Chargebacks: A Survival Guide

Chargeback

Credit card chargebacks happen when a customer, for any number of reasons (ranging from fraudulent use of a card to dissatisfaction with the good or service received), disputes a credit card transaction through her issuing bank.

The chargeback process is designed to increase consumer confidence — it's very easy for credit card users to dispute charges, while merchants and banks have to do all of the legwork to figure out whether or not a transaction is legitimate.

From a business's perspective, however, chargebacks can often be a costly hassle. The burden of proof to show that a customer has been rightfully charged falls on the merchant, and when consumers successfully dispute charges, the merchant loses both the product sold and the revenue from that sale.

Even when a dispute is unsuccessful, a merchant's acquiring bank will withhold payment for any chargebacks until the matter is resolved. Add in the fees charged by banks and processors, and even disputes which turn out in a merchant's favor can be expensive. This article aims to give more details about chargebacks, why they happen, and how merchants can prevent them.


What is a Chargeback?

Chargeback is the term used when a customer disputes a charge on her credit card bill. Generally, chargebacks will happen for one of several reasons:
  • A clerical error, such as a customer being double-billed or being billed for an incorrect amount
  • Customer dissatisfaction, such as not receiving a product or receiving a product different than what was paid for
  • A customer not recognizing a purchase, especially if the merchant name that appears on her bill differs from the actual name of the store
  • Fraud — when a customer claims she did not authorize a purchase or a purchase was made as a result of identity theft

For most transactions, customers have 120 days from the sale or when they discovered a problem with the product to dispute a charge.

The bottom line here is that whenever customers feel that they have been charged for something they shouldn't have, they can file a dispute with their bank which begins the chargeback process. The entire process will be detailed in the next section, but it's worth noting here that resolving these disputes can sometimes take more than two months — PayPal, for example, advises its merchants that the whole process can take up to 75 days. During this time, the revenue from the disputed sale is withheld from the merchant's account.

Whenever a chargeback is initiated, a merchant will receive a code from its issuing bank that gives a reason for the dispute. Some of the most common Visa and MasterCard chargeback codes are listed below. Once a customer has disputed a charge, a merchant's acquiring bank will begin going through a specific procedure to resolve the issue.

Visa Chargeback Reason Codes

  • 30: Services Not Provided or Merchandise Not Received
  • 41: Cancelled Recurring Transaction
  • 53: Not as Described or Defective Merchandise
  • 57: Fraudulent Multiple Transactions
  • 60: Illegible Fulfillment
  • 62: Counterfeit Transaction
  • 71: Declined Authorization
  • 72: No Authorization
  • 73: Expired Card
  • 74: Late Presentment
  • 75: Transaction Not Recognized
  • 76: Incorrect Currency or Transaction Code or Domestic
  • Transaction Processing Violation
  • 77: Non-Matching Account Number
  • 80: Incorrect Transaction Amount or Account Number
  • 81: Fraud—Card-Present Environment
  • 82: Duplicate Processing
  • 83: Fraud—Card-Absent Environment
  • 85: Credit Not Processed
  • 86: Paid by Other Means
  • 96: Transaction Exceeds Limited Amount

MasterCard Chargeback Reason Codes

  • 4802: Requested/Required Information Illegible or Missing
  • 4807: Warning Bulletin File
  • 4808: Requested/Required Authorization Not Obtained
  • 4812: Account Number Not On File
  • 4831: Transaction Amount Differs
  • 4834: Duplicate Processing
  • 4837: No Cardholder Authorization
  • 4840: Fraudulent Processing of Transactions
  • 4841: Cancelled Recurring Transaction
  • 4842: Late Presentment
  • 4846: Correct Transaction Currency Code Not Provided
  • 4847: Requested/Required Authorization Not Obtained and Fraudulent Transaction
  • 4849: Questionable Merchant Activity
  • 4850: Installment Billing Dispute
  • 4853: Cardholder Dispute—Defective Merchandise/Not as Described
  • 4854: Cardholder Dispute—Not Elsewhere Classified (U.S. region only)
  • 4855: Goods or services not provided
  • 4857: Card-Activated Telephone Transaction (fraud only)
  • 4859: Change to Addendum, No-show, or ATM Dispute
  • 4860: Credit Not Processed
  • 4862: Counterfeit Transaction Magnetic Stripe POS Fraud
  • 4863: Cardholder Does Not Recognize—Potential Fraud
  • 4870: Chip Liability Shift
  • 4871: Chip/PIN Liability Shift

The Chargeback Process

Once a customer initiates a chargeback, the issuing bank sends the transaction in question back to the merchant's acquiring bank — effectively reversing the sale. The cardholder's account is credited for the amount of the transaction, and the merchant's account has the funds from the sale in question withheld until the matter is resolved.

