Credit Card Chargeback Primer

Nobody goes into business to lose money. You work hard for every penny, and every penny counts. To have that taken away from you months after a sale was completed is not only bad for business but extremely frustrating. Too many chargebacks usually spells doom for an online merchant.

The best tools for avoiding a chargeback are not available for online merchants. Retail-style businesses can perform certain actions that render them virtually bulletproof to chargebacks (they're still vulnerable, so don't be envious just yet). They can either swipe the customer's credit card through a processing terminal or get a manual imprint of the card. Plus they can get a signature on that receipt at the time of sale. All of these verify that the customer, merchant, merchandise, and credit card were present and satisfactory at the time of sale. Pretty hard to dispute that.

So what is an online merchant to do? Since giving up is not an option, education and prevention are an online merchant's best weapons. Having some basic policies and procedures in place can significantly reduce the number of chargebacks your business will receive. Below we will both educate ourselves as well as identify some strategies that will lower your potential for chargebacks.

What exactly is a chargeback?

A chargeback is when a customer initiates a refund for a purchase they made on a credit card by contacting their card-issuing bank. The reasons for this can vary greatly but generally is a result of a customer being dissatisfied with their purchase. The customer may or may not have contacted the merchant about remedying this situation ahead of time. They may even be completely wrong. However, responsibility falls on to the seller to ensure that the transaction goes smoothly and the customer is satisfied. A failure somewhere along the fulfillment process, including at the customer service level, can lead to a chargeback.

The Chargeback Process

The chargeback process is a largely unknown to merchants and can often be a cause of frustration. To assist merchants in understanding the chargeback process, I've provided the chargeback process used by Visa and MasterCard. American Express and Discover Card use a similar process. However, because they do not issue their credit cards through member banks there are fewer steps involved and the process is usually faster. The process is as follows:

1. The customer disputes a transaction by contacting their card-issuing bank

2. The card-issuing bank researches to determine whether the reasoning for the chargeback is valid. If not, the chargeback is declined and the customer is held responsible for the charge.

3. A provisional credit is provided to the customer. The card-issuing bank initiates a chargeback process and obtains credit from the merchant's processing bank.

4. The merchant's processing bank researches the validity of that chargeback. If they determine the chargeback is invalid they will decline the chargeback and return it to the card-issuing bank.

5. The chargeback amount is removed from the merchant's account and the merchant's processing bank provides written notification to the merchant.

6. Did a processing error occur? If so the sale is re-presented to the card-issuing bank for corrections.

7. The merchant provides documentation to remedy the chargeback. If the provided documentation is found to be satisfactory the chargeback is declined and the customer is once again charged for the sale. If the documentation is found to be unsatisfactory the chargeback is successful and the process ends.

As you can see, there are multiple steps involving multiple parties- each requiring their own amount of time to manage their responsibilities. A typical chargeback can take anywhere from six weeks to six months before it is resolved. If each party takes the maximum amount of time to complete their responsibility, it is not hard to see how a chargeback can seem to drag on forever.