It is absolutely essential to understand what a chargeback is and how it affects a business’s bottom line. Answering the question, “what is a chargeback?” is the first step towards implementing an effective management solution.
The Chargeback Process
Let’s take a look at the basic progression of a chargeback:
The cardholder files a chargeback.
A dissatisfied customer contacts the bank (issuer) and asks for a refund.
The issuer reviews the chargeback request.
Each chargeback is accompanied by a reason code. These reason codes offer an explanation as to why the consumer is disputing the transaction (for example, “goods or services not as described”). Each code has its own set of rules (filing time limits, necessary documentation, etc.). The issuer will check the cardholder’s chargeback claim, making sure all the regulations have been addressed.
The issuer takes action.
If the cardholder has a valid claim, the funds will be removed from the merchant’s bank account and credited to the cardholder’s. Notification of the chargeback will be sent to the merchant’s bank (acquirer). If the cardholder doesn’t have a valid claim, the chargeback will be voided.
The acquirer reviews the chargeback and takes action.
The credit card networks (Visa, MasterCard) have created various chargeback rights; as such, merchants have the right to dispute an illegitimate chargeback.
If inaccurate claims are made, the merchant can try to regain profits that were fraudulently removed.
If the acquirer has access to the compelling evidence needed to dispute the chargeback, the bank will act on the merchant’s behalf. Otherwise, the acquirer will pass the chargeback along to the merchant.
The merchant reviews the chargeback and takes action.
If the chargeback is justified, the merchant may be forced to accept the losses. However, if the business has sufficient compelling evidence (documentation to prove the chargeback is invalid), the merchant can re-present the chargeback for the issuer’s review.
The acquirer re-presents the chargeback.
The acquirer disputes the chargeback (a process called representment) on behalf of the merchant.
The issuer reviews the compelling evidence and takes action.
If the merchant’s compelling evidence successfully refutes the cardholder’s claim, the transaction will be posted to the cardholder’s account a second time. The funds that were originally deposited into the merchant’s account, and removed with the chargeback, will be deposited once again.
If the merchant’s compelling evidence doesn’t refute the cardholder’s claim, the chargeback stands. The transaction amount is permanently removed from the merchant’s bank account and applied to the consumer’s credit card statement.