Every acquiring bank has its own specific procedure for handling chargebacks, but they're all governed by the framework set up by the card brand. Acquiring banks will generally let merchants know exactly what's expected of them, and it's important for merchants to follow these procedures to the letter to protect their chargeback rights. Discover, for example, prohibits merchants from contacting customers who have disputed a transaction.

Another VERY important note: a customer's bank will refund the balance of a disputed transaction as soon as the customer initiates a chargeback. Merchants should NOT refund the customer on their own!

Acquiring banks deduct the amount of the disputed transaction from the merchant's account, at which point it's up to the merchant to either accept the chargeback or to plead its case. At this stage, and in most cases (unless the merchant has violated the terms of service of their card association), the merchant will be able to present evidence to its acquirer proving that the transaction in question is legitimate. The evidence required will be dependent upon the reason for the chargeback. If this evidence convinces the acquiring bank that a customer was rightfully charged, the acquirer will submit the transaction to the issuing bank a second time.

At this point, the issuing bank will either agree with the acquirer and reject the cardholder's dispute or disagree, in which case the merchant can either accept this outcome or send the transaction to the card association for final arbitration. If the card association decides in the merchant's favor, the cardholder will be billed for the appropriate amount and the merchant will receive payment. If the decision goes in the cardholder's favor, the cardholder will retain the credit already issued by her bank and the merchant will not be paid for the amount of the transaction.

If any products were delivered, the merchant will have to accept the loss of that good or service as well. Again, the banks and the card association take care of moving all the money during the chargeback process — if a customer's dispute is upheld, the merchant should not issue a refund. Likewise, if the merchant wins the chargeback dispute, it should not bill the customer a second time — it will be paid for the original transaction by its acquiring bank.

Chargeback Fees

Unsurprisingly, the process outlined above costs merchants money in the form of chargeback fees, and businesses have to pay regardless of whether or not they win the dispute.

First up is the nominal fee charged for retrieval requests. These requests are made by issuing banks when a cardholder asks about or disputes a charge. Processors vary on what they charge, but this fee tends to fall in the range of $5-15.

If the information obtained in a retrieval request does not satisfy a customer or the customer's issuing bank, the dispute moves to a chargeback and the merchant is then hit with a chargeback fee. Merchants have to pay the chargeback fee even if the cardholder's claim is rejected, and even if the chargeback is a result of fraud or identity theft. This fee can range from $15 — 40.

If a merchant takes a dispute to the arbitration stage, she risks paying in the neighborhood of $400 in various fees to the card brand.

On top of all of these fees, both Visa and MasterCard have a strict limit on the total number of transactions that can be charged back before additional fines and penalties are levied. A merchant whose chargebacks exceed 1% of its total sales volume (the dollar amount, not the number of transactions) becomes subject to a chargeback monitoring program administered by the card brand, which is accompanied by a $5,000 fine. At this point, there is a very good chance that the merchant's account will simply be terminated by its bank or credit card processor.

Preventing Chargebacks

With the cost associated with chargebacks, merchants should take steps to protect themselves. Here are some simple steps that can help prevent chargebacks:

  • Respond Quickly
    Respond to retrieval requests and chargebacks promptly. Banks will simply process a chargeback if a merchant doesn't respond to the dispute in the allotted time.
  • Deliver Great Customer Service & Clearly Post Return Policies
    Make it as easy as possible for customers to get customer service, and make the return policy clear at the time of the transaction. Many customers will go to a merchant to resolve a dispute first, only initiating the chargeback process if they cannot get assistance or a refund from the merchant. A direct refund from a merchant to a customer is always less expensive than if a customer wins a chargeback.
  • Swipe Cards When Possible
    Card-present businesses can prevent chargebacks by requiring that cards be swiped, and get a signature whenever possible. This makes it easy to prove that the cardholder is the one using the card — so easy that, beginning in April, Visa will reject chargebacks with certain fraud reason codes if the card was electronically read.
  • Obtain CVV/CVC Codes
    Another suggestion to prevent fraud is to require customers to enter the 3 digit security code on the back of their card when ordering products online. This helps to ensure that the person using the card has the physical card in hand and has not stolen an account number.
  • Use Verified by Visa & MasterCard SecureCode
    One more step to prevent fraudulent online purchases is to take advantage of Verified by Visa or MasterCard SecureCode — both programs that require customers to enter a password when using a card online.
  • Communicate
    Communicate with customers. If customers know the status of their orders, they will be less likely to dispute a charge.
  • Ensure Truth in Advertising
    Advertise honestly and have clear terms of service — these can prevent customers from disputing transactions because the product they purchased was not as described.
  • Avoid Technical Errors
    Take measures to avoid clerical or technical errors. Visa provides an excellent list of suggestions here.
  • Abide by Card Association Regulations
    Follow the terms of service set by the card brands. Any compliance violation can cause a merchant to lose its chargeback rights.

