The Simple Guide to Understanding Chargebacks:  A Resource for Business’ and Payments Professionals.

The Simple Guide to Understanding Chargebacks: A Resource for Business’ and Payments Professionals.

A Chargeback, Simply Defined

A chargeback, which can also be referred to as a reversal or dispute, is when a cardholder (post purchase of a good or service) contacts their card-issuing bank and disputes the transaction.  This can happen for a wide variety of reasons, one being the card holder feels that the business did not provide the product of service committed to them, and the business is not adhering to their return or refund policy.  Chargebacks can be a valuable alternative to cardholders who feels a business has taken advantage of them, and, conversely, they can simply be a mechanism for card holders to take advantage of businesses.  Card-issuing banks can also initiate a chargeback on behalf of their cardholders for a number of different reasons including, they detect fraud, or if they see an authorization captured 30 or more days after the original date of authorization.To honest consumers, the protection that credit cards and the dispute process provides is the reason to use a credit card; while at the same time it should help to ensure that businesses maintain honest and ethical sales practices and have well published terms and conditions/return and refund policies.  In this article we will explore how the chargeback process affects cardholders and businesses, as well as discuss the best practices that a business should implement to protect itself against losing a cardholder-initiated chargeback.

The Cardholders’ Perspective of a Chargeback

As a user of Visa, Mastercard, Discover, Amex, or any other card brand, I have certain rights and protections.  Credit cards are to help me, as a consumer, make purchases, but they also afford me certain protections.  My card-issuer and issuing bank want me to be a happy customer and continue to use their card month over month.  So, if you called your card issuer by dialing the 800-number on the back of your card and inform them that a business you made a purchase with did not provide you with the service or product they promised verbally or contractually, and the business refused to return your money after you made attempts at returning the product or cancelling the service, your issuer will return your money, take your statement and documentation to support your claim, and investigate whether or not the claims are valid.  Given credit cards are there to protect the consumer, they have a tendency to be biased in their rulings,  in which case the card holder retains their money and the business loses it.As cardholders we generally have 180 days to dispute a transaction after the product or service has been delivered IN FULL.  For example lets say I purchase an extended service warranty on my car and pay $3,000 today for it, and the service contract expires in 12 months from now.  I have 6 months from the time the contract expires, because technically what I purchased took 12 months to deliver.  If at any point in that 12 months or the 6 months following, I need my car serviced and the warranty I purchased does not cover the repair as it was told to me it would, CHARGEBACK, and as a consumer I have a very good chance of winning this dispute.The ability to chargeback a sale as a consumer is a good safeguard to protect us consumers against predatory businesses.  Unfortunately, a dishonest consumer who understands how the system works will all too often take advantage of it.  It’s always in all parties best interests to resolve these disputes amongst each other.  Call the business and work out the terms of the refund or how the business can make you happy.  If it is a good business, they will do what is necessary and practical to have you as a happy customer.   If you feel that you have exhausted your options and are not satisfied with the outcome, then it is time to call your bank and let them determine who gets the money.

The Business’ Perspective of a Chargeback

For business owners, accepting credit cards is a necessary evil.  If consumers, particularly in the US, did not want to pay with credit, the majority of the time many business would not accept credit cards.  Not only are there necessary processing fees, but if you don’t accept credit cards, you will lose business to competitors who do take plastic.  Technically, when a business does takes a credit card, that money can then be taken back within a 6-month window following the delivery of products or completion of services through a chargeback.Getting a chargeback as a business owner is one of the most frustrating and expensive experiences a business can go through, as it pertains to the acceptance of credit cards.  Even if you are the most customer-centric business with the most lenient and published return policy and greatest customer service, you can and will experience a chargeback.   A chargeback to a business is like a blindside hit in the back after the whistle was blown.  You thought the play was over, then WHAM! you get hit.  Sometimes that hit can cause serious damage.  Chargebacks to a business that conducts itself appropriately (by delivering the product or service committed to the card holder, doesn’t cut corners and produces sound invoices, agreements and contracts,  and works diligently to service their customers needs and ensures satisfaction to the best of their ability,) are very un-settling.Most simply put, when a business receives a chargeback notification, the amount associated with the dispute is held back from the merchant’s next settlement and kept in a reserve.  Now, the business must produce the proper documentation to supply to the card network proving the sale was conducted properly and that the product or service purchased was delivered.  Businesses have approximately 10 days to respond to a chargeback.  Upon submission the card network will rule either in favor of the card holder or business.  If the ruling is in favor of the card holder, the business is out the product, service, and money.  A little known fact:  the business can refute the chargeback ruling and try once more to get the card networks to see it your way.  If it is still decided that the cardholder wins, you can then take the cardholder to court.  Unfortunately, the cost of pursuing legal action is far greater than the loss of capital and minimal chargeback fees.Navigating chargebacks for most business takes more time and attention than they are worth.  A good client-first credit card processor will provide the business with people and resources to help a business fight and win chargebacks.  Bottom line:  as a processor we are on your side and want our merchants to win every chargeback.

