Chargebacks are an ongoing challenge for every business that accepts card payments. Online merchants are no exception and, with the continuing growth of ecommerce, need to be extra diligent in avoiding any unnecessary refunds or fees. For every chargeback you fail to dispute, not only will you be forced to return the funds to the customer, you will also be hit with an additional fee, typically ranging from £5 to £15. If your volume of chargebacks is not kept under control, they will quickly become a much bigger problem for both your time and profitability.
The first step to protecting your business from chargebacks is to understand what they are, how they are handled and what you can do to challenge them. In this article we will cover the definition of a chargeback, chargeback reason codes and breakdown the full chargeback process.
A chargeback is a transaction that has been disputed by a customer in an effort to reclaim funds back to the card from which the payment was made. The chargeback process exists to help protect customers against unauthorised transactions or goods or services that are either defective or have not been received.
Unfortunately, the chargeback process is often exploited by customers with fraudulent intentions, such as using details of a stolen card or other techniques to avoid providing a valid form of payment. First party fraud is also common, in which cardholders placing orders, receive the goods and services and then reporting the transaction as unauthorised. According to a report in 2020, 76.43% of VISA chargeback disputes were related to fraud in 2019.
Chargeback reason codes are 2-4 digit codes created by the major card networks and are used by a cardholder’s issuing bank to identify and provide the reason for a disputed transaction.
While each card network and payment provider will have their own codes and categorisations, chargeback reason codes typically fall into four main types:
How to challenge a chargeback
If you decide to challenge a chargeback, you will be required to provide evidence to your acquirer, which can include:
If the card issuer rules against you, the chargeback process continues and becomes a second chargeback where the card issuer decides to uphold the original claim decision and does not return the funds to you.
A second chargeback can occur for several reasons:
If this happens, the issuer will notify your acquiring bank of the second chargeback and you will once again be given the opportunity to accept or contest it. If you decide to contest, you will then be required to provide further supporting information and reasoning for further disputing the claim.
If you or your acquiring bank disagree with the issuer’s decision, either party can pursue arbitration by the card association in order to make a final decision. If the dispute has still not been resolved, arbitration is final step of the process and can involve large fees, time and effort.