What is Chargeback? How to protect your business from chargeback?

What is a Chargeback?

There are various situations when the buyer might be discontented with the merchant with regard to the services or products they had paid for.

A chargeback is a provision for the buyer protection under which 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.

The customer can also file a chargeback if there were any fraudulent activities observed on their card. With the help of a chargeback, they will get their funds back.

What are the Reasons for a Chargeback?

The cardholder would file a chargeback under various reasons for which they would like to get their refund.

• The fraud was committed and the transaction was done without buyers’ knowledge or consent.
• Defective product received
• Paid Product not received
• Paid twice mistakenly
• The requested refund was not received
• The unauthorized transaction was charged
• Cancelled service or product was charged and not refunded
• Returns processed but did not get the refund
• Friendly fraud, in which, suppose, the buyer would buy a product and receive it. But, later he would claim that his Card was stolen and he had not made the purchase, this way he will get a refund through chargeback.

Parties involved in the Chargeback Process:

To understand the chargeback process let us first go through its anatomy as to who all are included in that whole process.

1. Customer

The person who made the card payment and due to any of the above-given reasons decide to file a chargeback. He is the one who would raise a dispute with the issuing bank.

2. Issuing Bank/Card Issuer

The financial institution who has issued the card to the customer can be known as the Issuing Bank or the Card Issuer. It is the one that deducts the amount and pays to the merchant.

3. Merchant

The service provider or the seller to whom you have made the online payment is a Merchant. He is the one against whom the chargeback is to be raised.

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

The chargeback rules are decided by these cards networks. They have taken up the responsibility of securing the cardholders from any kind of fraudulent activities. They reimburse in case the issuing bank’s investigation proves that the chargeback filed is valid. VISA, Mastercard, AMEX and Discover are major Card Networks.

6. Merchant Banks Account

These are the destination banks where the funds are being captured by the merchant. The funds from the Acquiring bank are settled to this bank account by the payment gateway.

7. Payment Gateway

In the whole process, the payment gateway plays its role as an intermediate. They are the ones involved in the payment transfer. The complex work of facilitating the connecting of the various parties involved in the online payment transfer is done by the technology provided by the payment gateways.

Starting from providing the checkout to various integrated and tied up payment options, back and forth sending requests to various parties mentioned above and getting the response, transfer of funds from issuing bank to acquiring bank and settlement to the merchant bank account; all these and many more activities and features are provided by the payment gateways.

Chargeback process

Step 1:

The cardholder disputes the transaction because of any of the reasons as mentioned previously. They file the chargeback with their issuing bank through the online medium by providing the necessary details in the chargeback online form. The issuing bank will be the responsible party to move forward with the case and also to disburse back the funds.

Step 2:

Further, the issuing bank reviews the case and checks 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 as the dispute filed is deemed to be invalid

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

Under this step, there can be side by side two processes taking place:

1. 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.
2. Some of the issuing banks would forward the Chargeback Dispute case to the Payment Gateways for further investigation, which 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:

As soon as the Chargeback is proved to be Valid the customer is reimbursed by the issuing bank and also the process for the funds’ transfer from the merchant bank to the acquiring bank and to the issuing bank is ignited.

So 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

As mentioned earlier, 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 need to provide the proof which proves that the reason for which the Chargeback is filed is invalid. They may provide below-mentioned details or documents:

• May provide date and time stamp 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

Protect your business from the chargeback according to the Types of Frauds:

1. Merchant Error Suspected

• Avoid manual entry of the data of any manner, that results in double payment or wrong entry of credit card details.
• Have the contact details of the company accessible, most preferably on the invoices and keep the contact us webpage clearly visible
• Provide optimum customer services so that the customer finds it easy to reach. If the customer service hours are not 24/7 then mention the working hours. Try to provide all kinds of customer services like call, email and live chat.
• It is necessary to set proper business standards and practices and adhere to it.
• Keep the customers informed about all the updates with regard to their ordered product 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.
• It is necessary that you are interactive with your potential customers or already a customer. So, if any question is asked by them, they must be responded to as soon as possible.
• 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 order 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 frauds.

3. Friendly Fraud

• Address Verification Service (AVS) could be useful here. Apart from that track the delivery, get the delivery confirmation.