By Andrew Reszka, Regional Head APAC
The convoluted process for chargebacks makes it difficult for merchants to understand them from the very start. A ‘chargeback’ refers to a customer’s transaction dispute in which the merchant must refund the value of the goods or services purchased. It is a reversal of a transaction, meant to serve as a form of consumer protection from fraudulent activity, and is essentially a demand made by a credit card issuing bank to a merchant to cover the loss on a fraudulent or disputed transaction. What makes this process difficult is that each credit card issuing bank approaches chargebacks in their own unique way.
The Chargeback Process
When cardholders dispute a transaction with their card-issuing bank, the merchant’s account is debited with the amount of the transaction. The merchant must then provide evidence to disprove the transaction was fraudulent. If the card-issuing bank considers the evidence strong enough, it returns the funds to the merchant’s account. If the cardholder still believes the transaction was fraudulent or wishes to continue the dispute, they can initiate a second chargeback. This entire process can take up to six months or more to complete per transaction.
This is how the chargeback process works in a nutshell:
Step 1 – The Customer Disputes a Purchase
• The card-holding customer contacts the card-issuing bank and disputes a transaction. The cardholder enjoys this right as a result of the zero-fraud guarantee made by each card issuer.
Step 2 – The Card Issuing Bank Reviews the Claim
• The card-issuing bank reviews the disputed transaction to determine whether or not to send the chargeback to the card network. If the dispute is not valid, the process ends. If the dispute is valid, the process continues.
Step 3 – The Customer Is Reimbursed
• The issuing bank provides an immediate credit to the customer for the disputed amount, and the networks initiate the transfer of funds from the merchant’s account back to the card issuing bank.
Step 4 – Chargeback Is Sent to the Card Network
• The card-issuing bank submits the chargeback to the card network, which passes it to the acquiring bank. There are fees incurred here that are passed on to the merchant.
Step 5 – The Merchant Receives the Chargeback
• The card-issuing bank notifies the merchant of the dispute. This notification typically contains instructions for the merchant to gather compelling evidence, should they decide to respond to the claim.
Step 6 – To Respond or Not to Respond?
• Once the merchant knows the chargeback has been filed, they have a choice on whether or not to submit a response. If the choice is to not respond, the process ends and the customer wins the dispute. Should a merchant choose to respond, they must gather enough evidence relating to the transaction and the customer and create a response letter, which is then submitted to the card issuing bank.
Step 7 – The Card-Issuing Bank Decides
• The issuing bank reviews the chargeback claim and the evidence provided by the merchant. The merchant wins if the evidence is sufficient and compelling. The customer wins if the evidence is deemed as insufficient and non-compelling.
Needless to say, this process is not as simple as seven easy steps. The fact is that often chances of winning certain disputes are slim, without even considering the time and cost involved. Despite many merchants not knowing what a chargeback is or how to respond, they face the burden of proof in this process. In addition to a worsening chargeback ratio, mounting penalties and fees, the choice not to respond to a claim can leave the merchant with the loss of both revenue and customer. The complexity of this process makes it essential for merchants to seek expert, professional help.
Faced with just one or two chargebacks, a simple solution can help to recover lost revenue. But when merchants start dealing with several claims, they have to allocate valuable resources to deal with chargebacks instead of concentrating on their business. The payments industry often uses technical jargon that is difficult to understand, and additionally, merchants won’t necessarily have the access or knowledge needed to affect change. Consider outsourcing this complicated, lengthy process to professionals. Let us help you boost your profits.