A Deeper Look at Chargebacks

Considered one of the most time consuming and difficult parts of accepting card payments, chargebacks can really be a pain in the you know what. Let us walk you through what a chargeback is and how you can prevent and address them if they do occur.
What is a Chargeback?
A chargeback is a transaction dispute sent from a cardholder to their issuing bank. Typically, this would be a request for some or all of the transaction cost to be refunded to the cardholder due to the transaction being invalid in one way or another. Below are some of the common reasons for chargebacks:

• Charged more than the expected amount for a transaction
• Charged more than one time for the same transaction
• Charged for a product/service that was never received
• Charged for a product/service that was cancelled
• A fraudulent sale posted to the cardholder’s account without their knowledge
• The product/service provided to the cardholder was not as described or ‘defective’
• Customer initiates a chargeback after knowingly agreeing to the sale to receive ‘free’ products/services (friendly fraud)

Chargeback Money Flow
When a chargeback occurs, the impacted business will immediately receive a debit on their account from their processor for the amount of the chargeback. This amount is then forwarded to the cardholder and acts as a ‘temporary credit’ for the cardholder until the chargeback case is resolved by the card brands (i.e. Visa, Mastercard) who make the final decision.
The funds are held by the processor until the card brands make a final decision on the case. This process can take anywhere from 2 weeks to 3 months, depending on a few factors including amount of evidence provided, size of the case and whether or not additional information is requested for verification.
If the business can prove to the card brands that the transaction was legitimate and ran correctly, the card brands will return the funds to the business, and the initial credit that the cardholder received will be taken back. If the chargeback is ruled in favor of the cardholder though, the business will be out the amount of the chargeback and any chargeback related fees.
** Please be aware that chargebacks are meant to protect cardholders from bad transactions. So, a merchant will always be considered the guilty party in every chargeback situation until they can prove otherwise.

Resolution Outcomes
Once a chargeback and any submitted supporting documentation has been reviewed by the card brands, they will make a decision on the outcome. Below are the possible rulings that could occur:

1. Reversal to the merchant – Card brands rule in favor of the merchant that the transaction was legitimate. The disputed funds are then directed back to the merchant’s bank account and debited from the cardholder’s account.
2. Second Presentment – The supporting documentation does not verify the legitimacy of the sale so the card brands decide they need more information from the merchant and/or the cardholder to make a decision on the case.
3. Arbitration – Later stage in the chargeback process where all parties involved are not able to resolve the chargeback with the supporting documentation provided, so a representative from the card network will act as an intermediary to resolve the case through arbitration.

If possible, we always recommend that merchants try to avoid the arbitration process as it is time consuming and usually more expensive than just letting the chargeback take place. This of course depends on the size of the chargeback and whether or not the merchant deems it reasonable to pursue further.

How to Prevent/Avoid Chargebacks
One of the most common questions we are asked is “How do I prevent a chargeback from happening in the first place?” The short answer is you cannot. There is always a chance for a chargeback to happen for the reasons previously mentioned, but there are a few ways to mitigate the possibility of them occurring.
Here are some of the top tips we can advise to avoid chargebacks:

1. For in-person sales, use a POS or card reader that can accept EMV chip cards. If a merchant cannot accept EMV chip cards, they will always lose the chargeback dispute.
2. For card-not-present sales (i.e. keyed in or online orders), ensure you are collecting four main card details: (1) the card number, (2) expiration date, (3) security code and (4) billing ZIP code. This will not only help to show that the transaction was verified in full, but it will also provide a merchant with better interchange rates and fees assessed by the card brands.
3. When possible, collect a signature from the cardholder on the printed receipt or invoice
4. Keep (signed) receipts and invoices on file for at least 3 months since cardholders are provided that period of time to initiate a chargeback with their bank.
5. Properly display refund and return policies on invoices, receipts and web pages so if a chargeback occurs, you can reference the proper protocols for how returns and refunds should be handled.

It is agreeable that the way the chargeback system is currently set up does not necessarily advocate for merchants. PolyPay takes affirmative action on chargebacks by notifying our merchants and assisting throughout the entire process.
Chargebacks are not always avoidable, but keeping these details in mind should give merchants the best chance at fighting and winning disputes.