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The difference between a chargeback and dispute

Saturday, December 05, 2015
Inevitably, every business will at some point experience a transaction that goes amiss. Whether due to fraud, customers unhappy with a product or a provided service, or processing issues, these problems can lead to a chargeback, in which the merchant is required to make up the customer’s lost funds.

Chargebacks are often confused with disputes, which occur when a customer contests a charge to either the merchant or their issuing bank. But although disputes and chargebacks are related and often come paired together, they have important differences that business owners should familiarize themselves with.

Regardless of which option a business faces, both are not desired and can lead to loss of profits, wasted services, and a damaged reputation with customers. Because merchants who are informed about how disputes come about and how the chargeback process works are better able to avoid both issues, this article will focus on how exactly both terms work and what merchants can do on their end to protect their business and reduce instances of them taking place.

What is a dispute?

Typically, disputes precede chargebacks, so it’s a good idea to start by breaking them down first.

Disputes are an action performed by cardholders when they contact their issuing bank to contest a transaction. The reasons they might contest a purchase could range from suspicious behavior, a belief that fraud took place, inadequate service being given, an incorrect amount charged, or ordered products never arriving.

Cardholders are encouraged to first contact merchants when faced with a charge they want to contest. This gives merchants a chance to resolve the transaction, offer refunds, and offer a more personal experience to strengthen the relationship between them and the customer.

But this is often not the case, and soon after reviewing card statements and finding a charge they think is suspicious, the majority of consumers will reach out to their bank, and this action starts the chargeback process.

What is a chargeback?

As mentioned earlier, a chargeback is when a merchant is required to return funds to a cardholder. This takes place after an issuing bank completes an investigation on a disputed purchase and finds the transaction fraudulent. In this way, chargebacks can be seen as a result of a process, or, more specifically, an investigation working toward determining whether or not a transaction can justly be deemed fraudulent and warrant issuing a chargeback upon a merchant.

The timetable for the investigatory process can range from days to weeks or even months. While issuing banks are given 30 days by the Federal Change Commision (FCC) to complete their investigation, most banks seek to finish within 10 days after a disputed charge is reported. Banks can request extensions if an investigation grows more complicated or demands more time.

In this event, banks will often send out a provisional credit to the customer to ease over tensions as the investigation ensues (this is typically only for credit card charge disputes). If this occurs, then merchants who are issued chargebacks will reimburse the cardholder’s bank the provisional credit amount.

Chargebacks vs. refunds: While at first chargebacks and refunds might seem like the same thing, the difference is monumental: merchants don’t receive back any products sent out, services completed, or hours or costs spent in preparation.

This is why it’s so beneficial for merchants to inform customers that in the event of any problems, whether they occur in payment processing, dissatisfaction with a product or service, or anything else, that they reach out to you and that you’ll be happy to resolve the issue. Chargebacks are never desirable, whereas with refunds, there’s at least the potential to break even.

Chargeback dispute: This is a largely decommissioned term that was previously used to refer to when merchants appealed a bank’s chargeback decision and introduced new evidence and potentially had an investigation repeated. This is now referred to as representment, and will be discussed in more detail later.

Chargeback ratio: This term refers to the number produced after dividing the number of chargebacks a merchant received in a month by the number of total transactions made across a month.

This ratio affects how much merchants are charged by their credit card processor in fees in the event of chargebacks, and can even make or break whether a processor wants to work with your business.

Combined, the two terms create a system like this:

  • A customer reaches out to their card issuer due to believing a charge is suspicious or unauthorized by them. They might also contact their bank due to not receiving products or from inadequate service. This is the payment dispute.
  • The customer’s bank then receives the claim and assigns it to a member of their investigation department. This member will act as a representative for the bank and is trained in chargeback procedures and uncovering fraudulent behavior.
  • The investigator works alongside the merchant and the customer to gather all evidence and information about the charge. They’ll also work with the credit card networks to gather additional details that often prove crucial.
  • The investigator reviews all the information available to determine whether or not the cardholder’s claim is justified.
  • The investigator makes a decision and either issues a chargeback to the merchant’s issuing bank or determines the charge is authentic and no chargeback is required.

What can merchants do to protect themselves?

