when all other attempts to solve the issue have been exhausted.

Often times, consumer grievances can be resolved if the issuer is able to obtain additional transaction information and clarify it with the cardholder. There are two ways the additional information can be obtained:

Retrieval Request

An issuer may send a retrieval request to the acquirer. The acquirer will respond with transaction information to clarify any confusion and provide additional insight.

Retrieval requests were once a popular process used by all the card brands. However, American Express® and Discover® are the only brands to currently require the use of retrieval requests.

Order Validation

There are two order validation platforms that merchants can enroll in: Consumer Clarity and Order Insight.

Through these platforms, merchants can communicate with issuers in real time. The goal is to supply enough supporting information to clarify the transaction and help the issuer “talk off” the dispute.

If neither the retrieval request nor order validation resolve the dispute, the issuer may choose to send a prevention alert.

Prevention Alerts

Prevention alert networks enable an issuer to notify a merchant when a transaction is disputed. The merchant then has the option to refund the transaction and resolve the dispute, hopefully preventing the issue from progressing any farther.

Rapid Dispute Resolution

Similar to prevention alerts, RDR allows you to automatically refund disputed Visa transactions. 

Legitimate and Illegitimate Chargebacks

Chargebacks are a much-needed consumer protection mechanism. However, they are often used incorrectly and illegitimately.

Fraud is the only legitimate reason for filing a chargeback. This includes criminal activity that resulted in an unauthorized transaction. It also includes merchant fraud — situations where the merchant intentionally misled the cardholder or didn’t fulfill obligations.

Chargebacks filed under any other pretense are considered illegitimate. Illegitimate chargebacks are commonly known as friendly fraud. Friendly fraud is most often perpetrated out of convenience, as an accident or misunderstanding, or as an intentional act to get something for free.

To obtain an illegitimate chargeback, cardholders will often make false claims, such as saying the transaction wasn’t authorized or the merchandise wasn’t received. Issuers are responsible for investigating cardholder claims and declining unwarranted chargeback requests.

Chargeback-to-Transaction Ratio

Card brands and acquirers monitor merchant risk with a chargeback-to-transaction ratio. Exceeding the chargeback-to-transaction threshold could be considered a breach of the merchant agreement and could result in the loss of the merchant account.

Financial Impact of Chargebacks

In addition to damaging the chargeback-to-transaction ratio, each transaction dispute has financial drawbacks for the merchant too.

The chargeback removes revenue from the merchant’s account and returns the funds to the cardholder. Additionally, the merchant is usually assessed a chargeback fee.

Therefore, it is important for merchants to try to prevent chargebacks, the resulting revenue loss, and the associated costs. When chargebacks do happen, merchants should fight back and recover lost revenue. Without effective management techniques, chargebacks can cause irreparable damage to the merchant’s bottom line.

Disputing Illegitimate Chargebacks

Card brands grant merchants a right called representment, which provides merchants with the opportunity to prove the validity of the original transaction.

If merchants are able to supply the required compelling evidence in the given timeframe, the issuer will review the case and reassess the initial chargeback decision. Successful responses will overturn the chargeback, withdrawing funds from the cardholder’s account once again and returning them to the merchant.

The chargeback fee will not be refunded in cases of successful representment, nor will the chargeback-to-transaction ratio be recalculated.

Also referred to as:

  • Dispute (Mastercard and Visa often use different terms to express the same concept. Mastercard uses the term “chargeback”, but Visa uses “dispute” instead.)
  • Transaction dispute

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