How a business can prevent and protect itself from losses due to chargebacks:

Below are best practices to implement to best protect a business from losing a cardholder dispute.  If you are a business owner, you may find some of these add extra steps or work for you and your employees.  I can assure you, they are no more work, and generally less painful, than taking a loss due to a chargeback.  Being proactive and implementing these practices provides you the best chance of protecting your business.

  • If possible, get a signature on a receipt.  If you are not swiping the card, get an imprint via a card imprinter with an imprint plate that is specific to your business.  Validate the signature with the cardholders drivers license.  A valid signature and accurate date on a transaction is the golden ticket to winning a dispute!
  • E-Commerce business:  Prior to the cardholders being directed to checkout, require them to acknowledge they have read and agree to the terms and conditions of the sale.  This guarantees that customers have been required to read and agree to the T&C’s before being allowed to make a purchase.  Keep shipping records that validate when the item was shipped and require a signature upon receipt at the cardholder’s address.
  • Itemize invoices:  As opposed to providing customers with an invoice or agreement with one lump amount, break out each service performed in as clear and precise detail as you can and show the dollar amount associated with that service.  This makes it more difficult for a cardholder to charge back all services, when only one was the issue.
  • Do not take annual fees or annual payments up front.  Always bill your customers monthly.
  • Have your return or refund policy clearly posted in your store, on your contracts, on your website, etc.  Make the return or refund policy easy to read and understand.
  • Utilize a credit card authorization form that is separate from your normal agreement.  Make sure this document has the terms and conditions attached and specifies the charges incurred.  It’s always best to take a credit card payment AFTER A SERVICE has been completed.  It is also a good practice to have a form signed by your customers after service is completed that states the service has been completed and is to their satisfaction, sign and date.  It doesn’t hurt to get a legible copy of the card holder’s driver’s license if possible.
  • Take your customers’ calls and do what you can to keep your customers happy, within reason.  Make it clear before the sale or delivery of services as to what the terms of the agreement are.  Adhere to your return and refund policy as they were presented to your customer.  Weigh out what will cost you less:  a refund and happy customer, or a chargeback, meaning lost time, products and/or fines from your credit card processor.

And In Closing…

While putting this article together, I did some research and found there were very few resources available to help businesses navigate this area of payments in general let alone any that told me something I didn’t already know.  MasterCard and Visa have extensive documents on the topic, but they are not written in layman terms.   A lack of merchant knowledge mixed with consumers who know more than businesses about the dispute process can lead to consumers exploiting the system  and committing fraud against business who do not have the measures in place to protect themselves or worse prove they are being taken advantage of.  Time and time again we are providing the advice above to honest merchants who are being taken advantage of.  Many times it takes a business to lose money and really feel the pain a chargeback can cause to put in place new practices that better protect them.  At the same time there are business that take advantage of cardholders and the utilization of a chargeback is the cardholders only defense.  This brings us to the unfortunate reality that we live in a world where a handshake or someone’s word is irrelevant by most standards.  All sides to a sale via electronic payments must do everything they can to protect themselves and their hard earned money.  Whether you are a business or consumer reading this, PLEASE take the information in here and use it to protect yourself and business and not to criminally take advantage of the system.  If you are a business and believe that some of the steps to prevent losses are too dramatic and do not coincide with how you run your business, I would strongly urge you to reconsider.My company, Transnational Bankcard, provides our merchants with resources to help protect themselves, as well as people with extensive experience in chargebacks who’s job is to review our merchants’ chargeback responses and provide suggestions as to what the business should include to increase the chances the resolution is in their favor, we even go so far in some cases to submit the merchant response to the card networks.  I would strongly encourage you to inquire with your service provider or current ISO you submit to and see what resources they provide to help protect your business or merchant portfolio (if you don’t like the response you know what to do).  Payments Industry Professionals be an advocate for your merchants and educate yourself and them.  I promise at some point sooner than later your merchants will thank you for it.I would love to hear your experiences on this topic.  Please feel free to comment to this post or connect with me directly.  Please, share this article to any businesses or industry professionals it is applicable to.  Hopefully, through further education on the topic, we can help put all parties in a better place.Lastly, you may notice that I have not cited any sources in this article.  Reason being all of the information contained within is based on my own experience and endless conversations I have had with the Risk and Chargeback personnel at Transnational.  Thank you to Martha, Kyle, Bob, Troy, Darrell and Chad for not just your insight, but for being great at what you do and sharing it with others.Cheers!


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