Chargeback Fraud

In addition to the prevention measures outlined above, merchants also need to be aware of chargeback fraud and how they can protect themselves. Last November, the FBI's Internet Crime Complaint Center published a list of the most frequent types of online fraud. The third costliest type of fraud to businesses was "friendly" fraud — when consumers purchase products with the intent of initiating a chargeback in order to get free merchandise.

The person committing the fraud will often claim that a product was not delivered, was not as described, or that they simply did not order a product. Especially since the recession, this type of fraud is on the rise, and is especially prevalent for card-not-present transactions.

Proving friendly fraud can be difficult — and expensive, given the fees charged for taking a dispute to arbitration. However, if a merchant can prove that the consumer in question actually made the purchase, friendly fraud chargebacks can be reversed. Thankfully, many of the steps merchants can take to prevent fraud in general also help to prevent friendly fraud. Here are some additional ideas:

  • Require Signatures Upon Delivery
    Require a signature for goods that are shipped. This prevents unscrupulous customers from claiming a product never arrived.
  • Track Communication
    Keep a record of all communication with customers who make purchases online or over the phone. Often, these records can help prove that a cardholder actually did make a disputed purchase.
  • Record Customer IP Addresses
    For online merchants, keep a record of the IP address used to make transactions. This information will reveal the geographic area where a computer accessed the internet. If a cardholder uses their computer to initiate a chargeback, and the IP address used points to the same location the computer was used to make the order in question, there's a chance the cardholder is attempting friendly fraud (especially if the mailing address matches as well).

Unfortunately, chargebacks are one of the "costs of doing business" when accepting credit cards. However, by taking steps to ensure that customers are informed and satisfied with their purchases, and putting measures in place to prevent credit card fraud, merchants can greatly reduce exposure to chargeback risk — and all of the accompanying costs.

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19 Responses to Chargebacks: A Survival Guide

  1. Liz says:

    I ordered a hat from a third party website and when the hat arrived it was not at all what I ordered, wrong team, not fitted, etc. When I contacted the website, they refused to take the hat back and said to get what I originally ordered I had to order a new one. Can I file a chargeback with my bank?

  2. Steve says:

    Hi, does anybody know how long it takes mastercard to rule for arbitration cases

  3. Mike says:

    What if you don’t have the money in your account for a charge back? In other words, the chargeback amount is $5000 and you only have $3200. What happens in this scenario? Does the processor kick you out and put you on the “Match” list?

    • Ben says:

      Mike, in the chargeback process the processing bank reimburses the issuing bank for any disputes and chargebacks. It’s then up to the processing bank to recoup funds from its merchant. Exactly what happens if the merchant does not have enough funds to cover the chargeback is a tough question to answer specifically because the actions of the processing bank will depend on the details of the individual situation. For example — fraudulent activity, the merchant’s processing history, the merchant’s industry and other variables will all impact the method(s) used to recoup losses, if any.

      Whether or not to list a merchant on the Terminated Merchant File (TMF) is left to the discretion of the processing bank, but it’s virtually inevitable the bank will opt to list the merchant on the TMF if it suspects fraud is involved.

      I suggest contacting your processor to discuss the situation if you’re expecting a chargeback that you won’t have sufficient funds to cover. Being proactive is always the best course of action when dealing with chargebacks.

      • Mike says:

        Thanks Ben, I had to submit documents, of the services that were rendered, to the Risk Department of my merchant services. They then submit those docs to the cardholders bank for review. My merchant services told me today that the cardholder’s bank is Siding with the cardholder, and there is nothing I can do? I now owe 4700. I asked my merchant services, “I thought there was an arbitration process?” They said, case is closed you owe us since we paid them, if you can’t pay us then we will send you to collections…you can go after the cardholder for your money. Does this sound correct?

