Understanding Chargeback Disputes: A Comprehensive Guide for Merchants

Does your business regularly get hit with chargebacks? If you’re a merchant, losing money to chargebacks can feel like a nightmare. It’s more like the whole world is against you. Unfortunately, the rules for sorting out payment problems are hard to understand. The worst part is that they keep changing and can be different depending on the bank or card company.

This is why a lot of businesses don't bother fighting chargebacks. Another reason is because their success rate is usually only 20-40%. Also, it takes a lot of time and money to fight chargebacks on your own, which can be disheartening.

However, if you're a merchant and take payments with credit cards, then you'll likely deal with chargebacks at some point. Usually, as a merchant, you'll be notified of a chargeback when a customer disagrees with a purchase and asks their bank to cancel the payment. This could be because of fraud, mix-ups, or not liking what they bought.

As we've already established, dealing with chargebacks can be annoying, take up a lot of time, and cost your business money. In this guide, we’ll take a look at what a chargeback is, how it works, why it exists, and how to handle it if you’re a merchant.

What is a Chargeback Dispute?

A chargeback happens when a cardholder who is not satisfied with a transaction initiates the process that returns funds to him/her. It acts as a consumer protection mechanism that allows cardholders to dispute fraudulent charges and dissatisfactory purchases by filing such a dispute with their bank. Meanwhile, a dispute arises when you're unhappy with a purchase, notice unauthorized use of your card, or suspect fraud, leading you to request a chargeback. This process gives you the right to sue for unauthorized transactions or products/services that do not fulfill the expectations. It's quite unfortunate that chargebacks are causing merchants to lose more money than ever, with Americans disputing a massive $83 billion in credit card charges in 2023. Also, the average cost of disputes went up by 16% last year, according to Sift research. Actually, every chargeback starts when there's a problem with a payment. Usually, it's the person who used the card that will first file for a chargeback. When the merchant finds out about the problem, they can either agree with the chargeback or try to prove that the payment was okay. If they agree with the chargeback, the person who used the card gets their money back, and that's the end of it. But if the merchant wants to argue against it, they can send evidence to the bank that gave the card. The bank will then decide if they should change their mind about the chargeback. When the bank thinks the chargeback is valid, the merchant can ask the card company to look into it again. The main aim is to refund the money and settle the payment disputes.

Chargeback vs Dispute

Chargebacks and disputes are two concepts that are often mistaken, but they are separate steps of the same process. Dispute is the term used when a customer reports a transaction on their card statement either because they do not recognize the charge or they believe they did not make the transaction. On the other hand, chargeback is when the bank conducts the investigation and if the claim is valid, it will force a reversal of the payment from the merchant's account. In this case, the merchant is being penalized. It assists consumers with the return of their money in case of fraud or dissatisfaction with the purchase. However, it can be quite expensive for merchants. They lose money from the sale and are charged a fee by the bank. The truth is that a large number of chargebacks will often leave the merchants in a difficult situation as far as payment processing is concerned.

What Happens if a Merchant Disputes a Chargeback?

A merchant can dispute a chargeback by launching a formal process. This includes providing a rebuttal letter with evidence to show why a chargeback is not warranted. The issuing bank will then review the evidence to decide whether to reverse or confirm the chargeback. If the bank sides with the merchant, the merchant can appeal to arbitration. At this stage, the card network steps in to make a final decision on the case. However, a losing party in arbitration generally has to pay several hundred dollars in fees to the card network. If the merchant doesn’t respond on time, the issuer will automatically grant the chargeback. This can result in merchants being charged extra fees besides the chargeback fee, such as fees for non-response.

What Does it Mean to Dispute a Transaction?

Disputing a transaction means questioning the validity of a particular charge on your bank statement and seeking a refund from your card issuing bank. This process is initiated when a cardholder contacts their bank to challenge the legitimacy of a transaction.

Some people see Disputes as a safeguard provided by major card networks like Visa, Mastercard, and American Express to protect cardholders from fraudulent or erroneous charges.

