The Chargeback Process: A Beginner's Step-by-Step Guide

Having dealt with chargebacks with my e-commerce store made me want to help other merchants understand the severity of chargebacks. That led me to write this post.

I’ll explain who takes part in the process, each step in the process, and what the results could entail.

Let’s jump in.

Key Takeaways

• The process involves the cardholder, merchant, issuing bank, acquiring bank, and credit card network.
• It also includes dispute, provisional refund, reason code assignment, option to fight dispute, and evidence gathering.
• Merchants can prevent chargebacks by providing clear descriptions, strong customer support, and utilizing fraud prevention tools.
• Winning a chargeback means the issuing bank reverses the provisional credit and returns funds to the merchant.
• Losing a chargeback means the issuing bank deducts the disputed funds from the merchant's account.

Who Takes Part in the Chargeback Process?

We first need to know who takes place in the chargeback process to understand it.

Here are the participants and their roles:

1. Cardholder (Customer): Initiates the dispute by contacting the issuing bank and claiming a transaction is invalid. They can also initiate the second chargeback
2. Merchant: Accepts the chargeback or fights it by providing evidence to the acquiring bank.
3. Issuing Bank: The customer’s bank investigates the cardholder's claim, assigns a reason code, may issue a provisional credit, and decides whether to uphold or reverse the chargeback.
4. Acquiring Bank (Acquirer): The merchant’s payment processor or bank reviews the chargeback, notifies the merchant, and acts as an intermediary, forwarding the merchant's evidence to the issuing bank.
5. Credit Card Network (e.g., Visa, Mastercard): Provides regulations for the chargeback process and acts as the final arbiter in disputes that reach the arbitration stage.

Any bank (e.g., Chase) is considered an issuing or acquiring bank.

If merchants use a payment processor like PayPal and Stripe, they can act as a processor and acquiring bank [1]. Thus, if a transaction involves them, they would play the role of the acquirer.

However…

Payment processors might have their own internal dispute resolution process before forwarding the chargeback to the issuing bank. They may also offer additional resources or tools to help merchants fight chargebacks.

What Is the Chargeback Process: Chargeback Process Flow

The chargeback process is a way for cardholders to dispute transactions. They contact their issuing bank to reverse a charge. The bank investigates, potentially withdrawing funds from the merchant's account. 

The merchant can challenge the chargeback with evidence. The bank decides whether the chargeback is justified.

Here’s how the process goes:

• Dispute: The cardholder contacts their bank to challenge a transaction's validity.
• Provisional Refund: The issuing bank may temporarily credit the cardholder's account while investigating.
• Bank Assigns a Reason Code: The bank categorizes the dispute using a specific code to streamline the process.
• Option to Fight Dispute: The merchant decides whether to accept the chargeback or contest it.
• Gather Evidence and Documents: The merchant compiles supporting documents to prove the transaction's legitimacy.
• Submit Documents and Evidence: The merchant provides the compiled evidence to the acquiring bank for review.
• Bank Reviews Documents and Evidence: The issuing bank carefully evaluates the merchant's evidence to determine the chargeback's outcome.
• Arbitration: If the dispute remains unresolved, the card network acts as a final judge, potentially with fees for the losing party.

I’ll dive more into each of these steps throughout the following sections. Meanwhile, I’ll explain the merchant’s responsibilities in each of these steps.

Many websites will say the process goes like:

• First chargeback
• Second chargeback
• Arbitration

However, I’m going to go more in-depth.

Here we go.

1. Dispute

• Merchant’s Responsibilities: None.
• Who’s Involved: Customer, merchant, acquiring bank, and issuing bank.

The cardholder initiates a dispute by contacting their issuing bank to challenge a transaction's validity. The merchant won't know about the dispute until the chargeback is issued.

Multiple chargebacks can occur simultaneously. As each transaction has the potential to result in a separate chargeback.

Your best bet to prevent this step from happening is to prevent chargebacks altogether. I’ll talk about more steps later, but here’s a summary:

• Clear Communication: Provide accurate product descriptions and transparent billing practices.
• Strong Customer Support: Offer easily accessible support channels to resolve issues quickly.
• Fraud Prevention Tools: Use fraud detection systems to identify and block suspicious transactions.

Even with strong prevention measures, chargebacks can still occur.