        • Ben says:

          Hi Mike, I’m sorry to hear about your situation. Many aspects of the chargeback process are weighted in the cardholder’s favor. There isn’t so much an arbitration process as there is an information gathering period and then a decision made by the issuing bank, which is what happened here. Your acquiring (processor) did have to pay the issuer if there wasn’t sufficient fund in your account when it attempted to draft the money to cover the chargeback.

          What you’ve described is the chargeback process. However, you may want to enlist the advice of an attorney that works in bankcard law/chargebacks, or a service that helps business mitigate chargeback risk and respond to chargeback claims. I wish you the best going forward.

  4. Pingback: How Tips Paid by Credit Card Could Affect Your Business

  5. Holly says:

    What if a regular client gets a new credit card and when he gives you his new card number over the phone, he transposes the last few digits (an honest but not uncommon mistake.) The transposed number passes the Luhn test so it was not automatically be flagged as an invalid number. The charge was over $4,000. Who is responsible for checking that the individual that owns the credit card account is the right person? Shouldn’t the issuing bank make some attempt to match the billing address or at least the zip code before allowing the charge on the account of the unsuspecting cardholder? When the error was discovered, the client gave the correct credit card number and the charge went through, but not before the bank had accused the merchant of fraud, debited the chargeback from the merchant’s account and imposed significant chargeback fees. If a chargeback results from an honest error on the part of a good client who inadvertently gave the wrong card number and the client subsequently makes good on the charge, should the merchant be held responsible and subject to chargeback fees?

    • Hi Holly,
      For specific situations like this, it’s best to contact your processor or bank directly so they can assist you. In the future you may be able to take advantage of fraud prevention tools like Address Verification Services that allow you to compare the address of the buyer with the address on file for the credit card, which could help with these type of unusual situations.

  6. Jennifer Morris says:

    Do you have any information or opinions in regards to processors holding reserve accounts? Currently, my processor is holding 5% of all my sales supposedly to cover charge backs. Some of this money has been held for almost 2 years. How long can they hold it for? And can it cap? Thank you!

    • Hi Jennifer,
      What you’re referring to is called a “rolling reserve” and you’re correct that processors sometimes do it to cover potential chargebacks. In general we suggest merchants don’t agree to a rolling reserve unless they have to, but sometimes it’s the only option that a processor will offer. They can hold the funds for the length of time specified in your original agreement. A cap would also be according to that agreement. It all should have been disclosed in your original terms with the processor. I hope this helps!

      • Jennifer Morris says:

        Hi Ellen.. it only said they reserved the right to hold 5%, but it doesn’t have a cap. There is no length of time specified and no dollar amount to cap it at. Do you know if there’s laws against that? I don’t mind the reserve, but it should cap somewhere. They’ve been holding 5% for the whole two years we’ve been in business.

        • Hi Jennifer,
          Unfortunately, I can’t really help with the legal aspect. That’s something you’d need to contact your lawyer or the processor directly to discuss.

          Have you signed up for CardFellow to see what kind of quotes you get through our processor marketplace? It may be worth looking into, and we’re intimately familiar with the agreements that processors we work with offer to our clients. Putting in your business info for quotes is quick, free, and completely private, so you won’t get unsolicited sales calls. There’s no obligation, you can just take a look to see what other pricing is available to you and see if it might make sense for your business. Just a suggestion!

  7. tom sampliner says:

    what is your analysis of: PNC bank will not permit myself as credit cardholder to dispute a transaction for services because they are after the point in time that they define using the concept of “authorization”. The disputed services can be described as the following: not what was bargained for, deceptive in attracting me to even order, claiming their services were something that they were not.

  8. Beth Johnson says:

    Hi what happens if I issued a credit after a chargeback has already occurred. How do I get my money back?

    • As you probably already know, the customer’s issuing bank will initiate a refund during the early stages of the chargeback process. By also refunding transaction the customer receives double her money back, which is why it’s important not to issue a refund for a disputed transaction.

      It can be difficult to recoup a refund issued in response to a chargeback. The best course of action is to contact your processor to inquire about the possibility of recovering the funds.

      It should also be noted that the issuing bank will redeposit funds if you win the chargeback claim. In this case, if it was your intention to refund the customer originally, you will effectively be made whole.

  9. brad starr says:

    Thanks for the information. For the first time in 12 years I’ve had a chargeback. I own an auto repair shop with a 4-4.5 star rating no BBB complaints. This guy lied about the cost, mileage driven , and time after repair. I submitted all the invoices and signed receipt to my bank. The dispute is ‘ defective goods /or services. This is such a general category that it would be difficult to be definitive. Business is tough enough and it’s people like this that we as merchants need a forum to expose them to other businesses.

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