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What is Chargeback and How to Avoid it?

Boaz Gam

Boaz Gam

CEO

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30.07.2021
9 min

Chargeback (refund a payment): what it is and how a business can avoid canceling payments

Article content
  1. What is the Chargeback?
  2. What are the Reasons for the Chargeback?
  3. Sides Participating in the Chargeback
  4. Stages of the Procedure
  5. Within what Time can the Chargeback Request Submitted?
  6. How Can the Customer Get Money Back?
  7. Cases of Chargeback Refusal
  8. What is the Difference between the Chargeback through a Bank and a Payment System?
  9. Why are Merchants Afraid of Chargebacks?
  10. How to Minimize the Number of Chargebacks?
  11. How to Write a Chargeback Letter?
  12. Avoiding Chargebacks: Effective Tool from Payneteasy

Online payments using bank cards are convenient for cardholders. However, sometimes disputes occur due to fraud or other cases when services or goods are not provided (or provided not in full). In such situations, a customer has a chance to get money back by launching a chargeback process.

What is the Chargeback?

According to the chargeback definition, it is a process of transaction cancellation. If a consumer pays for goods or services with a credit card, it is possible to request the chargeback. In other words, this is a refund of the payment to the cardholder. Payment dispute takes place out of court. All stages go through an issuing bank.

What are the Reasons for the Chargeback?

It is possible to dispute a charge of funds from the card only in certain cases, namely:

  • a technical failure occurred during the payment process, which leads to double debiting;
  • an ATM did not give out money;
  • the sum of the transaction differs from the actual one;
  • fraudulent money debiting;
  • when buying goods online, the quality does not meet requirements, but the merchant does not intend to refund;
  • payment for a service/product was made, but a company did not provide it;
  • charging money from a non-existent/inactive account.

Sides Participating in the Chargeback

Five key parties participate in the chargeback process, including:

  • A deceived owner of a bank account/card acts as the initiator.
  • The issuing bank stands as the actual owner of the card from which funds were debited.
  • An acquiring bank that acts as a representative of the merchant.
  • The merchant is an individual or legal entity to whose account the payment was transferred from the account of the initiator.
  • The payment system (Mastercard, Visa, etc.) through which funds were transferred from account to account stands as an outside observer. It can be directly included in the procedure when the arbitrators decide the issue.

Stages of the Procedure

Chargeback (refund a payment): what it is and how a business can avoid canceling payments

The rules of the IPS strictly regulate the interaction process between all participants in cases of chargeback disputes. The holders of credit cards cannot ask the payment system directly to undo the charge of funds. The decision on the refund will be made by banks. The procedure of chargeback is the following:

  1. The cardholder informs the issuing bank that he/she intends to dispute the transaction.
  2. The issuing bank checks the data provided by the client: whether payments were made, whether negotiations were carried out with the merchant, whether there is evidence that the terms of the contract have not been fulfilled.
  3. The issuing bank sends the request to the acquiring bank.
  4. The acquiring bank accepts the request, analyzes the received evidence, compares them with the rules of the IPS, decides whether there is enough data or clarifications are needed. If there is enough data, the acquiring bank independently charges money back from the merchant’s account. Or, conversely, it rejects the chargeback request on its own.
  5. If the data is not enough, the acquiring bank asks for an explanation from the merchant.
  6. In some cases, the merchant accepts the chargeback and informs the acquiring bank about it. For example, if there is little time for consideration, and the amount is relatively small. Then the acquiring bank refunds money to the issuing bank, and the latter returns money to the cardholder.
  7. If the merchant does not agree, it sends a Representment to the acquiring bank, with arguments in its favor.
  8. The acquiring bank sends the merchant’s response to the issuing bank;
  9. The issuing bank may accept the merchant’s evidence and inform its client (cardholder) that the appeal has been rejected;
  10. Either the issuing bank can side with its client, reject the merchant’s arguments, and require the acquiring bank to initiate the chargeback and refund;
  11. If the acquiring bank then agrees with the issuing bank, it will debit money from the merchant’s account, transfer it to the issuing bank, and the latter, in turn, will credit it to the customer’s card account;
  12. The acquiring bank may or may not agree. Then the issuing bank has the right to apply to the arbitration commission of the payment system. It conducts its own investigation and makes final chargeback decisions.

Within what Time can the Chargeback Request Submitted?

