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What Is a Chargeback?

posted on: Thu Jan 04 2018

Record-breaking online sales for the 2017 holidays combined with higher card-not-present (CNP) fraud mean online businesses may be facing a big surge in chargebacks over the next 30-90 days.

With that possibility in mind, now might be a good time to review what a chargeback is. A chargeback can incur when a consumer calls their card issuer or bank to request a refund on a purchase. While definitions and conditions vary from geography to geography and card network to card network, the following detailed description from Visa provides a good framework:

A “chargeback” provides an issuer with a way to return a disputed transaction. When a cardholder disputes a transaction, the issuer may request a written explanation of the problem from the cardholder and can also request a copy of the related sales transaction receipt from the acquirer, if needed. Once the issuer receives this documentation, the first step is to determine whether a chargeback situation exists.

When a chargeback right applies, the issuer sends the transaction back to the acquirer and charges back the dollar amount of the disputed sale. The acquirer then researches the transaction. If the chargeback is valid, the acquirer deducts the amount of the chargeback from the merchant account and informs the merchant. Under certain circumstances, a merchant may re-present the chargeback to its acquirer. If the merchant cannot remedy the chargeback, it is the merchant’s loss. If there are no funds in the merchant’s account to cover the chargeback amount, the acquirer must cover the loss.

Fraud is behind many chargebacks, however, there are other numerous reasons why a merchant might see a chargeback, including:

  • Services Not Provided or Merchandise Not Received
  • Cancelled Recurring Transaction
  • Not as Described or Defective Merchandise
  • Fraudulent Multiple Transactions
  • Counterfeit Transaction
  • Declined Authorization
  • No Authorization
  • Expired Card
  • Late Presentment
  • Transaction Not Recognized
  • Incorrect Currency or Transaction Code or Domestic Transaction
  • Processing Violation
  • Non-Matching Account Number
  • Incorrect Transaction Amount or Account Number
  • Fraud—Card-Present Environment
  • Duplicate Processing
  • Fraud—Card-Absent Environment
  • Credit Not Processed
  • Paid by Other Means

Regardless of the reason for a chargeback, once the process is initiated, a complex dance ensues. Again, it varies from card network to card network, but the following provides a reasonable depiction:

  1. First Chargeback: Issuer or cardholder disputes transaction.
  2. Representment/ Second Presentment: Merchant re-presents transaction, accompanied by supporting evidence that contradicts issuer or cardholder’s claim.
  3. Second Chargeback/Pre-arbitration. Cardholder resubmits a chargeback after merchant has won representment/second presentment.
  4. Arbitration Chargeback: Cardholder or merchant disputes the outcome of second chargeback/pre-arbitration.
  5. First Chargeback. The issuing bank reviews the cardholder’s claim and/or transaction data. If the issuing bank doesn’t find a valid basis for the claim, the chargeback claim is denied. However, if the issuing bank determines that the chargeback claim is valid, it issues a refund credit to the cardholder.

Next, the issuing bank submits the chargeback to the card network, who passes the chargeback to the acquiring bank. During this stage, the acquiring bank as well as the payment processor will typically add on chargeback fees. These fees may be passed on to the merchant, resulting in a loss for the merchant that is actually higher than the original order amount. The acquiring bank settles the funds collected less their processing fees, network fees, and interchange fees. Finally, the merchant is alerted of the chargeback claim via an online portal or offline letter.

  1. Representment/ Second Presentment. At this point, the merchant can choose to accept the chargeback loss and attendant fees, or they can contest the chargeback claim. This requires the merchant to gather up data related to the transaction and submit a response letter that addresses the specific reason code associated with the chargeback. Response letter formats and requirements vary from processor to processor, but typically may include data such as:
  • Date/time stamp
  • CVV match
  • Shipping verification
  • Device ID, geolocation, etc.
  • Prior and subsequent customer transactions
  • Customer communications and interactions
  • Social commentary by customer

This information goes to the merchant account processor, who passes the evidence onto the acquiring bank, who passes it to the card network, who passes it to the issuing bank. The issuing bank weighs the evidence and makes a determination.

If the issuing bank decides in favor of the cardholder, the credit refund originally awarded to the cardholder remains. If the issuing bank decides in favor of the merchant, the card network pulls the funds in question from the issuing bank and passes them onto the acquiring bank. The acquiring bank then deposits them back into the merchant account.

  1. Second Chargeback (Pre-arbitration). Exhausted yet? Too bad, because that’s not the end. If the cardholder isn’t satisfied with the result, he or she can resubmit the chargeback and the entire process starts over again. When this second chargeback claim finishes making its way through the various stages of the process once more, the issuing bank is again the ultimate decision maker. It can find in favor of the cardholder or the merchant.
  2. Arbitration Chargeback. We’re still not finished. If the merchant or cardholder aren’t satisfied with the outcome of the second chargeback/pre-arbitration stage, either one can file for arbitration. At this point, fees totaling hundreds of dollars can be incurred and ROI is usually negative.

Of course, the win-win for merchants is to avoid all of this by having an enterprise-class fraud prevention solution that stops fraud and chargebacks before they even start. What’s more, even in cases not involving criminal fraud, enterprise-class fraud prevention can support representment with extensive data that provides compelling evidence that’s key to winning chargeback representment rapidly and convincingly. 

Download our eBook "Fighting Fraud and Chargebacks" to learn about the true cost of chargebacks and how to win at every stage of the chargeback cycle.