However, there are various reasons why disputes may arise. One common reason is when a cardholder claims that the goods received were not as described or significantly different from what they expected.

Another scenario is when a cardholder does not recognize a charge on their bank statement and seeks clarification. Also, administrative errors such as duplicate billing or promised refunds not received may also lead to disputes.

In essence, disputing a transaction involves questioning the validity of a charge and seeking resolution from the card issuing bank, typically with the aim of receiving a refund for the disputed amount.

How to Dispute a Chargeback as a Merchant

When customers raise concerns about transactions on their credit or debit cards merchants have the option to challenge the dispute by proving its validity. This can be done through the following ways:

• Get Prepared
  You'll need to gather all the details of the customer's transaction in advance such as delivery confirmations, purchase receipts, and refund policies to effectively address any unjustified disputes.
• Know the Deadlines
  Familiarize yourself with the timeframes and deadlines for initiating your chargeback dispute. Different networks have varying guidelines. Typically you are given 20 to 45 days after notification. The entire process may extend up to 120 days.
• Gather Evidence
  As a merchant, you can organize all evidence linked to the disputed transaction. This evidence includes receipts agreements, order forms, or any relevant transactional information.
• Submit on Time
  Adhere to the deadline provided by the acquirer and submit all evidence by the specified date. Missing the deadline means losing the dispute by default. Write a Rebuttal Present your case clearly and convincingly in writing. You'll have to include a chargeback rebuttal letter summarizing your evidence and why the customer’s dispute is invalid.
• Await the Decision
  In this final step, the acquirer will forward all the information to the payment card network, which will be sent to the issuer for a final decision. If the chargeback is denied, you’ll get the transaction amount refunded. If it’s approved, the customer gets a refund.

How to Win a Chargeback Dispute

Winning a chargeback could be tricky, but with the right strategy, you could improve your chances of success. Here are some tips:

• Provide Clear Evidence
  You'll have to gather all the receipts, order confirmations, and any kind of correspondence with the customer. This will provide the proof to your case to show that the deal was both fair and genuine.
• Respond Promptly
  Don't take too long to respond to the chargeback. The faster you move, the more winning chances you will have. When deadlines are not met, it can be detrimental to a case.
• Be Honest and Transparent
  As a merchant, don't ever try to conceal things or give fake figures. Honesty is the greatest policy when it comes to the response to a customer's chargeback claim.
• Understand Reason Codes
  Every chargeback has a reason code associated with it and this is where the customer has indicated why they opted for a transaction dispute. Learning these codes will enable you to use them to the case and to point out the exact problems a customer has.
• Don't Ignore Communication
  Keeping communication channels open with your bank or credit card issuer during the dispute will help you resolve the issue more efficiently. Failure to look into their questions or give them a chance for clarification can be a great hindrance to your case.
• Leave out Emotions
  Try to keep calm and maintain your professionalism while managing the dispute. You'll need to keep calm because if you get emotional or angry, it will spoil the impression you are supposed to create.

What Does Chargeback Mean in Banking?

In banking, a chargeback happens when a customer disputes a transaction on their account. This could happen if you didn’t authorize the charge, didn’t receive the goods or services you paid for, or if there was some other issue with the transaction.

Chargebacks have significant implications for banks and merchants. They affect bank operations by requiring staff to investigate and process the dispute. If the chargeback is upheld, the bank may have to refund the customer’s money, which impacts its finances. Chargebacks also affect relations between banks and merchants.

When a chargeback happens, the merchant’s bank may have to return the funds to the customer’s bank, resulting in financial losses for the merchant. This can strain the relationship between banks and merchants, especially if chargebacks occur frequently.

What Does Dispute Transaction Mean?

A dispute transaction refers to any transaction on your account that you question or challenge. This could be because you didn’t make the purchase, you didn’t receive what you paid for, or there was some other problem with the transaction.

Disputing a transaction involves contacting your bank to report the issue and request a refund. The bank then investigates the dispute to determine whether it’s valid. If they find it in your favor, they may issue a chargeback to reverse the transaction and refund your money.

