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Protecting your business from chargebacks

Chargebacks, the reversal of a money transfer to a cardholder’s account from a merchant’s account, have increased in recent years with the accelerated rise in card and online payments.

Merchants

either deliberately or accidentally liable in a chargeback dispute depending on the circumstances.

Merchant Fraud vs. Merchant Error

The most straightforward examples of a business committing merchant fraud of a transaction involves deliberately failing to ship a product or provide a service, or offering a fake or damaged product, or item/ service of lower quality than agreed, and charging unagreed higher prices or unexpected additional fees/ charges.

Chargeback disputes occurring from merchant error can be difficult for a business to accept, so it’s important to know how they may occur when customers receive defective merchandise by accident, consumers feel misled on a product’s specifications or the standard of a service when it fails to match their expectations or subscriptions and cancellation policies are unclear.

Customers

initiate friendly fraud, which differs from regular fraud as it is made by the cardholder or someone with legitimate access to the cardholder’s account.

Friendly Fraud

Cardholders might mistakenly dispute charges they made because they forgot they made the purchase or they don’t recognize the business listed on their card statement due to a different business name appearing. Also, family members linked to an account might make purchases unknown to the primary cardholder, who then initiates a chargeback.

However, friendly fraud isn’t always accidental. Cardholders may dispute a purchase because they have buyer’s regret. They could also be trying to con the system and profit from a transaction, gaining both a product/ service as well as their money back through a chargeback.

Our blog on five ways to prevent your business from friendly fraud and merchant error chargeback disputes offers practical tips on what you can do to protect your business.

4 questions all businesses should ask when choosing a merhcant services provider (3)

When chargebacks happen

Who’s involved

Cardholder: The person who initiates the chargeback

Merchant

The business which sold the disputed product/ service

Issuer

The cardholder's bank and/ or financial institution

Acquirer

The merchant's card processor

Card Scheme

The association that owns the card brand (Visa, Mastercard etc.)

Disputing a chargeback

The cardholder initiates a chargeback claim by contacting the issuer, who must verify the chargeback claim and forwards the claim to the card scheme.  The card scheme then sends the claim to the acquirer, who considers the evidence from the claim and forwards the claim to the merchant.

4 questions all businesses should ask when choosing a merhcant services provider (3000 × 750px)

The cardholder initiates a chargeback claim by contacting the issuer, who must verify the chargeback claim and forwards the claim to the card scheme.  The card scheme then sends the claim to the acquirer, who considers the evidence from the claim and forwards the claim to the merchant.

The merchant can either accept or dispute the cardholder’s claim by following the steps below:

  • Merchant forwards representment (submitting evidence to the bank proving that a transaction was valid) to the acquirer.
  • The acquirer then forwards the merchants claim to the issuer.
  • Either the issuer can accept the merchant’s evidence and reject the cardholder’s claim or they side with the cardholder and reject the merchant’s argument, requesting the acquirer to initiate the chargeback and reverse the money transfer from the merchant to the cardholder.
  • If the acquirer agrees with the issuer, it will inform the merchant and, if the merchant accepts the decision, the issuer debits money from the merchant’s account, transfer it to the issuing bank, who credits it to the customer’s card account.
  • The cardholder, merchant and acquirer may or may not agree with the decision. The arbitration commission of the payment system will then conduct its own investigation and make the final chargeback decision. (Note: This process involves a fee from the initiator)

What steps can you take when you are involved in a chargeback dispute?

Be prepared and record transactions

Depending on your business type and structure, and the nature of the purchase being disputed, all or some of the below examples will equip you with relevant evidence to defend a chargeback claim from a cardholder.

  • Proof of customer purchase and history of customer transactions
  • Confirmation of delivery confirmation or any evidence the customer received the product or service)
  • Copy of the refund or return policy agreed to by the customer
  • AVS (address verification system) and CVV (card verification value) matches
  • IP address of customer’s purchase device for online transactions, along with exact time and date of purchase
  • Geographic location of the device
  • Any correspondence, with the cardholder or their representatives – emails, phone records or letters/ records documenting conversations with the customer.

Follow the timeframes and deadlines

Being aware of the timeframes and deadlines and following them is key to implementation a success appeal to a chargeback case.

Once the cardholder has made a chargeback request, it’s important to note the timelines set out by the acquirer for responding to the initial notification and submitting supporting documents to defend the chargeback claim.

Engage with the acquirer and submit evidence and all other requested documentation to them on time.

Engaging fully with the acquirer improves your chances of successfully defending your business against an illegitimate claim. This will help the acquirer create a more-informed picture of the situation.

Responding to the decision

By keeping and submitting relevant records and engaging fully with the process, an illegitimate chargeback claim should hopefully be appealed successfully. If you are unsuccessful, you can still appeal to arbitration but, as mentioned, this can cost up to $500 and may take some time for a final decision to be made.

The impacts of chargeback on a business, whether successfully or unsuccessfully disputed, can cause stress and create a strain on resources, as well as having a telling financial impact. By being informed on what they are and how they may potentially occur, can protect you from becoming involved in a chargeback dispute and, if you are unfairly targeted in a chargeback claim, being prepared will support you through the described process.