How to prevent and resolve chargeback disputes

Payments

27.08.2022

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Chargebacks exist to protect consumers from fraud. However, this tool often creates problems for businesses. This is
an important risk factor to consider when developing a risk management strategy. We will tell you what fraud
chargebacks are, how they work, and how you can protect your business from them.

What are chargebacks?

A chargeback is the cancellation of a financial transaction that occurs after a consumer opens a dispute. For
example, if the client received a damaged product, the seller double-charged funds, etc.

In the event of a dispute, the client can contact the bank and apply for a chargeback. If the application is
approved, the client receives the entire financial transaction amount. However, if the seller does not agree with
this, they can challenge the bank’s decision.

Reasons for chargebacks

It is important to know why chargebacks may occur. There are four main reasons.

• Fraudulent activity – the cardholder claims that they did not initiate the transaction.
• Consumer dispute – the product does not arrive by the expected date or does not meet the stated
  specifications.
• Processing error – the payment information was incorrect (e.g., an incorrect account number or an incorrect
  amount).
• Authorization – if it was not possible to authorize the payment.

How do chargebacks work?

The chargeback process depends on each bank. If successful, the bank returns the funds to the client. After such a
decision, the seller can challenge the decision on the return of payments. In general, the chargeback procedure is
as follows:

• The client requests a chargeback. The deadline for filing depends on the bank and can vary from 4 to 12 months.
• The bank considers the request and assigns a reason code.
• The card scheme receives the chargeback and sends it to the acquirer.
• The acquirer deducts funds from the merchant’s account, together with a commission.

If the seller does not agree with such a decision, they can challenge it. The procedure looks like this:

• The seller provides the defense document to the acquiring bank. There are 14 to 40 days for this.
• The acquirer reviews the document and passes the decision to the issuer.
• If the issuing bank accepts the defense, it debits the money from the buyer’s account and sends it to the
  seller.
• If the issuer rejects the document, the seller may resubmit the objection. This is called a second chargeback.

It is also possible to apply for arbitration for the third time, but as a rule, such a procedure is no longer carried
out due to too high commission fees. Commission for the third arbitration may exceed 500 USD.

Chargebacks vs. refunds

Chargeback and refund are two tools that have the same goal but work differently. The client can request a refund
directly from the seller in accordance with the return policy. That is, the interaction is made directly between the
buyer and the seller.

In the case of a chargeback, the client does not contact the seller but the bank. A chargeback will require more time
and more steps than a refund. 

How to prevent and dispute chargebacks

Chargebacks are dangerous for businesses because there is a chargeback ratio. The higher it is, the higher the
likelihood of fines from banks or card networks. Even if the arbitration is successful, the coefficient does not
decrease. Therefore, every effort must be made to prevent chargebacks on debit cards.

In order to avoid chargebacks, merchants need to follow fairly simple guidelines.

• Develop a return policy. Specify as many contacts as possible on the site and simplify the return process.
• Ensure timely delivery. Indicate a real date and inform customers about possible delays. Ensure the fastest
  possible return of funds if it is not possible to ensure timely delivery.
• Making orders should be simple. Make sure the payment descriptor is as clear as possible. Ensure prompt
  technical support. Inform customers if the item is out of stock.
• Protect yourself. Use authentication tools. Make sure that your management system provides ways to deal with
  fraudsters who regularly file chargebacks.

If a chargeback has been initiated, you will receive a notification. After that, you can defend the transaction. You
have 14 to 40 days to do this. Review the chargeback reason code and decide whether to dispute it. Prepare as much
evidence as possible for correctness – all correspondence with the client, documents about the product, etc.
Submit them to the bank. Some payment providers defend chargebacks automatically and deal with such cases fairly
quickly. However, manual review is also possible.