Credit Card Chargebacks Explained: A Guide For Merchants

Credit card chargebacks happen when a customer requests their bank returns their funds for a purchase or when your customer's bank detects a problem with a transaction. They frequently occur when a consumer is unable to obtain a refund directly from you, the merchant, and instead forcibly takes their money back. In other words, it's a forced refund where the customer doesn't necessarily have to give anything back. Chargebacks are generally very bad for merchants as they often come fees that range between $20 and $100. If a business has too many chargebacks as a percentage of their total transactions, their account can be shut down or their per transaction costs may go up significantly.

Credit Card Chargeback Time Limit & Rules

Generally, consumers have to file a chargeback between 60 and 120 days from the time of the original purchase. After that happens, merchants have approximately 45 days to respond, if they wish to dispute it. These rules are set by the credit card processing company and will differ based on the card in question – be it a Visa, Mastercard, American Express or Discover card. After a merchant submits a response, the merchant bank will investigate the evidence and make a determination. If arbitration is deemed necessary, the entire process can take much longer to complete.

Typically, the entire lifecycle of a credit card chargeback works as follows:

  • First, the consumer submits a complaint with his or her issuing bank.
  • Then the issuing bank verifies whether the dispute is valid. If the bank finds the consumer is at fault, the process ends here.
  • Following that, the consumer is immediately refunded money, and the cardholder's bank official initiates the chargeback process and contacts the merchant’s bank.
  • After this, the merchant bank verifies the request and conducts their own investigation. At this point, the merchant is also notified that a chargeback is being processed.

From here on, one of two things can happen:

  • If the chargeback is deemed invalid by the merchant bank, the processor will contact the consumer’s bank and inform them of their findings. This happens very rarely.
  • If the chargeback is deemed valid by the merchant bank, the merchant will be asked to provide documentation so they can counterclaim the chargeback. If the merchant provides sufficient proof that they were in the right, the chargeback will be stricken from the record and the issuing bank will remove the funds from the cardholder’s account once again. Otherwise, the chargeback stays, and the funds are removed from the merchant’s bank and an additional fee is charged to the merchant.

How To Prevent Credit Card Chargebacks

The best way to prevent credit card chargebacks is to adhere to policies and guidelines set forth by each of the payment processing networks. Follow these links to get to Visa’s, Mastercard’s, American Express’, and Discover’s chargeback rulebooks. The general summary of the points made by each of these companies for you to always make sure you:

  • Obtain proper verification from your customer. Make sure they sign their receipts, and that the name of your business is legible on their bill.
  • Verify that the card they are using is not expired.
  • Follow proper PCI rules, and verify that the cardholder is actually who he/she says they are. This includes verifying the signature on the back of the card, and checking for identification when necessary.
  • Make sure your business adheres to current security standards, like EMV readers
  • If possible, capture your customer’s signature digitally and have sales staff compare that signature to the one on the back of the customer’s card
  • Do not accept credit cards with no signature on the back
  • Make sure all of your employees who handle credit card payments adhere to these best practices

Any business that accepts credit card payments will have to deal with chargebacks. They are, to a certain level, unavoidable. Your best chance at fighting back against chargebacks will be when faced with so-called friendly fraud, or chargeback fraud. In these instances, you will have the easiest time getting the chargeback reversed, provided you submit the proper paperwork.

Another key way to avoiding chargebacks is to understand why they occur in the first place, and then setting up policies that prevent these situations from arising at your establishment. According to Visa, the most common chargeback reasons include:

  • A credit has not been processed when the customer expected it would be
  • Merchandise ordered was never received
  • A service was not performed as expected
  • The customer did not make the purchase; it was fraudulent.
  • A Processing error occurred
  • Authorization issues

Credit Card Chargeback Merchant Rights

Unfortunately, merchants do not have many protections when it comes to fighting against chargebacks. Even if your store has a ‘no refund’ policy, the Fair Credit Billing Act allows consumers to file chargebacks. Despite that, it is advised that business owners clearly display their policies and make consumers aware of their sales rules. This may become relevant if a chargeback ever goes through an arbitration process, and generally helps with the above process of fighting against chargebacks.

By most accounts, banks tend to favor the cardholder over the business owner in most chargeback disputes. This is why it’s important for merchants to do everything in their power to have purchases and transactions well documented, and in strict accordance with the rules set forth by the card networks.

Chargeback Codes

Here is a list of official Visa and Mastercard chargeback codes for some of the most common issues that arise. These codes along with additional guidelines will be presented to the merchant whenever the merchant bank sends out the chargeback warning. More codes can be found in the network guidebooks that were linked above.

Visa Chargeback CodeReason
30Services Not Provided or Merchandise Not Received
41Cancelled Recurring Transaction
53Not as Described or Defective Merchandise
57Fraudulent Multiple Transactions
62Counterfeit Transaction
71Declined Authorization
72No Authorization
73Expired Card
74Late Presentment
75Transaction Not Recognized
76Incorrect Currency or Transaction Code or Domestic Transaction Processing Violation
77Non-Matching Account Number
80Incorrect Transaction Amount or Account Number
81Fraud—Card-Present Environment
82Duplicate Processing
83Fraud—Card-Absent Environment
85Credit Not Processed
86Paid by Other Means
Mastercard Chargeback CodeReason
2Requested/Required Information Illegible or Missing
7Warning Bulletin File
8Requested/Required Authorization Not Obtained
12Account Number Not On File
31Transaction Amount Differs
34Duplicate Processing
35Card Not Valid or Expired
37No Cardholder Authorization
40Fraudulent Processing of Transactions
41Cancelled Recurring Transaction
42Late Presentment
46Correct Transaction Currency Code Not Provided
47Exceeds Floor Limit, Not Authorized, and Fraudulent Transaction
49Questionable Merchant Activity
50Credit Posted as a Purchase
53Cardholder Dispute, Defective / Not as Described
55Non-receipt of Merchandise
57Card-Activated Telephone Transaction
59Services Not Rendered
60Credit Not Processed
62Counterfeit Transaction Magnetic Stripe POS Fraud
63Cardholder Does Not Recognise-Potential Fraud

Source: Worldpay.com

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