Chargeback Explained: Credit Card, Debit & Visa Examples

Chargebacks are an unfortunate but necessary reality of doing business online. On the one hand, chargebacks hold you, the merchant, to a higher standard and help protect consumers from fraud. However, on the other hand, chargebacks also come at a severe cost, leading to lost merchandise and seriously impacting your profits. They can also lead to your merchant account getting shut down, terminating your ability to accept payments.

At Pay.com, we realise the subject of chargebacks can be confusing, as many factors have to be taken into account. That said, understanding what chargebacks are, why they occur, and how they work is vital for every business owner, let alone merchants who rely on card payments. This post will cover everything you need to know about chargebacks so you can take the proper steps to prevent and dispute them.

What is a chargeback?

A chargeback is an act initiated by a cardholder to dispute a debit or credit card charge they believe to be illegitimate. When a chargeback occurs, a forced reimbursement of a transaction is initiated by the card issuer. Chargebacks can happen at any time after a sale occurs; however, they are most common within the first 120 days.

How does a chargeback work?

The chargeback process is set and managed by card networks and must be followed by financial institutions and merchants. The parties involved in the chargeback process include:

• The cardholder
• Issuing bank
• Acquiring bank
• Card Network
• Merchant

The chargeback process differs slightly depending on the card network. However, the general process looks something like this:

1. The cardholder notifies their bank of a transaction they would like to dispute.
2. The cardholder’s bank reviews the cardholder’s claim.
3. If valid, the issuing bank sends the claim to the merchant’s acquiring bank.
4. The acquiring bank notifies the merchant about the claim. It also informs the merchant that the transaction amount has been debited from their account to reimburse the cardholder. 
5. If the merchant wishes to fight the chargeback, they are provided forms to fill out and return within 7-10 days to explain their side of the dispute. 
6. The merchant then sends back the completed forms to the acquiring bank, which passes them onto the cardholder’s bank and sends the merchant a provisional credit for the chargeback amount. 
7. The issuing bank reviews the evidence submitted by the merchant. Merchants deemed to have fulfilled the transaction correctly keep the credit, while the cardholder’s credit gets withdrawn. If the issuing bank rules in favour of the cardholder, they will keep the credit, and the merchant’s credit is withdrawn.

What causes chargebacks?

There are numerous reasons a customer might dispute a credit or debit card transaction. Unfortunately, not all of them are legitimate. Here are some of the most common:

• A cardholder was the victim of a fraudulent purchase.  
• A cardholder is overcharged for a product or service.  
• A merchant failed to deliver the goods or services.  
• A merchant misrepresented a product or service.
• A cardholder is not satisfied with a product or service. 
• A cardholder is charged after a cancelled subscription or fails to cancel a subscription.
• A cardholder was accidentally charged twice for a purchase.
• A cardholder disputes a transaction for an illegitimate reason to keep goods or services without paying - aka Friendly fraud.

How to handle chargebacks (step by step)

As a merchant, you should always be ready to respond to chargebacks because they are bound to happen regularly. One of the most important things to handle chargebacks efficiently is staying organised and having good record-keeping practices. That way, if a customer disputes a charge on their card, you can be ready to fill out the required forms and respond as quickly as possible as soon as you’re notified of a claim. Without good record-keeping practices or the authenticating information necessary at the time of purchase, handling chargebacks can become extremely cumbersome and time-consuming. It’s also essential to know why the chargeback occurred in the first place. To do this, you’ll need to understand the reason code, which is attached to the transaction by the issuing bank. However, as a merchant, you also need to understand that you can’t afford to simply accept chargebacks. You’ll need to defend any valid transactions and recover lost revenue, requiring you to follow the chargeback representment process. Chargeback representment is a regulated process for responding to unwarranted chargebacks. 

To successfully fight a chargeback, you’ll need to:

• Collect compelling evidence that is relevant based on the reason code provided and specific card scheme requirements. This can include things like a sales receipt, customer communications, and delivery confirmation.
• Devise a chargeback rebuttal letter that includes a summary of the evidence provided and an explanation of how you can prove that the transaction in question is valid.
• Submit the representment within the required timeline.

