How does the Chargeback Payment Dispute Process Work?

Merchants who experience chargebacks at one point or another are well served by understanding how the process works. Doing so provides them with the knowledge they need to improve their chances of avoiding chargebacks in the first place and successfully overturning chargebacks when they can’t be avoided.

To understand the chargeback payment dispute process, the place to start is the 1974 law which inspired the creation of the chargeback system as we know it today.

The Fair Credit Act of 1974

As a result of 1974’s Fair Credit Billing Act, credit card issuers must allow cardholders the opportunity to dispute charges they believe are fraudulent or in error. If the credit card issuer believes that the disputed transaction is valid, they will process a chargeback and return the funds to the customer by debiting them from them the merchant.

It should be noted that credit card issuers can process chargebacks without a dispute if a transaction has not been properly processed by a merchant. However, the vast majority of chargebacks stem from customer disputes rather than unilateral issuer action. 

The 4 main steps of the Chargeback Payment Dispute Process Include:

Step #1: Customer Disputes a Payment

When a customer sees a charge on their card that they feel is invalid for any reason, they will typically call their card-issuing bank to begin the chargeback process. Customers can dispute payments for a variety of reasons; one would be for fraudulent charges, if their card was stolen or somehow charges were made without their knowledge or approval. 

They might also claim that they never received goods or services they were billed for, or that the product they received was defective or unsatisfactory in some way. 

While some disputed charges are clearly valid, in many cases it is more difficult for a payment processor to determine the validity of a charge. For instance, a customer may have accepted delivery of a product but claim they ordered a different item or claim that the product they received was not as promised. They may also claim they did not authorize a purchase they simply do not remember making, sometimes referred to as Friendly Fraud. The card issuer must consider the validity of such claims in the dispute evaluation process. 

Step #2: Card Issuer Investigates the Dispute

Once a customer has submitted a request for a reversal of a charge, the issuer looks into the claim and decides whether a chargeback is warranted. In some cases, for instance, if charges were made that were uncharacteristic of the customer and were in geographically distant locales, such as purchases of goods in a country or state where the customer has never travelled, a chargeback may be granted right away.

In other cases, the issue is not so clear, and the credit card processor may send the merchant a request for comment, called a retrieval request, giving them the chance to explain why they believe the charge was valid. These requests are time sensitive, so be sure to respond by the deadline to any such requests you receive.

If the card issuer is not convinced by the merchant’s response to their request for comment on a disputed charge, a chargeback is processed, and funds are debited from the merchant’s account and credited to the customer.

Step #3: Requesting a Chargeback Reversal

Once a chargeback is issued, if the merchant feels that it is invalid, the chargeback dispute process known as representment, begins. A request to overturn a chargeback is also time sensitive and must be processed within the time allotted by the merchant. 

To dispute a chargeback, the merchant represents their transaction along with any compelling evidence that may support of the validity of the charge. This includes receipts, delivery slips, or customer correspondence such as emails, call logs, etc. If the issuer is convinced by the merchant’s representment in the adjudication process, the chargeback is reversed, and the funds are returned to the merchant.

Step #4: Chargeback Reversal Request Adjudication

The Fair Credit Billing Act does not outline specific procedures for resolving disputed transactions, so the approach used for the process varies by issuer to some degree.

In the case of Visa, two categories are used in order to add efficiency to the process. Disputes involving fraud and authorization errors are designated “Allocation,” while all other disputes are classified under “Collaboration.”

If a dispute falls in the Allocation category, the merchant is automatically issued a chargeback. In the Collaboration category, the merchant can submit compelling evidence and represent the transaction against a chargeback. If the card issuer sides with the customer after representment and doesn’t reverse the chargeback, the merchant can appeal the decision to Visa.

American Express, because it is both card issuer and payment processor, skips the arbitration step – any rejection of a representment by the company is final and not subject to arbitration. 

Avoiding Chargebacks

While chargebacks can be reversed, the process is not easy and can take a fair amount of time and effort, especially without the help of a professional chargeback management platform. Because of this, every attempt should be made to prevent chargebacks from occurring in the first place. 

Some tips for preventing chargebacks include:

  • Be prepared to offer refunds in cases where customers are not happy with your products or services. While this approach must be used judiciously to avoid giving out excessive refunds, in some cases it may be preferable to refund a customer rather than risking a chargeback. 
  • Pay attention to your merchant description on bank and credit card statements. Try to pick a descriptor thar your customers are likely to recognize to reduce the incidence of payment disputes centered on “unrecognized” charges.
  • Be proactive about sending out updates to customers relating to delivery and tracking information for their orders.
  • Emphasize top notch customer service to reduce disputes and to encourage customers to contact you first about a dispute before going to their card payment processor. Taking this approach gives you a chance to prevent disputes from becoming chargebacks.
  • Employ tools designed to thwart fraudulent activity and perform AVS/CVV matching to make it harder for fraudsters.

Understanding the ins and outs of the chargeback dispute process can be a big help to merchants looking to keep their losses from chargebacks to a minimum. While you may not want to appeal every chargeback you receive, disputing those which appear invalid can boost your bottom line by reducing revenue slippage from this source. 

Knowing how the whole process works can also help you take the steps necessary to lower the number of chargebacks you receive. This can include taking a proactive response to retrieval requests. If a chargeback is lodged, you can use your knowledge of representment to effectively make your case for a chargeback reversal.

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FG Editorial Team
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