4 steps to disputing a chargeback - woman signing at credit card terminal

Four steps to disputing a chargeback

Monday, November 01, 2021

Everyone hopes running a business will be a smooth process. But, as a small business owner, you know that it’s not always easy. There are bumps and snags all the time, and one of these pain points is chargebacks. If your business accepts credit cards, chargebacks are bound to happen. While they can be frustrating to deal with, it’s important to know how to handle them, especially if you have a legitimate reason to dispute the chargeback. In this article, we’ll discuss what a chargeback is, the difference between a dispute and chargeback, and the steps you should take as a merchant to dispute a chargeback.

What’s a chargeback?

To start, let’s talk about chargebacks. A chargeback is when a customer requests that their debit card or credit card payment is returned to them following a transaction. There are a number of reasons a customer may request a chargeback, but it’s important to note that a chargeback is a forced reversal of funds. 

In your research, you may come across the term “dispute.” So does a chargeback differ from a dispute? In some contexts, yes. There are a few ways the word “dispute” is used and the difference is all in context. When a cardholder sees something is incorrect on their credit card billing statement, they may call the issuing bank to flag the charge and have it reversed. This process is called a cardholder or customer dispute. If the cardholder provides evidence that satisfies the issuing bank, then this cardholder dispute continues to the chargeback process.

The word “dispute” is sometimes also used interchangeably with chargeback, describing the whole process. Instead of credit card chargeback, it’s mentioned as credit card dispute. In fact, Visa uses the word “dispute” instead of “chargeback.”

Finally, the word “dispute” can also appear in phrases describing the merchant fighting (or disputing) the chargeback. In this context, it is describing the action of the merchant and not the process.

A brief overview of the chargeback process

To understand the steps you should take as a small business, you first need to understand the chargeback process. Let’s go over the general steps of this process.

 
  1. A cardholder initiates a dispute for a transaction
  2. The card issuer electronically sends the original transaction back to the acquirer
  3. The acquirer receives the transaction and either resolves the chargeback or forwards it to the merchant
  4. The merchant receives it and then decides to accept the chargeback or fight it through representment by sending compelling evidence to the acquirer
  5. The acquirer then reviews the compelling evidence and ensures it meets requirements before sending it back to the card issuer
  6. The card issuer reviews the information and then makes a decision based on the evidence
  7. If either the merchant or cardholder disagrees with the decision during this pre-arbitration period, they can go to arbitration, which then involves the card network

Now that you know more about the chargeback process and the nomenclature of chargebacks and disputes, let’s look at the process to dispute chargebacks as a small business.

Step 1: Talk with the consumer

After being notified of a dispute, it’s important to try to contact the customer who is requesting the chargeback. Often, chargebacks happen if the customer cannot get a hold of the business and feels like a chargeback is the only way to get their problem resolved.

When communicating with them, see if you can resolve their issue without a chargeback. Perhaps the customer forgot about placing the order or did not recognize the business name on their credit card statement. Once you’ve talked with them, you can work to come to a resolution (and also work to remedy the situation for future customers). 

If the customer decides that a chargeback is unnecessary, have them contact the issuing bank to ask the bank to drop the chargeback. It’s important to keep records of this decision so that you can submit documentation in step 2 that the customer agreed to drop the chargeback. 

Step 2: Representment

If after you contact the customer and they still believe a chargeback is necessary, you now need to either accept the chargeback or put together compelling evidence to support your case. You’ll put together a response that addresses the specific issues of the chargeback. 

The chargeback reason code provided to you by the card issuer will help you determine both the evidence you’ll need to present and the timeframe you have to submit your response. Chargeback reason codes are alphanumeric strings of digits created by the four card networks – Visa, Mastercard, American Express, and Discover – that help you decipher the reason for the chargeback. 

 

Depending on the type of chargeback code, you should look to include the following to help your case:

  • Proof of customer authorization
  • Proof of the correct transaction amount
  • Proof of product delivery or services to cardholder
  • Proof that the cardholder signed and approved the original transaction
  • Your small business return and/or cancellation policies

If you decide to attach documentation to your letter, make sure the documentation is easy to read without having to zoom into the photos or documents. Your payment processor can also help you send the evidence you need to the credit card company.

 

Step 3: Second chargeback

The third step to navigate is the second chargeback, which still happens during the pre-arbitration period. Mastercard, Discover, and American Express all allow for a second round while Visa is the only card issuer to limit pre-arbitration to a single round. To be clear, this second chargeback happens after the merchant submits a response on the first chargeback and wins. The issuing bank can then push for a second chargeback to dispute the same transaction if there is new information from the cardholder, a change to the chargeback reason, or the merchant’s documentation is missing information, invalid, or wasn’t compelling.
 

In this second round of chargebacks, the merchant is again given the opportunity to accept or contest the chargeback. Much like step 2, the business then provides more evidence to fight the disputed transaction, evidence that was likely not included in the first round. This information could include the matching bill-to and ship-to addresses, proof of delivery, consumer communications, and any other compelling evidence.

Once the acquiring bank collects this information from the merchant, they represent it to the issuing bank. The bank then reviews it and makes a decision.

If the issuing bank deems the evidence supporting the merchant to be compelling, they’ll cancel the chargeback and award the disputed charge's funds to the business's merchant account. The cardholder will then be charged the transaction amount.

However, should the issuing bank find the evidence to be non-compelling, the temporary credit granted to the cardholder will become permanent. This is seen by the cardholder as a credit on their statement. At this point, the merchant loses the chargeback and forfeits the chargeback amount and also pays the chargeback fees.

Finally, if the merchant and acquiring bank still disagree with the issuing bank, or the issuing bank wants to, the arbitration process begins. This involves the credit card network directly. 
Now, let’s take a look at this arbitration process.
 

Step 4: Arbitration

The last step of the process is arbitration. As mentioned above, this directly involves the specific credit card network. During this process, the card network steps in to make a decision on the chargeback in question.

Before arbitration begins, each party can decide if they want to continue the arbitration process. This step is often intentionally avoided, because of the high fees associated with arbitration as well as drawing out the dispute process. One consideration for your business is the size of the dispute. Transactions less than a certain amount may not be worth the time and money it takes for arbitration, while higher dollar transactions could be worth the effort.

Either the issuer or the acquirer – whoever decided to go into arbitration – is responsible for notifying the card network. Once the card association has all of the evidence from both the issuer and acquirer, they’ll issue a decision.

Once the card network has made a decision, that decision is final. The chargeback dispute is then closed and the losing bank is responsible for paying the arbitration fees.

Avoiding future chargebacks

The chargeback process can be tedious and cumbersome for your business. Long, drawn-out processes are detrimental to your business and can cost you serious money. Therefore, it’s important to do what you can to prevent chargebacks, as they can affect not only your bottom line but also your access to credit or payment processing solutions. Here are a few key ways you can avoid future chargebacks:

 

  • Clearly post your business’s contact information so that customers can contact you before disputing a charge
  • Respond to your customers in a timely manner to help resolve their issues
  • Suggest dispute resolution to avoid the customer going to their card issuer
  • Provide clear return policies and refund policies so that your customers know what to expect 
As you’ve seen in this article, chargebacks are best when avoided. However, they’re bound to happen at some point. Knowing the process and making sure your business is equipped to handle the chargeback dispute process is essential in reacting to them and minimizing future occurrences. 

 


Looking for a payment processing partner that can help you navigate the chargeback process?

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