All of this can be done in-house if you have the resources and expertise to do so. If not, it’s advised to hire a third party that specialises in chargebacks. All merchants should also use a payment processor that provides protections against chargebacks. If you’re interested in how other merchants manage chargebacks, here are some interesting facts. According to the 2021 Payment Risk Mitigation Survey by Worldpay and Forrester Consulting, in-house teams manage chargebacks for half of the merchants surveyed with external teams managing chargebacks for 31% of global merchants surveyed. 18% report using a hybrid model that combines internal teams and third-party providers. 

Credit card chargebacks

Credit card chargebacks are an excellent defense for cardholders and are often successful when filed. In fact, the credit card chargeback process is now so easy that more and more merchants are reporting customers are using chargebacks in place of refunds. 80% of merchants surveyed have also reported experiencing an increase in friendly fraud attacks over the past three years. The old-fashioned idea that chargebacks take a long time to process is a relic from a bygone era. In today's digital world, strict deadlines determine how long consumers, banks, and merchants have to initiate or respond to the chargeback process. These deadlines vary depending on the specific card network you're dealing with.

Visa card chargeback

• Cardholders have 120 days from the day after the transaction date to file a chargeback for most issues.
• Merchants have 30 days to respond and fight a chargeback. 
• Merchants have 10 days to file for arbitration.

Mastercard chargeback

• Cardholders have 120 days from the day of the transaction to file a chargeback for most issues.
• Merchants have 45 days to respond and fight a chargeback. 
• Merchants have 45 days to file for arbitration.

American Express chargeback

• Cardholders have 120 days from the day of the transaction to file a chargeback for most issues.
• Merchants have 20 days to respond and fight a chargeback. 

Merchant rights

While consumers have a powerful weapon to use in chargebacks, merchants are not defenseless. Merchants have rights within the chargeback process and can dispute chargebacks whenever they see fit. Even though fighting a chargeback can take time and resources, it is a fundamental right that all merchants should utilise to recover lost revenue and defend themselves against dishonest customers. However, there are also some other vital rights every merchant should know about.

• The total for all chargebacks for a transaction cannot exceed the original purchase amount.
• If a customer files a chargeback claim for late delivery, they must first try to get a return. A chargeback is only possible if both the return and refund are denied.
• Returned items are not eligible for chargebacks until fifteen days after the return is received. This enables merchants to have enough time to issue a refund.

Debit card chargebacks

There are several critical differences between debit card chargebacks and credit card chargebacks. One of the most important is that debit card transactions take cash straight from a person’s bank account, while credit card transactions simply record a debt. There is also a difference in the time it takes for a customer to receive a reimbursement. Refunds usually take around 10 days to process debit cards, compared to 1-2 days for credit cards. However, if a debit card dispute happens to enter into the chargeback process, merchants will have to follow the same steps to fight a claim as they would when dealing with a credit card chargeback. Just like credit card chargebacks, debit card chargebacks are also something every merchant will have to confront. The best way to prevent or reduce debit card chargebacks from occurring is to be proactive and clearly communicate. This means having a high level of customer service that enables customers to easily get in contact. Merchants should also share their return, exchange, and authorization policies with customers.

Visa card chargeback

When a Visa cardholder files a dispute, a transaction is turned into what is known as a Visa dispute. Visa disputes (aka chargebacks) are governed by rules set out by Visa. The chargeback process includes several steps.

• The issuing bank credits the cardholder’s account and notifies the merchant’s acquiring bank about the chargeback. 
• The acquirer notifies the merchant and debits their account for the transaction amount, along with any chargeback fees.
• If a merchant wants to fight a claim, they must provide evidence to the issuing bank to prove the chargeback is illegitimate. If accepted, the chargeback is reversed.

Visa chargeback reason codes

Each chargeback claim is given a reason code which helps explain to merchants the reason for the dispute. These codes fit into four categories:

(10) Fraud: 

For transactions where no EMV chip was used, stolen payment card credentials were used or transactions were flagged by the Visa Fraud Program.

(11) Authorisation:

For transactions without the appropriate authorisation or where a Card Recovery Bulletin was ignored.

(12) Processing Errors

For transactions with incorrect transaction codes, account numbers, and a range of other issues such as duplicate payments.

