The Chargeback Process

The Chargeback Process

By In Information On May 15, 2015

The Chargeback Process Explained

The chargeback process is quite intricate. There are lots of steps that must be completed in a timely fashion.

The Transaction Process

All chargebacks begin with credit card transactions. Chargebacks are reversals of previous transactions, and therefore the same key players are involved in the transaction cycle and chargeback process. In order to understand the steps taken in a chargeback dispute before a refund is given, it is helpful to understand how the transaction was approved to begin with.

It should be noted that the transaction process might vary slightly based on the type of shopping experience. For example, card-present transactions are different from those that rely on mobile payment technologies. However, all purchases follow the same general process.

  1. The transaction cycle begins with a cardholder who wants to make a purchase from a merchant. When it comes to card-not-present transactions, the cardholder enters their payment and billing information into an electronic form or recites them over the telephone to the merchant, who does this for them.
  2. The information is entered into the merchant’s payment gateway along with the transaction amount. This information is sent to the merchant’s acquiring bank.
  3. The acquirer’s payment processor takes over from this point and submits an authorization request to the credit card network, which has the ability to approve or deny the transaction based upon the cardholder in some circumstances. However, in everyday transactions the card network is used to link the acquiring and issuing banks to one another.
  4. Once in the hands of the card network, the authorization request is then sent to the cardholder’s issuing bank. If the issuing bank determines that the cardholder has the necessary funds or credit available to them, they approve the transaction. If the cardholder is unable to afford the purchase, the issuing bank declines the transaction.
  5. The result of the issuing bank’s authorization—the transaction is either approved or declined—is then sent back through the processor to the card network, who reroutes the response to the merchant’s acquiring bank.
  6. If the transaction is approved, the acquiring bank notifies the merchant and the funds, which were obtained from the cardholder’s issuer, are deposited into the merchant’s account. If the transaction was declined, the merchant and cardholder are notified that it will not go through, and the sale will not be made.
  7. If the charge is presented to the issuing bank through the processor as a valid charge, this is called first presentment.

The issuing bank then retrieves the funds from the cardholder’s account for payment to the merchant.

If the cardholder sees the charge on their bank or credit card statement and does not recognize or did not authorize it, he would then contact the issuing bank to inquire about filing a chargeback dispute.

The Chargeback Process

The chargeback process deals with five main players, but doesn’t have a set timeline that every case follows. Due to the human nature of each chargeback dispute, every case is different, and therefore, goes through a slightly different process before reaching its conclusion.

The five steps involved in the chargeback process can be broken down to:

  1. Presentment
  2. First Chargeback
  3. Representment
  4. Second Chargeback/Pre-Arbitration
  5. Arbitration

Although some chargebacks cannot be resolved without reaching arbitration, other cases may begin and end in the First Chargeback phase. If an issuing bank requests a transaction be charged back to the cardholder, and the merchant agrees, the money is transferred from the acquiring bank to the issuing bank and the process comes to a close.

However, if the merchant disagrees with the chargeback and chooses to fight back, the dispute cycle begins:

  1. The cardholder decides to file a chargeback dispute with their issuing bank to receive a refund for a transaction made with their credit or debit card.
    When this happens the cardholder is responding to one of the following scenarios:
  • Merchant error: there was an issue with the ordered product or service.
  • Criminal fraud: the cardholder is a victim of credit card fraud and did not make the purchase himself.
  • Friendly fraud: the cardholder made the purchase but is requesting a refund through the bank in order to retrieve the funds but keep the product.
  1. The cardholder’s card issuing bank then reviews the chargeback claim and determines if the cardholder is eligible for a refund caused by a billing error. After confirming that the cardholder is attempting to dispute within the applicable time frame, the necessary paperwork is sent by mail to the cardholder for authorization. The cardholder then returns the signed and confirmed paperwork to the issuing bank.
    The issuing bank determines of the cardholder is eligible for a chargeback:
  • If eligible, the cardholder receives a temporary refund and the chargeback process moves forward.
  • If not eligible, the chargeback is denied, the merchant keeps the sale, and the cardholder is unable to receive the refund.
  1. The chargeback has been deemed appropriate by the issuer, and the retrieval request for the funds is forwarded to the merchant’s acquiring bank after being reviewed by the card association. With card association approval, at this time, the acquirer notifies the merchant of the chargeback dispute and places a hold on the amount that is being disputed.
  2. Once the first chargeback process has begun, the merchant has the opportunity to either release the funds to the cardholder or plead their case.
  3. If unwilling to return the funds, the merchant gathers evidence to respond to the dispute. In order to prove the charge is valid and authorized, and the chargeback is not warranted, the merchant sends any and all information connected to the disputed charge to their acquiring bank for representment.
    Common documents used in representment include:
  • Proof of delivery.
  • Proof of address.
  • Proof of authorization.
  • Proof of purchase.
  • Proof that the customer received the product on time and as it was described in any related advertisements or sales descriptions
  • Proof that the customer confirmed comprehension of Terms and Services, if applicable.
  • Any email, telephone transcripts, or customer service communication with the cardholder.
  • Any signed contracts involved in the transaction.
  • Any copies of CRMs or payment gateways used in the disputed order.
  • Any documents that can confirm the customer who placed the order is the one who received the order, such as: IP address matching, billing and shipping address matching, use of correct card security (CVV2) code, etc.
  1. Once the acquiring bank receives the documentation from the merchant, they send the case to the card association for review. If no errors are found, the acquirer files representment on the merchant’s behalf, in essence re-presenting the charge to the issuing bank as valid.
  2. The issuing bank then reviews the case and determines whether the charge is valid or invalid by assessing all of the evidence provided.
    If the evidence is sufficient and submitted within the time frame, two situations may result:
  • If the charge is determined by the cardholder’s issuing bank to be valid, the merchant wins the dispute and keeps the funds being disputed.
  • If the charge is determined to be erroneous, a second chargeback, also known as pre-arbitration is sent to the acquiring bank as a request for the funds.
  1. The validity of the merchant’s case is sent from the issuing bank back to the acquiring bank.

When the merchant’s acquiring bank receives the second chargeback they have two final options:

  • The first option is to release the funds to the issuing bank to be returned to the cardholder.
  • The second option is for the dispute to be sent to arbitration.
  1. When an issuer or acquirer sends the dispute to arbitration it is then assessed by the card association involved in the transaction. Acting as a neutral third party, the card network charges fees to both the winner and loser in the case, but asks that the party who loses the dispute pay the processing fees. When the card network reaches a verdict in the dispute case, that verdict is final. Depending on the final result, the temporary refund issued to cardholder at the beginning of the process is either made permanent, or it is reversed and the merchant is able to retrieve the funds from the initial sale.

Successfully Mastering the Chargeback Process

The chargeback process is difficult to understand. There are subjective rules, tight deadlines, and tedious tasks. However, it is possible to master the system. A merchant can successfully prevent and dispute chargebacks.

If you’d like to create a long-term, sustainable chargeback management program, let us know!