Summary: The dispute stage begins when a cardholder contacts their bank to contest a charge. Merchants have limited options at this point.

2. Provisional Refund: First Chargeback

• Merchant’s Responsibilities:None.
• Who’s Involved: Issuing bank.

The issuing bank may issue the cardholder a provisional credit, reversing the disputed transaction amount. 

In credit card transactions, funds are temporarily credited back to the cardholder's account. With debit cards, banks and card providers freeze disputed funds for the merchant and cardholder.

This step occurs without the merchant's prior knowledge.

Summary: The issuing bank may refund the cardholder while the chargeback is investigated.

3. Bank Assigns a Reason Code

• Merchant’s Responsibilities:Review the reason code.
• Who’s Involved: Issuing bank.

The issuing bank assigns a numeric code (like Visa reason code 13.3) according to the cardholder's claim. 

They then send this information, along with the chargeback details, sent to the acquiring bank. The acquiring bank forwards this information to the merchant in the form of a Chargeback Debit Advice Letter.

The reason code reflects the cardholder's claim, which might not accurately represent the transaction's true nature. This makes it crucial for merchants to gather their own evidence to effectively contest the chargeback.

This stage typically happens without any prior warning to the merchant.

Here’s an example of what happens during this phase. Let’s say the bank assigns the Visa reason code 13.3. This code means that the cardholder claims the purchased products or services didn’t meet the merchant’s description, was defective, and/or didn’t meet quality expectations.

A merchant would have 20 days to respond to this claim. From there, they’d need to check if any product information or images might have been misleading. If they can build a case, they’d send the necessary evidence to the issuing bank.

If not, that leads us to the next step.

Summary: The issuing bank categorizes the chargeback with a reason code and forwards the information to the merchant.

4. Option to Fight Dispute

• Merchant’s Responsibilities: Decide whether to accept the chargeback or contest it.
• Who’s Involved: Merchant.

The merchant reviews the Chargeback Debit Advice Letter supplied by the acquiring bank, weighing the cost of potential losses against the likelihood of winning a dispute. From there, they’ll determine whether they should engage in representment.

Representment means the merchant disputes the chargeback by providing evidence to support their case. 

When to fight a chargeback:

• Merchant has strong evidence proving the transaction's legitimacy.
• Disputed amount is significant enough to justify the effort.

When it might be better to accept:

• Disputed amount is minimal, and fighting might be costlier.
• Merchant's evidence is weak, decreasing chances of success.

Merchants should also consider their chargeback rate, as exceeding a threshold set by payment processors like Visa can risk termination of service. This varies by provider, but Visa has a threshold of 0.9% or 100 chargebacks.

How does a business figure out their chargeback rate?

Divide the total number of chargebacks received in a given month by the total number of transactions processed in that same month. Multiply the total by 100 to express it as a percentage.

This stage occurs after the initial chargeback, often leaving the merchant with a limited timeframe for action. This timeframe will vary by payment provider and reason code. For instance, with Visa and their reason code 13.3, the merchant has 13.3 days to respond.

Summary: The merchant decides whether to accept the chargeback or fight it with representment. This decision requires careful consideration of the evidence and the potential cost and success of a dispute.

5. Gather Evidence & Documents

• Merchant’s Responsibilities: Gather evidence, along with a rebuttal letter, Chargeback Debit Advice letter, and reversal request form.
• Who’s Involved: Merchant.

If a business chooses to fight the chargeback, they need to gather evidence that supports their claim and refutes the reason code. The specific evidence needed depends on the chargeback reason.

For example, Visa Reason Code 13.3 might require:

• Proof of the product's description and condition before shipment.
• Detailed shipping information and delivery confirmation.
• Customer communication records indicating satisfaction with the product.

Alongside the evidence, sellers must also return the Chargeback Debit Advice Letter, a reversal request form, and a rebuttal letter. The reversal request formally indicates their dispute, while the rebuttal letter outlines their argument and explains the evidence provided.

Here’s what those entail:

1. Reversal Request: A form that the acquiring bank provides. It includes essential information like the chargeback amount, date, and reason code. Merchants need to fill this out and indicate their intent to dispute the chargeback.