(13) Customer Disputes:

For transactions where services were not received, a product or service was not as advertised, or where a product is defective or counterfeit, among other reasons.

Mastercard chargeback

When a Mastercard holder files a dispute, the following chargeback process occurs according to rules set out by Mastercard. It should be noted that this process is different to Visa.

First Presentment: 

This occurs when the transaction amount is taken from the cardholder and credited to the merchant account. If the cardholder wants to dispute the transaction, the issuing bank may ask for more information from the merchant.

Chargeback:

The issuer will initiate a chargeback if the merchant fails to respond or provide compelling evidence that proves the transaction’s validity. If a chargeback occurs and the merchant does not choose to fight it, the total transaction amount is withdrawn from the merchant’s account and credited to the cardholder.  

Second Presentment:

Suppose a merchant chooses to fight the chargeback. In that case, they will need to provide evidence that proves the chargeback is invalid and send it to the acquirer. The acquirer can then process the second presentment if they believe the issuer’s chargeback didn’t meet the requirements of the chargeback reason code and can provide evidence that addresses the original reason for the dispute.

Pre-arbitration (formerly Arbitration Chargeback):

The issuer needs to be convinced before reversing a chargeback. If not, the issuer moves the case to pre-arbitration. At this stage, the merchant can simply accept the or continue to fight the chargeback by presenting new evidence. The issuer then decides to reverse the chargeback or move to arbitration case filing.

Arbitration Case Filing:

When an arbitration case is not resolved between the issuer and the acquirer (cardholder & merchant), Mastercard steps in to determine final responsibility for the dispute. 

Mastercard chargeback reason codes

Each chargeback claim is given a reason code which helps explain to merchants the reason for the dispute.

4837 No Cardholder Authorization

4840 Fraudulent Processing of Transactions

4849 Questionable Merchant Activity

4863 Cardholder Does Not Recognize—Potential Fraud

4870 Chip Liability Shift

4871 Chip/PIN Liability Shift

4807 Warning Bulletin File

4808 Authorization-Related Chargeback

4812 Account Number Not On File

4834 Point-of-Interaction Error

4831 Transaction Amount Differs

4842 Late Presentment

4846 Correct Transaction Currency Code Not Provided

4850 Installment Billing Dispute

4999 Domestic Chargeback Dispute (Europe Region Only) None Point-of-Interaction Error

4853 Cardholder Dispute

4841 Canceled Recurring or Digital Goods Transactions 

4854 Cardholder Dispute—Not Elsewhere Classified (U.S. Region Only)

4855 Goods or Services Not Provided

4859 Addendum, No-show, or ATM Dispute

4860 Credit Not Processed

How can Pay help reduce chargeback disputes?

Pay.com enables merchants to increase conversions with a secure, fraud-resistant checkout that prevents certain fraud chargebacks and brings your business fully in line with the latest PSD2 legislation. With a 3D-secure component, our system decides how risky each transaction is based on the amount being spent and whether the shopper is known to your store. Regular/familiar customers and those spending an expected amount are “exempted” from extra security measures. Only unfamiliar customers, large sums, and suspicious behavior is subject to more stringent checks. To find out more about how Pay.com helps protect you from fraud-based chargebacks - sign up now!

FAQ

How does a chargeback work?

The chargeback process is set and managed by card networks and must be followed by financial institutions and merchants. In general the process starts by the issuing bank crediting the cardholder’s account and notifying the merchant’s acquiring bank about the chargeback. The acquirer then notifies the merchant and debits their account for the transaction amount, along with any chargeback fees. If a merchant wants to fight a claim, they must provide evidence to the issuing bank to prove the chargeback is illegitimate. If accepted the chargeback is reversed.

Is a chargeback a refund?

No. A chargeback involves a customer contacting their bank to take money back for a purchase by force whether a merchant likes it or not. On the other hand, a refund occurs directly between a merchant and their customer and is agreed upon by the merchant.

Can you go to jail for chargebacks?

Merchants can criminally prosecute customers who engage in fraudulent and illegitimate transactions, which can result in jail time.

Is a chargeback bad?

Chargebacks are not good for any merchant. They come with a series of negative consequences, including lost revenue, lost products and fees. If merchants experience too many chargebacks, there is even the potential for their merchant account to be shut down.