Chargebacks explained
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Chargebacks explained
Explanation of the occurrence of a chargeback, with a detailed breakdown by type and prevention options

Overview

Glossary
A chargeback is the process by which the issuing bank debits the merchant’s account to return it to the cardholder.
Chargeback
is a process by which an issuing bank debits the merchant’s account to return it to the Glossary
The cardholder is the person to whom the bank has issued a particular credit or debit card.
cardholder
. All schemes have their own specific rules.

It should be noted that chargebacks are dangerous because their acceptable monthly number can be limited, and exceeding the established norm will lead to the cancellation of your trading account.

success
Every credit/debit card provider, whether it’s Visa, Masterсard, American Express Company (Amex), or any other, has certain chargeback thresholds, and exceeding this threshold has several consequences:
  • Your payment processing costs will increase significantly
  • You are enrolled in a remedial program and may pay additional fines
  • You will have to bear these costs for several months after the issues are resolved, and you are reclassified as a low-risk merchant

Explanation

Ultimately, chargebacks are disputes between the merchant and the cardholder, who is not always the customer. The merchant’s acquiring bank handles some aspects of the chargeback, while the cardholder’s issuing bank acts as a judge in deciding the outcome of the dispute. Unlike a traditional refund, where the customer and merchant work together to resolve a problem, a chargeback allows the customer to bypass the merchant and get a refund directly from the issuer.

A chargeback occurs when the issuing bank cancels a card transaction because of:

This includes transactions where an available EMV chip was not used for authorization, where stolen payment card data was used in a card-present or card-less environment, and transactions reported by the Visa Fraud Monitoring Program.

Processing error disputes can include:

  • late presentments
  • incorrect transaction codes, currencies, account numbers, or accounts
  • duplicate processing, duplicate payments involving payment by other means
  • and transactions containing invalid data
This category tends to deal with issues that can crop up between the customer and the merchant, such as merchandise or services not received, recurring transactions that the cardholder attempted to cancel, merchandise that is counterfeit or defective, merchandise that does not match the product description, failure to process a refund credit, and other merchant misrepresentations.
Disputes in this category include transactions processed without authorization or with a declined authorization.

Types

  • 1st Chargeback
    The customer queries a transaction with their card issuer by creating a chargeback.

    You can dispute the chargeback request at this stage, but you must prove that the transaction is valid and not fraudulent, that the user is verified, and that you provided the service. Kindly note that chargeback there is a processing fee for each chargeback. As for the commission, please contact your account manager. You must monitor these disputes and respond to them as soon as possible.

  • 2nd Chargeback
    The issuer declines your defense and opens a pre-arbitration, which Chargebackhit will review.

    The card issuer rejects your objections to the cardholder’s application based on the evidence provided. At this stage, you have two options: accept the chargeback request and dispute the chargeback request for the second time - enter pre-arbitration. If the merchant or cardholder disputes the transaction a second time based on new evidence, the issuing bank can sue for a second chargeback.

  • Arbitration
    The issuer/cardholder disputes the merchant’s second presentment, and the case goes to the issuer network (Visa, Mastercard, etc.) for arbitration.

    At this stage, the parties involved - the bank, the cardholder, or the merchant - cannot resolve the dispute independently. Therefore, they ask the representative of the card scheme/network representative to intervene and decide (Visa, Mastercard, Discover, etc.).

Flow

The chargeback flow includes steps and may vary slightly depending on which banks and card networks are involved. The following parties are involved in the process: the cardholder, the cardholder’s issuing bank, the merchant, and the merchant’s acquiring bank. If the merchant has hired a chargeback representative, they will also be involved.

The chargeback flow begins with the merchant deciding to either accept the chargeback or fight it through, representment - when the issuing bank reviews the merchant’s evidence and either cancels or supports the chargeback.

  • When a cardholder disputes a transaction with their issuing bank, the bank decides whether the customer has grounds to claim a chargeback.
  • If the chargeback request is granted, the bank notifies the acquiring bank, also known as the merchant’s bank, and debits the merchant’s account.
  • The merchant can either accept the chargeback or fight it by resubmitting the payment along with a rebuttal letter and the necessary evidence to rebut the claims (this process is called representment).
  • The issuing bank will review the new evidence and decides. If they decide in favor of the merchants, the funds will be returned.
  • At this stage, any party dissatisfied with the decision can challenge it by initiating pre-arbitration proceedings. Most often, this happens when the issuing bank decides in favor of the merchant, but then receives new evidence that casts doubt on this decision.
  • If neither party admits liability during pre-arbitration, the chargeback will proceed to arbitration. Here, the card network examines the evidence and makes a final decision, which cannot be further appealed. The losing party will be required to pay hundreds of dollars in Glossary
    Chargeback fees are the fee merchants must pay when a chargeback occurs.
    fees
    .

By default, merchants are liable for chargebacks. This means that when a chargeback occurs, the funds are withdrawn from the merchant’s account and returned to the cardholder. Although both the merchant and the cardholder may be victims of Glossary
Fraud occurs when a customer disputes a debit from their account under false pretenses.
fraud
, the merchant pays for it.
With each chargeback, the merchant loses the transaction amount, as well as all goods and services that have already been provided. In addition, merchants face chargeback fees from their acquirers and processors. The chargeback rate is tracked by the acquirer, and merchants that exceed the allowable threshold may be subject to severe penalties.

If the chargeback rate exceeds certain thresholds set by card networks and other financial institutions they do business with, they may face fines, additional chargeback fees, and even termination of their trading account.