The pandemic has brought about a significant increase in card-not-present transactions all around the world. Growing steadily since 2013, the transaction volume is expected to exceed one trillion by 2023.
While most merchants enable card-not-present credit card payments, many still struggle to understand the difference between two very common terms used in credit card payments — “chargebacks” and “disputes.” And it doesn't help that some banks and payment processors often use the terms interchangeably.
This article will help you understand chargebacks and disputes, including the differences between them, their causes, and how to prevent or minimize their impact on your business.
When customers pay merchants with a credit card and, at the end of the billing cycle, the customer looks at their credit card statement but doesn't recognize the transaction, they may contact their bank to challenge the transaction. This action is known as a dispute. Whatever the reason may be, any time a cardholder questions or challenges the legitimacy of a transaction with their bank or card company, it constitutes a dispute.
It’s important to note that a dispute doesn't always mean that there was any nefarious intent or activity associated with a transaction. For example, a cashier may have entered the wrong amount in the point-of-sale device, or a customer may have been accidentally billed twice.
However, there are times when things may not be so straightforward. For example, a customer may have bought something online and it was never delivered, or the wrong items were delivered. And of course, sometimes card information may have been stolen and a customer’s card was used for fraudulent transactions.
Following a customer’s dispute, when an issuing bank investigates a transaction, agrees that it was illegitimate, and proceeds to reverse the payment, it’s called a “chargeback.”
If you’re a merchant this reversed payment comes out of your bank account and goes back to the cardholder. This initial phase of the chargeback process (where the payment is reversed) takes place at the banking level with no inputs from a merchant.
Of course, in some cases, the issuing bank may be able to satisfactorily answer the customer’s questions to resolve the dispute. Other times, the bank’s investigation may determine that the transaction was valid. In such cases, there will be no chargeback.
In other words, while every chargeback arises from a dispute, not every dispute results in a chargeback.
The chargeback process was originally introduced to protect customers and increase their trust in the credit card system. It assures customers that if merchants fail to deliver their order or deliver the wrong items — or if they’re victims of identity theft — their money is safe and they have recourse.
It’s important to note that chargebacks are not the same thing as refunds. A refund essentially reverses or cancels the entire transaction. The customer returns your products and you return their money. However, when a bank files a chargeback, not only do you lose the transaction amount, but also the services or products you’ve delivered (plus any cost associated with shipping and processing).
In addition, acquiring banks and payment processors will levy a chargeback fee on your account. For example, if you’re using PayPal for your business, you’ll be charged a non-refundable fee of $20 every time a customer files a chargeback.
As you can imagine, this puts merchants in a tough spot. It doesn’t help either that cases of “friendly fraud” are on the rise. Without a solid understanding of the process and the underlying factors, a merchant’s revenue stream can take a big hit from chargebacks.
Each card network dictates certain thresholds with respect to the number of chargebacks a merchant is permitted before running into trouble. If these numbers go beyond acceptable levels, merchants may be placed into a “monitoring program.”
Each card network uses different names for them. For example, the Mastercard Excessive Chargeback Program (ECP) or the Visa Dispute Monitoring Program (VDMP).
Essentially, if a merchant is placed into one of these, they will incur fines and other additional fees every month until their chargebacks are reduced to acceptable levels. Find out more here.
Thankfully, there's still hope for merchants after receiving a chargeback. They can fight these chargebacks after they have been filed and recover their lost revenue.
This is often referred to as a chargeback dispute. The term may make some sense, considering that the merchant is disputing the chargeback, but the correct term is “representment” or “chargeback representment.” Essentially, it’s the process by which merchants let the bank know that the original transaction was valid and request them to nullify or overturn the chargeback.
Fighting a chargeback can be complicated, and it’s hardly made any easier by the different terminologies that different providers use. While there is some general agreement on what “chargebacks” and “disputes” mean, the exact definitions may vary from one payment provider to the next. Let’s take a look:
In 2018, Visa announced the Visa Claims Resolution (VCR) initiative to revamp its dispute resolution process to make it simpler and quicker. In the new process, disputes are meant to be resolved on average in 31 days or less.
Visa introduced two new workflows to deal with disputes (depending on their nature) and introduced changes in their terminologies as well.
Visa no longer uses the word “chargeback.” Instead, a cardholder can raise a “dispute” on a transaction with the issuer (cardholder’s bank) if they can’t resolve the issue with the merchant directly. Representment is called a “dispute response,” i.e. when a merchant shares evidence to fight a dispute.
If the situation is not resolved — e.g., if the merchant’s evidence is not compelling enough or the cardholder presents new evidence — the dispute moves to pre-arbitration. During pre-arbitration, a merchant can either accept the transaction or present new evidence. If it moves to arbitration, it can be costly for the losing party, as they’ll have to pay an arbitration fee.
Mastercard’s latest Chargeback Guide was released in December 2021.
With Mastercard, if a customer doesn’t recognize a transaction, they may request a “chargeback.”
After a chargeback has been filed, the merchant can “represent” the case to the bank, along with compelling evidence, following which the bank may cancel or reverse the chargeback. If the cardholder isn’t happy with the decision, they can move to a “second chargeback” (Mastercard’s term for pre-arbitration), and then arbitration.
Since PayPal is not a credit card network, their process is a bit different.
If there’s an issue with a transaction, the buyer contacts the seller through the PayPal Resolution Center to file a dispute. Both parties will attempt to resolve the issue using this platform.
If the problem persists, the buyer can escalate the dispute to a claim. This is where PayPal tries to resolve the issue. The seller (or merchant) will have the opportunity to present their evidence during this phase, but if they don’t, the buyer will be given a full refund.
Of course, if the buyer funded the PayPal payment with a debit or credit card, they can also go directly to their bank to request a chargeback.
Chargebacks can be costly to merchants, and fighting them can be both tedious and time-consuming. In addition, if chargeback rates increase above a certain threshold, the merchant can be placed in a monitoring program which will cause them to incur much higher processing fees on all transactions. Understanding the terminology and processes used by the various payment providers is a good place to start. By working with Justt, you can free up your time from fighting chargebacks to focusing on running your business.
Our chargeback mitigation solution combines the power of AI with human expertise to simplify the dispute process for merchants. It flags incorrect chargebacks effortlessly and even gathers and submits evidence on your behalf. The best part? With a fee structure that’s based solely on success, it's risk-free.
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