9. Curious Case of Chargebacks
The interesting thing about chargeback is… nothing
They are kind of boring, merchants do not like them, aggregators despise them… but chargeback are important as they safeguard cardholders.
What is chargeback:
Chargeback is a dispute raised by cardholder with the issuing bank in case of cardholder doesn’t receive the service or doesn’t receive refund when merchant fails to deliver service.
Chargeback flow:
Chargeback raised by customer with her issuing bank reaches merchant through acquiring bank and then aggregator.
Handling of Chargeback:
Post receiving the chargeback info, merchant will have 4–5 days to respond to the chargeback by either accepting or rejecting it.
Accept: It is valid chargeback, acquiring bank recovers funds from aggregator and aggregator will adjust the amount from merchant’s next settlement. Customer receives the credit
Reject: Merchant provides information (proofs) that service provisioning is done as per terms or refund is given to customer
- If merchant doesn’t reply within stipulated time period then such chargeback is considered as valid chargeback.
- Merchant should take care that do not accept chargeback where already refund is initiated (else customer will receive money twice)
- Issuing bank won’t accept the information provided by merchant blindly and if the bank thinks that information is not sufficient then it will go into second presentment.
Importance of chargeback:
a. For a merchant: Number of chargebacks raised against a merchant shows the health of that merchant’s business. It is important for merchant to keep chargebacks within specified limit. If chargebacks are higher than normal then merchant will be on radar of Acquiring Bank and Visa/MasterCard. And acquiring bank may take decision to revoke the MID (merchant Id).
If merchant doesn’t have mechanism to store/retrieve proofs for service provisioning then merchant cannot provide sufficient proof to defend chargeback and lose money.
b. For Aggregator: If merchant doesn’t reply or do not provide satisfactory proof then acquiring bank recovers the chargeback amount from aggregator. If there are no settlement to adjust (e.g. merchant closed business or non-responsive) then aggregator will have no avenue to recover that amount. This is really crucial, as aggregators operate on thin (or no) margins.
Example: PG Charge: 2%, back-to-back cost = 1.90%
so aggregator has to process Rs.10,00,000 value (2,000 transactions of Rs.500 each) to make profit of Rs.1,000. And one mismanaged chargeback of Rs.1000 will wipe out that entire profit.
Challenges in managing Chargeback:
Chargeback information is exchanged over mail and also, there is no central system to track chargebacks or map against refunds. So it is cumbersome to manage chargebacks in mails.
How merchants can tackle chargeback:
- Better service provisioning
- Keep logs of transaction, service and delivery proofs (for 13 months)
- Put clear Terms of business, refund/cancellation policies on website/App that can be used as first line of defence against chargeback
(Ask your aggregator/acquiring bank how they can help reduce chargebacks. Check with them whether the processes, proofs and policies followed by you are adequate enough or need improvement)
How aggregators reduce risk of chargeback:
Aggregator recovers chargeback amount from merchant’s future settlement. But what if there are no future settlement?
This is the major risk of chargeback that aggregator has to bear so aggregators
- Follow good under writing process (collect & verify merchants credentials)
- Avoid risky merchants (job search, resume writing, online recharge etc.)
- Collect security deposit (to cover the chargeback related risks)
Chargeback in surcharge model:
Chargeback can be raised on full amount not partial. That gives an interesting use cases
A merchant is configured in surcharge model (Rs.100 transaction, Surcharge: 1.18). In this the chargeback will be raised for Rs.101.18 and if chargeback is valid then entire Rs.101.18 is recovered from merchant. So merchant loses Rs.1.18
Interesting cases to think…
Let us assume, merchant was using aggregator A for transactions and after one month replaced existing aggregator with aggregator B. Now there comes a chargeback that was related to transactions done by aggregator A. How aggregator A will get the merchant to react to that chargeback? Or recover the amount?
Let us assume, merchant was using aggregator A and merchant has to shut down the business. If a chargeback comes then how aggregator will recover amount or get proof from already defunct merchant?
Next Topic: Risk
