Chargeback Handling Lifecycle

In this article we are going to address the concept of credit card chargebacks, focusing on chargeback’s lifecycle.

In essence, a chargeback is a dispute between a cardholder and a merchant over a certain amount of money, happening when the cardholder believes that the money has been charged illegitimately or by mistake (for products or services he or she did not purchase).

When it comes to credit card chargeback handling, every card association (Visa, MasterCard, Amex, and Discover) has its own chargeback lifecycle and its own rules for chargeback disputing. Particular flow depends on the specific association, but we will now try to provide a high-level chargeback lifecycle description, which you can use as a general guideline.

The cycle starts when a cardholder contacts a bank and requests one of two things. The customer can inquire about a particular transaction. In this case the bank is going to issues a retrieval request (sometimes referred to as inquiry) to the merchant, who produced the transaction. Otherwise, the customer can dispute a charge and request a refund. In this case a chargeback is issued.

Retrieval request and chargeback creation

In case of retrieval request or inquiry, the merchant has to respond to the cardholder’s request with appropriate information. If the cardholder is satisfied with the answer, the case is dismissed. Otherwise, he or she can insist on a chargeback. Moreover, if the customer’s request remains unanswered (ignored by the merchant), the inquiry is automatically converted into a chargeback, that a merchant cannot represent (dispute).

When a chargeback is issued, the disputed amount is automatically deducted from the merchant’s account.

If the merchant accepts liability, the case is closed and no further action takes place.

Representment

If a merchant decides to dispute the chargeback (submit a representment), he has to prepare all the necessary supporting documentation, such as the copy of the contract or product order, shipment confirmation, etc. The acquirer reviews all the submitted documents. If the acquirer considers, that the information provided by the merchant, is sufficient, the chargeback is reversed, and the merchant gets the chargeback amount back. After the money is returned to the merchant, the cardholder has the opportunity to decide on the next step.

Chargeback disputing rounds and arbitration

If the cardholder is satisfied with the information provided by the merchant as part of the representment, the chargeback is dismissed. Otherwise, the second round of chargeback disputing starts.

Different associations have different rules, limiting the number of chargeback disputing rounds. Consequently, further disputing rounds are conducted based on association-specific disputing policy. American Express, for example, has no limitations on the number of rounds of disputing between the cardholder and the merchant. Visa and MasterCard limit this number to one additional iteration, after which the case has to go into the arbitration.

In any case, at a certain stage, when the two sides cannot come to terms, the arbitration is requested. The arbitration is done by the association, the decision is final, and the losing party has to cover the arbitration fees, that, generally, start at $400 per case. Consequently, a chargeback below $300 rarely makes it to the arbitration stage.

Keep in mind, that debit networks do not have chargeback handling mechanisms, so transactions, processed through PIN-less debit networks are final and cannot be reversed.

Conclusion

We hope, that now that you have this information on chargeback lifecycle, you will be able to deal with chargebacks more efficiently.