According to the rules of IPS, it is stipulated that the maximum period for a cardholder to file chargeback disputes is 540 days from the date of the transaction. Keep in mind that documents are transferred to the IPS through the issuing bank, so the appeal regarding the wrong charge of funds should be submitted in advance.

The period for transferring data for the issuing bank to the IPS is from 30 to 45 days from the date when the chargeback application from the cardholder was received.

Chargeback (refund a payment): what it is and how a business can avoid canceling payments

How Can the Customer Get Money Back?

The process of undoing the charge of funds is a trouble-some and long-lasting procedure for the merchant that implies going through the following steps:

  1. The chargeback procedure is launched by submitting a customer’s application to the issuing bank. The claim is described in free form. The amount and the time of the transaction are indicated; other supporting documents are presented.
  2. If considered positive, the application is passed on to the merchant’s bank.
  3. After examining the claim, the acquiring bank performs a reverse payment or transfers the claim to the second party to the conflict (the merchant).
  4. If within a certain period, the merchant does not provide evidence of the correctness of the transaction, the amount of the claim is debited from its account. If the request is ignored, the IPS appoints arbitration, where it independently decides the outcome of the dispute. The maximum chargeback time limit from the date of payment will be approximately 285 days.

Cases of Chargeback Refusal

There are cases when the chargeback application submitted by a customer is denied. This may happen in the following cases:

  • an error in the paperwork, and revision is needed;
  • insufficient evidence base;
  • incorrect payment details;
  • deadlines for accepting claims are not met.

What is the Difference between the Chargeback through a Bank and a Payment System?

There are two ways for the customers to get a refund in case of fraud or non-provision of services:

  1. Resolve the dispute directly with the merchant. If the merchant agrees with a refund, then the company refunds to the client’s credit card by contacting the bank.
  2. issue the chargeback. If the parties could not agree, then the client writes the application to the name of the bank and the dispute procedure begins, where the payment system acts as an arbiter between the customer and the merchant.

Why are Merchants Afraid of Chargebacks?

When the customer asks the bank to cancel and refund the transaction, the merchant receives the chargeback. For merchants, this procedure is inevitably connected with incurring losses and receiving a negative rating. In addition, the client remains dissatisfied and can leave negative feedback on an online store.

Besides, the chargeback procedure is unwilling for online stores since it bears all the refund costs. Merchant are usually fined for chargebacks. Each bank sets its own tariffs for fines.

Chargeback Threshold Ratio for Businesses

As mentioned earlier, the chargeback is the procedure that merchants try to avoid due to a number of factors. It directly influences their reputations and status in the market segment. Merchants are fined for a great number of chargebacks. Thus, both parties try to act responsively and solve all problems at the initial stages.

Besides, every online business must not exceed the monthly limits set for chargebacks, also known as the chargeback-to-transaction ratio (CTR). The formula to calculate it is as follows:

CTR = Total chargebacks per month/ Transaction number per month

Keep in mind that when it comes to chargebacks, it is irrelevant whether a merchant has encountered chargeback fraud. Every transaction of such nature still counts against the CTR of a business. Typically, a ratio that doesn’t exceed 1% will keep a merchant out of the high-risk category.

Various credit card networks handle chargebacks differently, so it is crucial that merchants are aware of their thresholds and policies. Here is what to expect from Visa and Mastercard:

Visa

The threshold ratio that Visa has set up for chargebacks has several levels:

  • Early Warning - 0.65% monthly chargeback ratio and a minimum of 75 chargebacks.
  • Standard - 0.9% chargeback ratio/month and at least 100 chargebacks.
  • Excessive - 1.8% chargeback ratio per month and over 1,000 chargebacks.

If you are a merchant using Visa’s services, you should also be aware of the threshold violation consequences of this credit card network. While there are no penalties following the breach of an Early Warning threshold, crossing the Standard limit is more serious.

A merchant receives a grace period of four months to get the level of chargebacks under control. If they fail to improve the transaction situation, Visa will introduce a $50-chargeback fee for every new dispute. Violating the Excessive tier will leave a business without any grace period and result in immediate fines.

