The need to fight chargebacks is frustrating, but honest merchants must always be on guard to protect themselves.
But don’t worry — even when you get hit with one, all is not lost. If you know how the dispute process works, you can take action to fight them.
What is a Chargeback?
In addition to an excellent way to ruin an honest merchant’s day, a “chargeback” is the payment industry term to describe when the legitimate holder of a credit card disputes the legitimacy of a requested payment to a merchant.
If left unchallenged, the bank doesn’t release the funds to the merchant that initiated the request for payment.
In other words, the merchant shipped the merchandise or provided the service, but doesn’t get paid.
Chargebacks hurt merchants in a number of ways. A few of the biggest are:
- Lost merchandise
- Lost fees associated with shipping merchandise
- Processing fees
- Increased processing fees or inability to process credit cards entirely
What Happens when a Chargeback is Filed?
Card holders most commonly initiate a chargeback by calling the issuing bank and disputing the charge.
Card holders will give many kinds of reasons during these conversations. However, there are common themes. One is they didn’t place the order. A second is they didn’t receive the expected merchandise.
Because keeping card holders happy (as opposed to merchants) is the bank’s business, they will usually accept the card holder’s explanation on its face and cancel the payment.
This can change if the customer creates a trackrecord of frequently charging back purchases, but card holders start with the benefit of the doubt and can maintain it for quite a while.
Chargebacks on a Merchant Statement: Where are they?
After the card holder files a dispute, the bank freezes payment, and earmarks money to shift from the merchant’s account to refund the card holder’s account.
Banks inform merchants of the dispute via merchant statements. Every bank’s statement will look different. However, most provide data in a column on the statement labeled either “reversals” or “adjustments”.
Businesses can very easily miss notice of a chargeback if they aren’t paying attention. That’s a big problem, because merchants must respond to them within a certain timeframe or they become permanent by default
Moreover, merchants must not go above the acceptable threshold of chargebacks to legitimate purchases (usually anything above 1-2% of total volume). If they do, they can be hit with higher fees, or, in the worst case, see their ability to process credit card transactions entirely revoked.
How to Fight Back
There are many things you can do to avoid revenue loss and other problems.
How to Fight Chargebacks
- Check Your Merchant Statement
Merchant statements provide you with the information you need to identify the inflows and outflows of your account. This includes sales and processing fees. To find the total cost, look for the amount under the heading “adjustments” and “chargeback fee”.
- Get the Reason Code
Credit card networks inform merchants of adjustments using reason codes. Each code requires a different kind of defense. For example, you would not fight alleged lack of card holder authorization in the same way you would a alleged failure to receive merchandise.
Unfortunately, these are not standardized across all payment networks. Even within payment networks, changes tend to occur frequently. As a result, another best practice is to remain up to date on what the codes for each payment network you use mean.
- Prioritize What to Fight
Merchants feel an impulse to fight everything However, some types of eCommerce fraud make it easier to win disputes than others.
For example, let’s take an adjustment for alleged non-receipt of delivered goods. This is an indication of friendly fraud, and you appear to have clear evidence against the card holder’s claim, so it’s worth your time to dispute.
On the other hand, if you see an adjustment where there is no record of receipt, or notice it appears to be made with a fake identity, that’s an indication of a sophisticated Account Takeover Fraud scheme. Because they can be hard to win, it’s probably better to de-emphasize that fight.
- Use Meticulous Records to Prepare Your Case
Once you understand the adjustment type, you will know what kind of evidence you need to dispute it. A best practice is to keep meticulous records of all transaction details so you can quickly and easily match up what you need with what you have.
One example of the kind of evidence you may need is the time, date, and IP address used to place order.
Other examples include signed proof of delivery to requested address, proof of residency or employment at requested address, and the credit card’s previous history of fraud.
Finally, it’s a good idea to keep any communication with card holders via phone, email, text, or chatbot.
- Draft Response Letters
Once the evidence is in place, it’s a good idea to prepare a standard response letter. This letter should include blank spaces where you can fill in details about each transaction, point the payment network to your evidence for disputing it, and provide any relevant terms and conditions or agreements that bolster your case.
- File a Dispute Using Correct Management Guidelines
Successful disputes require merchants to follow the correct procedures credit card companies lay out to do so.
There is a different system for each major credit card company. If a merchant does not follow the procedures exactly, their dispute can be disqualified solely on technical grounds, without ever getting to the merits of the case.
To avoid that, be sure to keep the management guidelines for Visa merchants, as well as Mastercard merchants, close at hand as a reference.
- Dispute Fraud Within the Statute of Limitations
Once you identify an adjustment you believe is fraud, dispute it. Disputes must be filed within a certain timeframe to be valid. For example, the dispute time limit is 30 days for Visa and 7-10 days for MasterCard.
Don’t Give-up in the Fight Against Chargebacks
At the end of the day, credit card companies do not set out to harm merchants. They understand the right of merchants to receive payment for their goods, and do provide resources and tools to help. But it starts with the merchant, who must be willing to protect themselves as much as possible.
It’s not easy to avoid problems, but knowing what to watch out for, what to bring to the fight, and how to press your case, is the best way to avoid as much lost revenue and payment processing nightmares as possible.