Chargeback Process

Woman disputing charge on phone_CardinalCommerceAs a merchant, it’s likely that you’ve already dealt with chargebacks. When a consumer is dissatisfied with a product or service, they will dispute that specific transaction to their bank, unbeknownst to the merchant. This process, called a chargeback, is inconvenient for you, the business owner. Dealing with chargebacks requires time and money that would serve a better purpose if it was allocated towards other business functions and activities. If you understand the chargeback process, you can protect your business and successfully navigate these problems.

No Banks Directly Involved

If a consumer wants a refund for a product or service, they can handle that problem exclusively with the merchant. By doing so, both parties avoid the hassle of a chargeback. For the chargeback process to formally begin, the consumer has to contact their bank (the card issuer) about the disputed charge. Ideally, in every disputed transaction, the consumer and merchant would work out the problem among themselves. If a merchant maintains a good reputation in regards to customer service, unhappy buyers will approach them directly in the event of a problem. Chargebacks, however, damage the merchant’s reputation with the cardholder’s bank, and with their own bank.   

Step 1: The Consumer Calls the Bank

Typically, the consumer, or cardholder, is the initiator in the chargeback process. They will call their bank to alert them that there’s been a double charge, a mistaken charge, a fraudulent charge or an incorrect amount charged on their credit card.

Step 2: The Consumer’s Bank Refunds the Charge

The consumer’s bank refunds the consumer the full amount of the transaction. The refund comes straight from the merchant’s bank account. Prior to issuing the refund, the bank reviews the alleged error and assumes the buyer was wronged. This action isn’t final, but, for the consumer, it temporarily handles the problem.

Step 3: The Merchant’s Bank is Notified

Next, the merchant’s bank is contacted. The consumer's bank has sent back the charge to the merchant’s bank—hence, the term “chargeback.” The consumer’s bank (also known as the “issuer” of the card) and the merchant’s bank also exchange a reason code—a number that explains the particular problem. At this time, the merchant’s bank can agree with the consumer, conclude that the merchant was in the wrong, and agree with the chargeback.

Step 4: The Merchant’s Bank Calls the Merchant

Sometimes, the merchant’s bank doesn’t accept the chargeback. When this happens, the bank notifies the merchant of the situation. Unfortunately, the merchant is often “out of the loop” and, is typically the last to know about this process. Once the merchant is made aware of the dispute, they have the same choice—accept the chargeback or dispute it as incorrect.

Step 5: The Merchant Submits Representment

If the merchant wants to dispute the charge, the process continues. The merchant only has a short time — typically, less than 10 days — to re-present the issue and argue that the charge was legitimate. At this point in the process, it seems like everything is moving backwards. The merchant sends the dispute back to their bank with supporting evidence regarding the chargeback reversal. The merchant’s bank then sends that to the issuing bank. The consumer’s bank, or the issuing bank, reviews the dispute and makes the final decision about the chargeback.

Step 6: The Consumer’s Bank Decides

In the end, the issuer rules in favor of either the consumer or the merchant. If the consumer wins the dispute, the process is finished. If the merchant wins the dispute, the charge is reversed once more — re-charged to the consumer and re-deposited into the merchant’s bank account. If the consumer continues to dispute the chargeback, both parties must work through the whole process again. If, after multiple losing efforts, the consumer still wants to dispute the charge, the credit card company can get involved in the form of an arbitration.

Chargebacks are driven by the consumer, beginning and ending with them and their card-issuing bank. The overarching process is inconvenient for the merchant, and can also damage their reputation with their bank and other lending institutions. It’s important, for merchants, to handle chargebacks immediately and efficiently.


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