MasterCard

When it comes to chargebacks, MasterCard also sets three threshold levels for merchants. However, they differ significantly from the ones offered by Visa:

  • Chargeback Monitored Merchant - at least 1% ratio and 100 chargebacks per month
  • Excessive Chargeback Merchant (Tier 1) - 1.5% - 2.99% ratio for two consecutive months and 100 - 299 monthly chargebacks.
  • Excessive Chargeback Merchant (Tier 2) - 3% or more chargeback ratio and over 300 chargebacks.

The consequences for a merchant violating the two excessive tiers are rather severe. Mastercard will impose significant fines and can also prompt the bank to freeze your funds or terminate your account.

Most acquirers do not look at the number of chargebacks; they compare the percentage of the number of chargebacks to the number of sales for 1 calendar month. At the same time, it is highly likely that the acquirer will ask the merchant for an explanation even if the amount of chargebacks has exceeded the threshold set by a credit card network.

How to Minimize the Number of Chargebacks?

Chargeback (refund a payment): what it is and how a business can avoid canceling payments

Thus, it is logical that online stores and companies should try to minimize the number of disputes and chargebacks. Here are some tips on how to do it:

  1. Online stores usually have a section on the Terms and Conditions, where all the cases for refund are specified. Take a responsible approach to develop this document since it will regulate your further cooperation with customers.

Usually, clients who pay with credit cards understand that processing chargebacks and the actual refund take a lot of time. Therefore, usually, they always try to resolve the issue via a direct dispute with the merchant.

  1. Place a detailed description of the services and goods provided on your website, attach photographs, indicate the dimensions and other necessary characteristics of the goods.
  2. Organize a technical customer support service that will answer customer questions timely.
  3. Keep all information about transactions and consumers, including e-mails, receipts of goods or services.
  4. Return conditions must be published on the website. Also, in the correspondence with the consumer, make sure that he/she is familiar with the conditions for the return of goods.
  5. Improve an anti-fraud system, introduce modern technologies.
  6. Provide documents confirming the fact that the client has received a product or service in accordance with the previously declared description.
  7. When dealing with courier services, take receipt upon delivery.

How to Write a Chargeback Letter?

The chargeback application is simple enough. In fact, it is only necessary to describe the circumstances when the charge of funds occurred and indicate the facts confirming that the merchant did not fulfill its obligations towards the cardholder.

Note that the money refund application can be submitted not only in the office but also via the Internet. Banks accept applications for chargebacks online in the feedback section on their website.

When applying for the chargeback, it is very important for a cardholder to indicate the reason for requesting a refund for the transaction. What could be the reasons:

  1. The product or service does not match the description. For example, we bought a TV and received a radio;
  2. Unauthorized transaction. That is, someone made a payment from our bank card without our consent;
  3. The service or product is not provided in full. For example, we ordered two sets of wheels, but received only one;
  4. Double deduction of the cost from the account. It happens that the payment is made twice. As a rule, this is a consequence of a technical error, and the money can be easily charged back;
  5. The consumer has not received the product or service. This is the most common reason for chargebacks.

As evidence, you can use any supporting documents, as well as photos and video recordings.

Avoiding Chargebacks: Effective Tool from Payneteasy

As you can see, when dealing with chargebacks, speedy actions are an absolute must. If you are responsive enough, it is possible to resolve any complaints from the customers and prevent the issuing bank from getting involved in the dispute. That’s why it is so important for a merchant to have a reliable payment management system.

Luckily, you don’t have to spend extra time searching for a perfect solution for your business - Payneteasy has got you covered. Our white-label payment gateway is a state-of-the-art technology that merchants are sure to appreciate. We offer:

  • Fast and smooth integration
  • Prompt technological support
  • Full customization to match your company’s needs
  • Flexibility to cater to all payment interactions
  • Effective fraud and risk management

Let’s take a look at our integrated chargeback prevention function in more detail. Here are the tools Payneteasy offers so that your business can decrease the number of chargebacks and potential fraud impact:

1. Ethoca Integration

As a part of the package, we offer seamless integration to Ethoca. It is guaranteed to reduce the chargeback ratio of your business and lower the risk of fraud without the need to establish the integration individually.

2. Dispute Management System

Merchants and PSPs will find managing disputes easy with our automatic chargeback alerts and clear status display. We also provide our clients with a chargeback ratio calculation service based on EFT rules. Payneteasy's software will automatically analyze and match the chargeback stages and keep you updated on the actions you need to undertake when managing disputes.

If you have any questions or wish to receive a personalized quote, contact us, and we will get back to you shortly.

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