2. Rebuttal Letter: This is a seller’s opportunity to tell their side of the story with this information:

• Start by stating the chargeback details (amount, date, reason code).
• Explain why the chargeback is invalid. Ensure it’s concise.
• Present evidence, referencing each included document.
• Conclude by requesting the chargeback to be reversed in the seller’s favor.

Businesses have a short timeframe (ranging from a few days to several weeks) to submit their response.

Summary: If a business contests a chargeback, they must assemble compelling evidence, fill out a reversal request, and draft a rebuttal letter explaining their case.

6. Submit Documents & Evidence

• Merchant’s Responsibilities: Submit rebuttal letter, reversal charge form, evidence, and Chargeback Debit Advice letter to the acquiring bank.
• Who’s Involved: Acquiring bank, issuing bank, and merchant.

The business must submit the completed representment package to their acquiring bank. This includes the Chargeback Debit Advice Letter, rebuttal letter, reversal request form, and all supporting evidence.

The acquiring bank reviews this package and forwards it to the issuing bank for a decision.

The exact submission process varies depending on the bank. Research their specific instructions. Consider using chargeback response templates to streamline the process and ensure they include all necessary information.

Summary: Merchants must submit a representment package containing their rebuttal letter, reversal request, evidence, and the original chargeback details to their acquiring bank.

7. Bank Reviews Documents & Evidence (Potential Second Chargeback)

• Merchant’s Responsibilities: Await the outcome.
• Who’s Involved: Issuing bank.

The issuing bank examines the representment package the business submitted.

Once reviewed, they’ll make one of the following decisions:

• Bank Rules in The Merchant’s Favor: They reverse the chargebacks and return the funds to the business.
• Bank Rules in Cardholder's Favor: The chargeback stands, and the business loses the funds and may incur additional fees.
• Second Chargeback: The cardholder may dispute the chargeback outcome, leading to a second representment cycle.

The customer may initiate a second chargeback because they disagree with the issuing bank's decision and attempt to pressure the business by refiling. In rare cases, the initial dispute might have been a misunderstanding, and the cardholder refiles with new information.

Even if a merchant loses the initial chargeback, the issuing bank's fee is usually the largest cost. However, the acquirer may also give the seller a separate chargeback penalty fee for each chargeback processed through their system.

These fees can vary.

Summary: The issuing bank reviews the business’ representment package and decides whether to uphold the chargeback or reverse it in the seller’s favor. A second chargeback is possible, carrying additional complexities and costs.

8. Arbitration

• Merchant’s Responsibilities: Arbitrate the chargeback.
• Important: Businesses cannot file new evidence during this stage.
• Who’s Involved: Card Network

Businesses have the right to request arbitration if they disagree with the bank's ruling against them. Arbitration is a dispute process where the card network (e.g., Visa, Mastercard) acts as an independent judge.

2% of chargeback cases reach this stage.

The number of days the seller’s acquirer has to arbitrate a chargeback will vary by card network. For instance, with MasterCard, it’s 45 days from the initial prenotification report date.

Fees will also vary by card network. For instance, businesses may need to pay a filing fee (costs hundreds) and a review fee (more than $200). In some cases, like with Visa, businesses must pay a $400–$500 filing fee [2].

This process also adds an additional 10–45 days to the chargeback cycle. Demanding more resources.

The merchant’s chargeback representative handles the arbitration process on their behalf.

Possible outcomes include:

• Ruling for the Cardholder: The chargeback becomes permanent, the business loses the disputed funds, and they’re liable for arbitration fees.
• Ruling for the Merchant: They reverse the chargebacks, the cardholder is re-billed, and the issuing bank pays arbitration fees (this outcome is rare).

I couldn’t find any data on business win rates when arbitrating chargebacks.

Summary: Arbitration is a final stage of the chargeback process where a seller can appeal the bank's decision. It requires paying fees and working with their chargeback representative, and the card network acts as the final judge.

Post-Chargeback

Here's what could happen after a chargeback decision:

• Merchant Loses: Accept the loss or, in certain cases, take the dispute to arbitration to fight for a reversal.
• Cardholder Loses: The cardholder might try to initiate a second chargeback, leading to another review cycle.

Arbitration is typically a last resort due to its high cost (filing and review fees). A seller might pursue this option if the disputed amount is high and they have strong evidence. However, they can’t present new evidence during arbitration.

Arbitration involves a risk. Losing means the seller is also responsible for arbitration fees that the card network imposes.

