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Chargeback Guide

Last changed: Tue, 28 Mar, 2017 at 11:47 AM
  1. What is a chargeback?

A chargeback is a reversal of a financial transaction, generally used when a customer(the cardholder) disputes a charge on her credit card bill.

Usually, chargebacks of customers will happen for one of several reasons:


  • Customer dissatisfaction, such as a product or service that was not provided or not as described
  • A clerical error, such as a customer being double-billed or being billed for an incorrect amount
  • The customer did not recognize the charge on his statement, especially if the merchant name that appears on his bill differs from the actual name of the store
  • Fraud, when a customer claims he did not authorize a purchase or a purchase was made as a result of identity theft

Remaining chargebacks result from technical and fraud-prevention issues. Technical and fraud-prevention chargebacks will be further explained according to the chargeback codes.

Chargebacks are usually raised within 120 days of the date when the service was to be provided or the product delivered. The complete chargeback process can take up to 75 days.

Whenever a chargeback is initiated, a merchant will receive a code from its issuing bank that gives a reason for the dispute. Once a customer has disputed a charge, a merchant's acquiring bank will begin going through a specific procedure to resolve the issue.


2. The chargeback process

After a transaction is made, a payment card statement is issued. Normally this is the end of the credit card transaction, but maybe an optional retrieval request is available for the customer. Otherwise the customer has 120 days for a first chargeback.

If a customer makes use of the option for chargeback, a first chargeback is made. Once a customer initiates a chargeback, the issuing bank sends the transaction in question back to the merchant's acquiring bank, hereby 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.

After the first chargeback, the merchant has a 14 days period to plead its case. The merchant has to provide supporting documentation of the chargeback’s issuance to the acquiring bank within these 14 days. 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.

If the merchant receives a notification regarding a pre-arbitration (VISA) or second chargeback (MasterCard), the transaction has been disputed further. At this stage, the issuing bank can either accept the second chargeback or reject the second chargeback and send the transaction to the card association for final arbitration. If the issuing bank rejects the second chargeback, the merchant has 7 days to inform the acquiring bank about the continuation of the refute of his case.

If the case is still not solved, the card association takes care for the final arbitration. The outcome of this final arbitration by the card association is the final decision.

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!


3. Prevent chargebacks

With the cost involved with chargebacks, merchants should better take steps to protect themselves against chargebacks. Some simple proactive steps that can help prevent chargebacks are:

Deliver excellent customer service

  • 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.
  • Easy Customer Service: 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.
  • 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.
  • Communication: Communicate with customers regarding any questions of concerns.

Apply security measures

  • Fraud Checks: Perform fraud checks on cardholders before processing orders.
  • Swipe Cards When Possible: Card-present businesses can prevent chargebacks by requiring that cards be swiped, and get a signature whenever possible.
  • Address Verification Service (AVS): The anti-fraud tool AVS compares customer's name, address, and zip code with the information on file at the credit card company. In case of a mismatch, this can indicate that transactions should be declined or that you should proceed with caution and require additional information. In case of a match, the likelihood of a valid transaction is greater.
  • CVV2: CVV2 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.
  • Verified by Visa & MasterCard SecureCode: To prevent fraudulent online purchases take advantage of Verified by Visa or MasterCard SecureCode, both programs that require customers to enter a password when using a card online.

4. Accept or challenge

Accept the chargeback, if:

  • The customer is correct
  • Merchant accepts liability
  • A refund should have been made
  • The risk of the involving expenses is not worth the challenge

Challenge the chargeback, if:

  • The merchant has enough evidence to support the case in disputing the customer’s claim
  • The merchant has enough evidence of the products or services being delivered

 

5. Challenging a chargeback

Provide supporting documentation to Magnius within 14 days of the chargeback’s issuance:

  • Signed delivery slips or Proof of Delivery (POD)
  • Email communication with the cardholder
  • Signed Terms and Conditions
  • Signed contracts
  • Transcripts of recorded telephone conversations (These might be acceptable if the cardholder was aware that the call was being recorded)
  • Proof of identity of the cardholder

When sending supporting documentation to Magnius, make sure that:

  • The Acquirer Reference Number (ARN) from our chargeback report is present
  • The documents are in .tiff format
  • All documentation is in English or accompanied by an English translation

Note: Never include full card details on the documentation sent for representment


6. Chargeback Fraude

One of the fastest growing types of chargebacks is what's known as "friendly" fraud, when consumers purchase products with the intent of initiating a chargeback in order to get free products.

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. This type of fraud is on the rise, and is prevalent for card-not-present transactions.

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.


7. Costs of lawsuit

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

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.

The costs for the merchant if the card scheme’s arbitration committee decides the merchant is liable consist of the disputed amount and a €540,00 handling fee. The costs for the merchant if he accepts liability before ruling consist of the disputed amount and a €270,00 handling fee.


8. Chargeback abbreviation/codes

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

Abbreviations

  • CBK1: First Chargeback
  • CBK REV: Chargeback Reversal
  • CE: Compelling Evidence
  • REP: Representment
  • PComp & Comp: Pre-Compliance & Compliance
  • PArb & Arb: Pre-Arbitration & Arbitration
  • RRQ: Retrieval Request
  • CBK2: Second Chargeback & Member Mediation

9. Magnius Support

If the merchant encounters complication, a team of experts from Magnius is available to fully support the merchant in the chargeback process. For questions about the chargeback process, the merchant can contact Magnius: info@magnius.com