How Chargebacks Affect Merchants?
It is absolutely essential to understand what a chargeback is and how it
affects a business’s bottom line. Answering the question, “what is a
chargeback?” is the first step towards implementing an effective
management solution.
The Chargeback Process
Let’s take a look at the basic progression of a chargeback:
The cardholder files a chargeback.
A dissatisfied customer contacts the bank (issuer) and asks for a refund.
The issuer reviews the chargeback request.
Each
chargeback is accompanied by a reason code. These reason codes offer an
explanation as to why the consumer is disputing the transaction (for
example, “goods or services not as described”). Each code has its own
set of rules (filing time limits, necessary documentation, etc.). The
issuer will check the cardholder’s chargeback claim, making sure all the
regulations have been addressed.
The issuer takes action.
If
the cardholder has a valid claim, the funds will be removed from the
merchant’s bank account and credited to the cardholder’s. Notification
of the chargeback will be sent to the merchant’s bank (acquirer). If the
cardholder doesn’t have a valid claim, the chargeback will be voided.
The acquirer reviews the chargeback and takes action.
The
credit card networks (Visa, MasterCard) have created various chargeback
rights; as such, merchants have the right to dispute an illegitimate
chargeback.
If inaccurate claims are made, the merchant can try to regain profits that were fraudulently removed.
If
the acquirer has access to the compelling evidence needed to dispute
the chargeback, the bank will act on the merchant’s behalf. Otherwise,
the acquirer will pass the chargeback along to the merchant.
The merchant reviews the chargeback and takes action.
If
the chargeback is justified, the merchant may be forced to accept the
losses. However, if the business has sufficient compelling evidence
(documentation to prove the chargeback is invalid), the merchant can
re-present the chargeback for the issuer’s review.
The acquirer re-presents the chargeback.
The acquirer disputes the chargeback (a process called representment) on behalf of the merchant.
The issuer reviews the compelling evidence and takes action.
If
the merchant’s compelling evidence successfully refutes the
cardholder’s claim, the transaction will be posted to the cardholder’s
account a second time. The funds that were originally deposited into the
merchant’s account, and removed with the chargeback, will be deposited
once again.
If the merchant’s compelling evidence doesn’t refute
the cardholder’s claim, the chargeback stands. The transaction amount is
permanently removed from the merchant’s bank account and applied to the
consumer’s credit card statement.