Businesses have various options and tools at their disposal to reduce disputed transactions and therefore minimize potential chargebacks. These range from preemptive practices, to fraud prevention tools offered by payment processors, to the ability to appeal a chargeback and defend your case with your own submittable evidence.

Practice precautionary fraud detection: Instilling preemptive tactics in all facets of your business can go a long way in stopping disputes before they have the chance to form (check out our article What to do if you suspect credit or debit card fraud by a customer).

Develop practices to avoid friendly fraud: Friendly fraud refers to customers who file payment disputes without a credible reason to do so. While at first it may seem like these disputes will simply be ironed out during a banks investigation period, this isn’t always the case if there’s not enough evidence to prove the dispute uncredible.

For this reason, it’s in every business’s best interest to:

  • Collect and secure photographs or emails that prove that the individual receiving services or goods is also the rightful card holder.
  • Secure proof that a product or service was delivered or provided.
  • Keep a history of any previous purchases made by the cardholder to show evidence that your business is not unfamiliar to the card holder or outside of their typical payment habits.

Remember, even if you appeal a chargeback and win, it still damages your chargeback ratio. For this reason, it’s in every company’s best interest to supply all the pertinent information above earlier rather than later so as to not have the dispute transform into a chargeback.

Use fraud prevention tools offered by your payment processor: Many payment processors offer anti-fraud applications. With Heartland’s payment gateway, you can choose to have undesired Address Verification Service (AVS)/Cardholder Verification Value (CVV) result codes automatically reversed. An AVS is the billing zip code attached to the card holder’s credit card account. The CVV are the three (or four with American Express) digit codes found on the back of credit or debit cards. If a suspected fraudster cannot provide the code, the payment will automatically be reversed.

Furthermore, working in conjunction with a team of experts in fraud detection and chargeback protocol is crucial when faced with numerous disputes every month as they can occur for various reasons and quickly prove overwhelming. Team up with experts and let them work with you so you can focus on other business decisions.

Encourage customers to come to you first: It’s almost always in your best interest to resolve transaction issues with your customers separately from the customer’s issuing bank. This can make all the difference in receiving a refund rather than lost funds, a strengthened relationship with your clients rather than a damaged one, and a better chargeback ratio.

Every business should consider reminding their customers to contact them if there are any problems, questions, or payment issues. They can do this during the payment process, whether online or offline, or through paper receipts or online order/payment confirmations.

Representment (appealing a chargeback)

If merchants disagree with an issuing bank’s chargeback determination, they can appeal the chargeback and have the investigation repeated. Furthermore, the merchant can introduce new evidence for the bank to use to determine the veracity of a charge. This process is known as representment.

If a chargeback is determined by the bank yet again and the merchant still disagrees with their decision, then the card network will conduct their own investigation and work as a third-party mediator between the bank and merchant. The decision the card network makes will be final and no further appeals can be filed.

Merchants will want to compile and secure the following data to strengthen their representment case:

  • Order forms
  • Tracking numbers
  • Confirmations of deliveries
  • Any and all recorded conversations between them and the cardholder
  • Receipts
  • Documentation of any previous payments made by the customer that were not contested
  • Photographs of products or services provided

Closing thoughts

Chargebacks are never desirable, as even ones appealed and dismissed count against a business's chargeback ratio and raise fees. Chargebacks can also result in lost funds, a damaged reputation, and a great deal of frustration.

For this reason, it’s best to invest in both preemptive to stop disputes from occurring and blazing the path for chargebacks to form. These can include encouraging customers to work with you to resolve transaction issues and taking advantage of fraud prevention tools supplied by your payment processor.

Businesses should also team with payment experts to defend themselves against illegitimate payment dispute claims or unfounded chargebacks. While merchants should remember they have the right to appeal bank’s decisions, they should take advantage of this option only when they have the best team in their corner and the proper evidence at hand to fight for their appeal.

Interested in working with a payment processor who can help you prevent and work through payment disputes?

Heartland helps nearly 1,000,000 entrepreneurs make and move money, manage employees, and engage customers with human-centered technology solutions that allow them to rise above the daily grind and lead their businesses into a brighter future. Learn more at heartland.us.