What happens if you lose a chargeback

Saturday, January 03, 2015

In an ideal world, every transaction your business processes is completed with no issues. But, in reality, every business will have to deal with a fraudulent purchase, unhappy customer, or processing issue at some point.

When a customer disputes a transaction, it initiates what’s commonly referred to as “the chargeback process”. This process includes an investigation by a card issuers fraud department, gathering of evidence related to a transaction, and reaching a verdict of whether the merchant or the customer will be responsible for covering the cost of the disputed transaction.

Because virtually every business will eventually encounter a disputed transaction, this article will focus on breaking down exactly how the chargeback process works, what it means for your business when you lose, and what options merchants have to appeal the chargeback.

What is a chargeback?

A chargeback is when a merchant is required to return funds from a disputed transaction to a customer. Chargebacks are issued to merchants by card issuing bank’s investigation teams. These investigations are initiated after a customer disputes a purchase. Investigation teams compile as much evidence of the disputed transaction as possible and use this information to determine whether any fraudulent behavior occurred.

Being issued a chargeback means losing money and potentially forfeiting products or suffering unpaid services. Additionally, a pattern or habit of being issued chargebacks could increase payment processing fees and hurt your business’s reputation with customers. Chargebacks are never preferable for merchants, and it’s in every business owner's best interest to set up various precautions to avoid their occurrence.

What is the chargeback process?

The exact process looks like this:

  • A customer reaches out to their card issuer, 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.

Investigation teams work toward determining whether or not a transaction can justly be deemed fraudulent within various timeframes. 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 Commission (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 complicated or demands more time.

For this reason, chargebacks can be seen as part of a process that’s in constant flux. New evidence can be discovered, cardholders can withdraw their dispute, or if the transaction fits into a larger scamming pattern, more significant authorities could get involved and prolong the investigation.

What happens if you lose a chargeback?

Losing a chargeback has multiple consequences; the most immediate and obvious is the merchant having to recoup the customer’s lost funds. While this will typically take the form of the merchant reversing the payment or transferring funds to the customer, oftentimes banks will have sent out a provisional credit to customer to ease over tensions as the investigation carries out. In this event, merchants will reimburse the cardholder’s bank the provisional credit amount.

Another consequence of losing a chargeback is an increased chargeback ratio. A chargeback ratio greater than 0.01 or 1% could result in increased credit card processing fees and cause processors to lose trust in your business and question your commitment to payment security. To find out your business’s chargeback ratio, divide the number of chargebacks you’ve received in a month by the number of total transactions made across a month.

Additionally, a pattern of transaction disputes and chargebacks can hurt your reputation with your consumer base. The chargeback process can take weeks to resolve. During this time, it’s likely customers could be complaining to friends and family about your business if you don’t communicate with them clearly and work in tandem with them throughout the process. But suffering too many disputed transactions and working one-on-one with multiple customers can quickly become overwhelming. For this reason, chargeback prevention should be at the forefront of every merchant.

Chargeback prevention

Encouraging customers to go to you first: Resolving transaction issues with your customers separately from the customer’s issuing bank is almost always preferable. Not only does solving the issue with them increase trust between you and the customer, but it can also result in a refund being enacted rather than a chargeback, letting you at the very least break even and not suffer an increased chargeback ratio.

Remind and invite your customers to come to you with any questions, concerns, or payment problems. This can be accomplished through reminders left on offline and online receipts, email confirmations, or simply communicated face to face at checkout.

Be on the lookout for suspicious behavior: Train your staff to spot telltale signs of fraud and establish protocols on what to do if suspicious behavior is encountered.

Use fraud prevention tools your payment processor offers: Many payment processors provide anti-fraud applications. With Heartland’s payment gateway, you can 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.

Develop practices to avoid friendly fraud: Not every payment dispute is filed in good faith or with a credible reason for doing so. This is known as “friendly fraud”, and while it may be tempting to think that it will be easily uncovered during the chargeback investigation, this isn’t always a guarantee. Knowing and proving are two separate things, and merchants can be issued chargebacks in the face of friendly fraud due to insufficient evidence to refute the disputed transaction.

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 cardholder or outside of their typical payment habits.

Can you appeal?

Merchants can appeal chargebacks and have investigations repeated with new evidence introduced. This form of appeal is known as representment.

If, after this second investigation, a chargeback is still issued and the merchant still disagrees, they can appeal again. In this event, the card network will conduct its investigation and work as a third-party mediator between the bank and merchant. The card network's decision 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
  • 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

It’s important to note that winning a chargeback appeal still increases your chargeback ratio. Therefore, merchants should plan to win the transaction dispute in the first round and provide investigators with all pertinent evidence and transaction information from the onset.

Closing thoughts

Chargebacks are bound to occur, oftentimes for reasons outside of your control. For this reason, staying informed on the chargeback process and what you can do on your end to argue your case can go a long way in keeping your chargeback ratio low, strengthening your relationship with your payment processor, and saving you money and time.

Chargeback prevention should be every merchant’s first antidote to solving transaction disputes. Encouraging customers to contact you to resolve any payment or service issues will help avoid the chargeback process and also strengthen your reputation with customers.

Lastly, working with a team of experts in fraud detection and the chargeback process is crucial. As your business grows, so can the number of disputed transactions, quickly proving overwhelming and costly. Team up with experts and let them work with you so you can focus on other business decisions.


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

Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us