Chargebacks were created as a form of protection for the consumer. The Federal Reserve created regulations guaranteeing card holders the right to a reversal. Various bank networks have their own corresponding rules. Initially, it would seem that a merchant would be more likely to provide quality products and speedy shipping if they had a threat of a chargeback or even having their merchant account turned off, however these rules are extremely one sided.

Consumers typically dispute transactions for a variety of reasons, and each one is issued a “reason code.” The most common reason code used is fraud and identity theft. Merchants are often left with little or no recourse. Visa and MasterCard may even issue their own fines for high chargeback ratios. But what happens when you have a consumer that is abusing the chargeback system? Some consumers make it a habit of reversing transactions.

Some online merchants have opted for chargeback insurance. Chargeback insurance is coverage protecting a merchant who accepts credit cards. With chargeback insurance merchants are covered in the event a consumer claims fraud, lost or stolen credit cards, and post purchase shipping information changes. Chargeback insurance can be costly and in some cases unnecessary. Chargeback disputing and prevention are key in ensuring your online business is making money for legitimate product sales.

Keeping your business safe against online consumer predators is easier and more cost effective than most may think. There are legal ways for a merchant to dispute and win a chargeback.  Ensure that your site has clear and well written terms and conditions and that your system is verifying AVS. Systems like Verified by Visa and MasterCard Secure can give your site extra security during the purchase process. In some cases, when a customer agrees to the terms and conditions on your site, it is as good as an actual signature at a store front. There are also systems that will respond to chargebacks on your behalf. This route will save you time, headache, and money.

One example of such relates to non-swiped transactions. Manually keyed transactions typically occur when the magnetic reader on the card doesn’t work or if an order is taken over the telephone. Visa and MasterCard regulations require that a manual imprint of the card be taken whenever possible and that the cardholder signs the imprint. This will provide proof that the card was present during the time of sale or delivery.

Another example would be if there was an equipment failure. When this occurs, a manual imprint and voice authorization is required. During a voice authorization a transaction will be entered into the terminal as a “post authorization” with the 10-digit authorization number keyed, and the funds are reserved for 10 days.  If the transaction is never keyed into the terminal, then the transaction will never be processed. Again, keeping the signed manual imprint is your proof that the customer was present at the time of the sale.

Getting an imprint of the credit card in the above situation would assist greatly in the event of a dispute or a chargeback. Visa requires that merchants keep all sales receipts for up three years and MasterCard requires you to keep receipts for 180 days. When a Retrieval Request occurs, your sales imprint will come in handy. A Retrieval Request is when the cardholder’s bank requests a copy of your sales draft. If you obtained an imprint of the card, you will be better prepared. So next time you are asked if you need an old fashioned knuckle buster, your answer should be yes.

A “chargeback” is more than a buzzword. A chargeback happens when a customer disputes a charge you’ve made on his or her credit or debit card. The chargeback usually happens after customers get their billing statement in the mail. And many times they’re quick on the draw – meaning they don’t call the merchant to try to figure out the problem before calling their bank.

There’s also the problem of “friendly fraud”, where customers dispute a legitimate charge. Friendly fraud is particularly pervasive in online gambling and adult entertainment industries.

So what happens when a chargeback is initiated? A chargeback usually happens within 120 days of the transaction date (most banks have a time limit on initiating chargebacks). The cardholder or bank claim that the merchant – that’s you – made a mistake at the time of the transaction.

Typical chargeback reasons:

• Disputes over merchandise quality
• Refund credit not received
• Proper authorization not obtained at the time of the transaction
• Merchandise not received
• Duplicate charges
• Fraud

Then your account is debited and you must provide proof that the transaction is valid and complies with Visa/MasterCard rules and regulations.

How the Chargeback Cycle Works:

There are five formal steps in the chargeback process:

1. Presentment: Original Sale
2. First Chargeback: A customer disputes a charge to his or her credit card company or bank and the bank responds with a retrieval request to dispute the transaction.
3. Second Presentation or Re-presentment: This is when the merchant has an opportunity to respond to the first chargeback.
4. Second Chargeback: If the second presentment is rejected by the cardholder, the issuing bank files a second chargeback.
5. Arbitration: This is when Visa/MasterCard staff reviews the situation. The losing party could pay up to $500 in fees. If it means keeping your chargeback ratio in check, you may find it worth the gamble.

First Chargeback

Once your bank receives electronic notice of a chargeback from a cardholder’s issuing bank, you will get a notice advising you of the chargeback. You will have about 7 days to offer your rebuttal. Unfortunately, until the matter is resolved, your account will be debited for the disputed amount.

