Here’s How the Chargeback Process Works and How to Win Disputes

Did you know that each day there are more than a billion credit and debit card transactions? Cash is so last century, and many consumers now prefer to swipe. And in many ways, card payments are a boon for businesses, making it easier to manage sales. Unfortunately, however, companies run the risk of getting hit with chargebacks, resulting in lost revenues and expensive fees.

With chargebacks, retailers will have to refund a cardholder the money from a purchase. The card issuing bank is in control and can authorize the refund without approval from the merchant. Typically, customers also aren’t required to return the products or services rendered, resulting in inventory costs. And if you suffer too many chargebacks, your processing fees go up and your penalties get more expensive.

Fortunately, it’s possible to both discourage and fight chargebacks. We’re going to cover the chargeback process and steps you can take along the way to fight them.

Preventing Chargebacks Before They’re Filed

When possible, businesses should prevent chargebacks before they’re even filed. Fortunately, there are many steps you can take to reduce the risk of getting hit with them, including:

• Clear billing descriptors- Make it easy for customers to recognize purchases.
• Accessible, easy-to-use returns- Customers who don’t want to deal with complicated returns may file chargebacks.
• Accurate product pages- Make sure you set customer expectations with accurate pictures and product descriptions.

Another great option for preventing chargebacks is to set up chargeback alerts. With these alerts, a bank can inform you of upcoming chargebacks. Then you can try to resolve the dispute before it’s filed, typically by offering a refund. You may not want to refund the money, but doing so could save you from fees and help keep your chargeback ratio low.

What Happens Once a Chargeback is Filed

Even with strong prevention measures, some disputes may get through and become chargebacks. The dispute will start when the customer contacts their bank, typically asserting a purchase was fraudulent in some way. The bank may decline the dispute if they believe the customer’s complaints are unwarranted. However, card-issuing banks tend to side with their clients. 

Generally, cardholders are offered a variety of methods for filing for a chargeback. A financial institution may provide email, online forms, and a phone number to call, for example. Since chargebacks are easy to file, customers are often quick to turn to them.

The card-issuing bank will contact the acquiring bank and inform them of the dispute. The acquiring bank is the institution that the merchant works with to accept payments. The acquiring bank will then pass on the information to the business, including a reason code. You can use this reason code to figure out what the dispute is about.

Merchant’s Choice: Dispute or Accept the Chargeback

Once informed, the merchant has a big decision to make; they can either accept the chargeback or fight it. If a retailer accepts the chargeback, the cardholder’s money will be returned and it’ll come out of the business’s pocket.

If the retailer disputes the chargeback, they’ll be given an opportunity to “represent” the transaction. Then the merchant can argue that it was a legitimate transaction and that they upheld their obligations, presenting any “compelling evidence” to support their argument against at that time. If they’re successful, the customer won’t be refunded the money in dispute.

Merchants will have to pay chargeback fees regardless of whether they win or lose the dispute. The same is true for the chargeback ratio; even if you win, the chargeback still counts against your chargebacks-to-sales ratio. If the ratio becomes high enough (>1%), payment processors may charge you higher processing fees. Some may decline to work with you altogether.

Representment and Fighting Chargebacks

When merchants dispute the chargeback, they must re-present the transaction with a rebuttal letter. Within the letter, the merchant will represent the transaction to the card-issuing bank. The business can provide evidence that the purchase was legitimate and that the chargeback is unwarranted.

Evidence may include communications with the customer, IP address, CVV/AVS numbers, shipping receipts, past purchases, and more. Gathering evidence can be time-consuming, but fortunately, dispute management platforms make it easier to obtain, track, and present data. Include anything that ties the cardholder to the purchase.

When writing a chargeback rebuttal letter, you’ll want to be clear and concise. Bank staffers are short on time, so get to the point or your most compelling arguments could get lost in the shuffle.

Merchant or Client Files a Second Chargeback

The card issuing bank will ultimately decide to approve or decline the chargeback. While banks lean towards siding with their clients, compelling evidence can win disputes. Either way, the losing party, whether the merchant or the client, can file a second chargeback. In this case, the chargeback dispute process is repeated.

If you uncover new evidence, it could sway the outcome of the second chargeback process. Otherwise, the outcome is likely to be the same.

Card Networks Brought In

If the cardholder or merchant disagrees with the outcome of the second chargeback, they can opt for the issue to be referred to the card network, such as Visa or Mastercard. The card network will step in as a neutral arbiter and decide the case. The losing party may end up on the hook for hundreds of dollars in fees, however.

Managing Disputes With the Right Tools

Unfortunately, managing chargebacks can be a hassle. There are a lot of steps in the entire process. Gathering evidence takes time, as does writing a rebuttal letter. Fortunately, you can now use dispute management platforms to organize the entire process. 

The best dispute management platforms integrate comprehensive tools, like fraud detection systems and chargeback alerts that cover all the payment networks you process on. You can also use these platforms to track approaching deadlines and to gather evidence, such as signed shipping receipts.

With the right tools, you can effectively prevent and fight chargebacks while remaining focused on your core business, such as marketing and moving inventory. By reducing and refuting chargebacks, you can protect your company and help ensure that it’s on a strong financial footing.