Chargeback Meaning, Process and Merchant Protection against it

When the buyer is not satisfied with the seller with regard to the services or products they paid for they can opt for the Chargeback.

A chargeback is a provision for the buyers to protect themselves. The cardholder (i.e. the buyer who has used the card to make the payment) can raise a chargeback dispute with the issuing bank to get their payment reversed.

If there are any fraudulent activities observed on their card, with the help of a chargeback, they will get their money back.

Reasons for a Chargeback

Here is the list of reasons for which the cardholder would file a chargeback to get the help for getting their money back.

  • The transaction was done without the buyers’ knowledge or consent (fraud committed).
  • Product Defective
  • Product not received
  • Paid twice mistakenly
  • The requested refund was not received
  • The unauthorized transaction was charged
  • Service or product Cancelled and refund not received
  • Returns processed but did not get the refund
  • Friendly fraud by the buyer. He would buy a product and receive it. And then claim that his Card was stolen and he had not made the purchase, this way he would get a refund through chargeback.

 Parties involved-

Let us know who all are involved in the Chargeback before we understand the Chargeback Process:

1. Customer

The one who decides to file a chargeback with the issuing bank for the card payment he made due to any of the above-given reasons.

2. Issuing Bank/Card Issuer

The financial institution that deducts the fund and makes the payment to the merchant and who has issued the card to the customer can be known as the Issuing Bank or the Card Issuer.

3. Merchant

The service provider or the seller to whom the customer paid is a Merchant. The chargeback would be filed against him.

4. Acquiring Bank

The bank that authenticates the card payment and facilitates the fund transfer from the customer to the service provider or the seller to whom the payment was made.

5. Card Networks

They have the responsibility of securing the cardholders from fraudulent activities. They decide the chargeback rules and reimburse the customer in case the issuing bank’s investigation proves that the chargeback was valid. VISA, Mastercard, AMEX and Discover are major Card Networks.

6. Merchant Banks Account

This is the merchant’s banks where the funds are being captured. The funds from the Acquiring bank are settled to this bank account by the payment gateway.

7. Payment Gateway

The payment gateway involved is an intermediate in the whole process and investigation.

They were involved in the whole payment processing and during the chargeback, the payment gateway would be helpful in providing aid for investigation.

All About Chargeback

Chargeback process

Step 1:

  • The cardholder files the dispute with the issuing bank against the transaction because of any of the reasons as mentioned previously.
  • He provides the necessary details in the chargeback online form.
  • The issuing bank will move forward with the case and also to disburse back the funds.

Step 2:

  • Issuing bank reviews case to decide if the filed dispute should be moved forward or not. If it seems to be genuine then it is forwarded to the Card Network.
  • One of the below conclusion may be drawn:

Invalid: The process ends

Valid: Dispute converted to Chargeback and forwarded to the Card Network

  • Under this step, there can be two things taking place:
  • Depending upon the process some of the issuing banks provide an immediate refund to the cardholder: If the Chargeback is proved to be valid then the funds are considered to be the resultant refunds due to the chargeback and if Invalid is the conclusion then the funds are withdrawn.
  • Some of the issuing banks would forward the Chargeback Dispute case to the Payment Gateways for further investigation: They, in turn, would ask the Merchant to respond on the same. If the Merchant responds then the Chargeback case is moved forward, investigated and if the Merchant was able to provide the required proof then the Chargeback would be invalid. If the merchant does not respond then the Chargeback would be valid and the refund process would be enacted.

Step 3:

  • If Chargeback was valid then the customer is reimbursed by the issuing bank and also the process for the funds’ transfer from the merchant bank-acquiring bank -the issuing bank is processed.
  • The Chargeback is passed to the Acquirer by the Card Network or the Payment Gateway whoever is the investigator. The fees are incurred by the Acquiring bank which would be eventually paid by the merchant (non-refundable). And the Acquiring bank would reach the Merchant Bank to initiate the funds’ transfer towards the issuing bank.

(The Cardholder is given an option to file the dispute again. This process is known as the pre-arbitration/second chargeback. If the merchant wins but still the cardholder is not satisfied then the dispute is filed again and that is called ‘Arbitration’.

With the filing of this, the whole process goes as the normal Chargeback Process, but the merchant will be charged a heavy fee, which will be returned back if the Merchant wins again. If they lose then that heavy fee with an additional fee will need to be paid by him.)

Chargeback Dispute by Merchant

When the Merchant receives the Chargeback, they would either respond to it or ignore it. If they respond to it and dispute the case they would have to provide the proof to prove that the Chargeback as invalid. They may provide below-mentioned details or documents:

  • Date and timestamp of the services provided
  • The IP address or geolocation of the user
  • Shipping Process or Delivery Verification
  • CVV Match
  • Device Fingerprinting
  • Past Transaction and Payment History
  • Subsequent Transactions from Customer
  • Email Communication & Interactions
  • Phone Call Transcripts
  • Live Chat Transcripts
  • Social Media Interactions & Shares by the user

Merchant can protect their business from chargebacks

Let us understand this according to the Types of Frauds:

1. Merchant Error Suspected

  • Manual data entry should be avoided that results in double payment or wrong entry of credit card details.
  • Allow the customers to contact you easily and for that, the contact details of the company should be accessible, most preferably on the invoices. Also, keep the contact us webpage clearly visible.
  • Customer services should be such that the customer finds it easy to reach out if there is an issue. Mention the working hours and try to provide all kinds of customer support like call, email and live chat.
  • Maintain proper business standards and practices.
  • Updates the customers about their ordered products or services. Like, the delay in shipping, tracking information, out of stock items, etc.
  • Make easy refund, returns, and cancellation policies so that if the customer is not satisfied with the product then they are able to act on it directly with you.
  • The product details, pictures, descriptions and other important needed clarities must be provided to the customers so that they know the product and buy accordingly.

2. Third-Party Fraud

  • Use certain tools for thorough customer verification like Address Verification Service (AVS), card security codes (CVV2, CVC2, etc.) and use a 3D Secure Payment Gateway.
  • Keep an eye for any speculative transactions, like too big orders made at once, or the contact is in the spams, etc. Staff must be trained for this procedure to be followed.
  • Follow high-security compliances and encryption standards to secure the customer data from any kind of hacking and fraud.

3. Friendly Fraud

The Address Verification Service (AVS) should be used, also, track the delivery and get the delivery confirmation.

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