Second Presentment

Once your bank receives your supporting documents, they will review them to determine if the substantiation you provided meets the Visa/MasterCard requirements necessary to remedy the chargeback.

If it doesn’t, expect to get a letter notifying you of the decision, along with the reason the documents didn’t meet Visa/MasterCard requirements. In some cases you may be asked to provide additional documentation to clear the chargeback.

If your documentation does meet the requirements, you’ll get your money credited back and a letter stating that the chargeback was remedied. The process up to this point can take up to 45 days.

Second Chargeback and Arbitration

When the situation escalates into a Second Chargeback or Pre-Arbitration, you have to make a decision about your next course of action. If you continue to disagree with the cardholder and issuing bank, you must file for MasterCard arbitration.

For Visa transactions, the transaction amount is left in the merchant’s bank account while the merchant decides whether to accept the issuing bank’s request and return the transaction amount to the cardholder. If the merchant rejects the request, the issuing bank has the right to file for Visa arbitration.

What is Arbitration?

Arbitration is a process reserved for cases when the cardholder/issuing bank and the merchant cannot resolve a disputed transaction through the chargeback process. You would only move on to arbitration after the Second Presentment stage. All involved parties have an opportunity to present their case to a Visa/MasterCard analyst.

Arbitration cases must be filed with Visa/MasterCard no later than 45 days after the Second Chargeback is issued.

Filing Procedures, Fees and Penalties for Chargeback Arbitration

You must complete a Visa/MasterCard Arbitration form along with a narrative description of the problem and legible copies of all documentation submitted during the chargeback process.

There is a filing fee of $150.00 and a review fee of $250.00 paid by the losing party (these fees are subject to change and verification). One important thing to note is that either party can be assessed a $100 fine for each technical violation against a party. A party could win a case but still be assessed a technical fine.

Who Wins?

If you end up in arbitration, there are several criteria the arbitrator will consider. Merchants usually get an unfavorable ruling if they:

• Fail to address the issued raised by the cardholder.
• Fail to prove that the dispute was unreasonable.
• Present insufficient documentation to support either argument.

Split decisions sometimes happen when one party offers a reasonable compromise solution to the dispute.

Compliance Issues

There are instances when you are not protected by the chargeback process. This happens when a cardholder or issuing bank alleges that you violated specific Visa/MasterCard Operating Rule(s) that is not covered by a chargeback right.

The issuing bank must certify that a financial loss did or will occur as a result of the rule violation. Each side has an opportunity to present to a Visa/MasterCard analyst assigned to the case.

Examples of compliance violations include:

• Failing to properly disclose limited refund or return policies to the cardholder at the time of the transaction;
• Preparing two or more transaction receipts to avoid authorization for a single transaction;
• Quality of service received from a travel and entertainment merchant.

Compliance cases are filed within 90 days (Visa) and 180 days (MasterCard) from the transaction date, the date of a Retrieval Request or the date of violation; or 90 days for Visa and 45 days for MasterCard from the date the issuing bank receives notice from its cardholder of a violation (Date of Discovery).

Filing Procedures, Fees and Penalties for Compliance Issues

If you face a compliance violation claim, you will have to complete a Visa/MasterCard compliance form and provide a narrative description of the problem and legible copies of all documentation supporting your case. The issuing bank must provide you with a pre-compliance letter at least 30 days prior to filing in an attempt to settle the matter.

As in regular arbitration, there is a filing fee of $150.00 and a review fee of $250.00 paid by the losing party. Further, a $100.00 fine may be assessed for each technical violation found against a party. A party could win a case but still be assessed a technical fine.

Decision Criteria for Compliance Violations

The arbitrator will consider the following factors when determining final financial liability:

• Whether or not there was a rule violation and a resulting financial loss.
• Whether or not the cardholder’s complaint was reasonable.
• Whether or not the disputed amount should be allocated between the requesting and opposing parties.

If you’re facing a chargeback claim, arbitration or a compliance violation charge, the most important thing to remember is to respond quickly and accurately with sufficient supporting documentation. Failure to respond by the stated deadlines is an automatic forfeiture of the transaction – meaning you will lose the full transaction amount.

Stay tuned for more on calculating chargeback ratios and preventing chargebacks. In the meantime, download the Visa Merchant Card Acceptance Guide. Learn more about the chargeback process and what triggers a chargeback on Visa’s website.