However, disputing a transaction can differ depending on the banking scenario. For example, if you purchased with a credit card, the process may be different from disputing a transaction on a debit card or through online banking. Each bank may also have its procedures for handling disputes, so it’s essential to follow their policies closely.

What is a Chargeback on a Credit Card?

The credit card chargeback occurs when your bank returns your money to you because of certain reasons. These might be refusing charges on a credit card, buying something online that wasn’t delivered but you still have to pay for it, or receiving a defective item. In most cases, you'd ask for a chargeback after trying to get a refund from the merchant with no success. For example, you just bought a high-end cell phone online, but surprisingly the one that was delivered was not the model that you ordered. You will certainly call your bank to request a chargeback to recover your money. Usually, for a credit card chargeback request, four main participants are involved: This system involves you (as a consumer), the merchant, your credit card issuer (the bank), and the credit card network. Before the chargeback, there's a credit card transaction involving two additional participants: the credit card processor, and an online payment gateway. Every participant gets involved in the process that goes into making a chargeback request.

What Does Return Item Chargeback Mean?

Return item chargeback is not the term that you may have in mind when you see chargeback. Instead, it is a fee that your bank charges you when the check you have deposited bounces or is rejected because the issuer's account has insufficient funds. Therefore, if you deposit a check but you find out there is no money to cover it, you'll be charged such a fee. Now, the return item chargebacks and regular chargebacks are going to be clarified. Often chargebacks bring conflicts when some goods are purchased with a credit card and a consumer claims there is a problem with the purchase and asks the bank to reverse the payment. However, debit cards and checks provide a more convenient way of paying, but you can be charged when the check you deposit bounces, and your bank takes a fee as a form of compensation. For merchants, it's quite different. They experience frequent chargebacks when customers question card transactions and the business may lose money or pay fines as a result. Nevertheless, return item chargebacks contradict the concept of bank checks bouncing, and that has no direct effect on merchants. Other than that, it is a charge you are billed for depositing a bad check.

How AI Tools Can Help Fight Chargebacks

The merchants face the constant stress of effectively managing chargebacks. A lot of time is spent on analyzing the controversy, gathering evidence, and formulating persuasive appeals for the case. But is there a smarter way? Fortunately, sophisticated technical tools are developed to accelerate the chargeback dispute process and help merchants fight back. These powerful tools can observe transactions and filter out the counterfeit activities and patterns that likely pose chargeback threats. The Generative AI system processes more than 200 data points of any transaction, such as IP addresses, billing mismatches, and velocity checks (sudden spikes in purchase frequency). This means that not only can the AI flag up suspicious transactions, but also provides a customized answer for every dispute case which will certainly increase your win rate.

Features and Benefits of Automated Chargeback Solutions

The automated chargeback solutions in the market today have features that considerably increase the efficacy of chargeback management for merchants. This software will inform you of the upcoming potential chargeback, help make a well-organized response, and even submit your dispute case to your acquiring bank within the allowed timeframe. AI-processed systems do automatic routine operations, thus saving time and resources for the merchants, which can be used for more important business issues. Moreover, most of the above-mentioned solutions charge based on their success. For instance, ChargePro works similarly by only charging the merchant when they successfully recover the chargeback. Therefore, it helps eliminate the initial financial investment and minimizes the financial risk of the implementation of the innovative solution. With technology like AI taking charge, managing chargebacks will no longer be an issue. These tools are extremely effective and merchants can in turn regain control, fight the disputes more efficiently, and ultimately protect their profit.

Conclusion

Dealing with chargebacks can be really frustrating and expensive for businesses that take credit card payments. But there are ways to reduce the risk and improve your chances of winning disputes. First, you need to know how the dispute process works. Make sure you have all the necessary documents ready and send them in on time. It's also important to have clear policies in place and stick to them. And always keep an eye out for any signs of fraud. Also, new technology like AI is here to help! These tools can spot fraud, build cases, and even save you time. Rather than trying the stressful manual process, you could consider using a service like ChargePro to automate this process and get back more money from chargebacks.