It is common to face customers who force refunds from businesses. This kind of request from a customer is known as a “chargeback.” Chargebacks can be one of the most frustrating elements of business for a merchant. To understand what to do when a customer forces a refund, a merchant must understand the reason behind a chargeback.
Reasons Behind Chargebacks
A chargeback may appear as a refund from the customer’s end. However, the reality is not the same. Chargebacks are refunds that are forcibly taken from the business’s bank account. The cardholder disputes a charge with their issuing bank. If the bank considers the request from the customer to be valid, then the transaction amount is taken out.
Chargebacks are meant to provide safety to the cardholder. They do the following things:
- Make the customer feel secure and create high standards for merchants. Businesses are constantly improving their processes to prevent the unwanted burden of a chargeback.
- Chargebacks discourage merchants from selling low-quality products/services. The merchants will be focused on selling products as they were promised since they know that selling a product below the quality standards and not according to what was described.
- Chargebacks can effectively help merchants to practice transparency in their business. For example, if a product was never delivered to the intended customer and a chargeback takes place, then who will be at fault - the business. If the merchant is aware of the consequences, the chances of conducting fraudulent activities are very slim.
- Without chargebacks, cardholders would have to experience fraudulent activities in the form of unsanctioned transactions from their accounts. This practice is one way of handling such double-dealings.
Now that we have covered the valid reasons customers dispute a charge, let’s go over in invalid reasons:
- Chargeback fraud is when a cardholder maliciously disputes a charge in an attempt to get their money back from the transaction, while still retaining the goods or services they received.
- Friendly fraud involves no malicious intent from the cardholder when they dispute a charge. Simple forgetfulness or even family members making unknown purchases can be at the root of friendly fraud.
Merchant’s can regain the transaction amount lost from invalid disputes through a dispute response.
What to do When Faced with a Dispute?
Once a customer has disputed a payment, the bank will collect evidence from the customer details and will then issue the chargeback according to different reason codes. For a merchant to know what evidence to submit in their dispute response when faced with a chargeback, it is important to understand how reason codes and transaction modifiers work. Businesses, therefore, need to adopt a professional and vigilant attitude in this regard. For example, a business offering Magento development services should focus on understanding how to respond to chargebacks against services if they are offering their services on-site like Upwork, etc. Or merchants selling physical goods will need to focus on evidence surrounding the delivery or quality of their merchandise.
Reason codes are used to define the reason for the dispute. These codes have been developed by the major card networks such as American Express, Discover, Visa, and MasterCard. Reason codes help merchants understand why a specific chargeback has taken place and what evidence can be provided to challenge the chargeback.
Types of Chargebacks
Here are the types of reason codes that merchant can receive:
Authorization chargebacks represent disputes related to authorization issues. For example, transactions where authorization was required but not obtained. They can also represent disputes where an authorization request received a decline or pickup response, and the merchant completed the transaction anyway.
Consumer disputes represent chargebacks initiated by the cardholder in regards to product, service, or merchant issues. Consumer disputes are also referred to as cardholder disputes, cardholder disputes, and service chargebacks. The reasons for disputes categorized under consumer disputes are varied and can include circumstances like goods not received to canceled recurring billing.
The fraud category is used for reason codes related to fraudulent transactions. Reason codes related to no cardholder authorization, EMV liability, card present, and card not present fraud are all found within the fraud category.
Processing errors, also referred to as point-of-interaction errors, categorize reason codes representing disputes including duplicate processing, late presentment, credit processed as charge, invalid card numbers, addendum/“no show” disputes, incorrect charge amounts, and other similar situations.
In order for the merchant to regain lost revenue from an invalid dispute, they have to submit a well researched and crafted dispute response. The reason codes that are associated with each chargeback will help the merchant gather evidence and submit it to the issuing bank. Depending on the type of chargeback faced, the business owner will need to offer evidence in the form of documents, timestamps, delivery receipts, IP addresses, etc. Understanding the type of chargeback will help gather the evidence and submit a response promptly and efficiently.