Summary: After the initial chargeback decision, the seller might face a second chargeback from the cardholder, accept the loss, or pursue arbitration if the financial risk justifies the potential gain.

Does the Chargeback Process Differ by Payment Processor & Card Network?

The chargeback process can differ depending on the payment processor and card network involved. 

Here's an example using PayPal, along with general differences to expect [3]:

• PayPal might act as the acquirer and the issuer in certain transactions.
• Businesses will likely receive dispute notifications via email rather than a formal chargeback document.
• Instead of a provisional credit, they often place a temporary hold on funds related to the disputed transaction.
• PayPal's Seller Protection program might help businesses avoid losing funds in certain chargeback scenarios.
• They typically give sellers a timeframe (like 20 days) to reach a resolution directly with the buyer before escalating the dispute to a claim.

Each payment processor and card network has its own specific rules and timetables for the chargeback process. Merchants might experience differences in communication methods, timelines, provisional funds handling, and dispute resolution tools.

Summary: The chargeback process varies based on the payment processor and card network.

How Do You Prevent Chargebacks? (As a Merchant)

Here are some ways to prevent chargebacks:

1. Clear Product Descriptions and Billing: Provide accurate information about your products/services. Also, use clear, recognizable billing descriptors on customer statements. Instead of having a descriptor of “BDF,” aim for “Bob Dillan’s Fishing Supplies.”

5–6% of chargebacks happen due to products not fitting descriptions and not meeting expectations [4].

2. Strong customer support: Offer easily accessible support channels to resolve issues quickly. Also deal with refunds before they can turn into chargebacks. We have a tool to help with that.

3. Fraud Protection Tools: Implement fraud detection systems to identify and block suspicious transactions. Address Verification Service (AVS) and CVV checks are a good place to start.

Fraudulent purchases make up for more than 34% of chargebacks. Implementing such tools will make the biggest difference in mitigating chargebacks.

4. Shipping Best Practices: Provide clear shipping timelines, tracking, and signed delivery confirmation when possible. At least 26% of comebacks come from orders never arriving. Such prevention methods will help prevent that.

5. Clear Return/Refund Policies: Display straightforward return/refund policies to manage customer expectations.

7. Avoid Billing Customers Twice: Ensure your billing system accurately tracks charges and prevents duplicate transactions. Duplicate transactions lead to 3% of chargebacks.

8. Get a Chargeback Prevention Software: Use tools to prevent disputes from escalating to chargebacks in the first place (we have a prevention tool; check it out).

While these figures offer a guideline, the effectiveness of each strategy can vary depending on your industry and specific business practices.

Summary: Preventing chargebacks requires a varied approach: focus on clear communication, customer service, fraud prevention tools, and transparent policies.

What Happens When You Win or Lose a Chargeback?

Here’s (in short) what’ll happen in different scenarios:

• Merchant Wins: The chargeback is reversed and funds are returned to you.
• Cardholder Wins: The chargeback is upheld, you lose the disputed funds, and potentially incur fees.

I’ll provide a bit more details throughout the following sections if the above list is too vague.

1. If the Merchant Wins

Let’s say you’re a business and win (congratulations). Here’s what to expect:

1. Chargeback Reversal: The issuing bank decides the chargeback was invalid and reverses the provisional credit given to the cardholder. This means the disputed funds are restored to your merchant account.

2. Fund Restoration: The timing and specific process for receiving your funds can vary. Some banks release the funds immediately, while others might hold them for a period to ensure the issue is fully resolved.

3. Improved Standing: Successfully contesting chargebacks helps maintain a healthy chargeback win rate and net recovery rate. This demonstrates to your payment processor that you have strong business practices, potentially reducing scrutiny and future penalties.

Check with your acquirer for their specific procedures regarding fund release and potential fee reversals. And even after winning, monitor for any potential second chargeback attempts by the customer.

Such a scenario would result in you going through the chargeback process again.

2. If the Cardholder Wins

And here’s what’ll happen if you’re a cardholder and win a chargeback:

1. Chargeback Upheld: The issuing bank determines the chargeback is valid, and the provisional credit to the cardholder's account becomes permanent. The disputed funds remain with the cardholder.

2. Merchant Loses Funds: The issuing bank permanently pulls the amount of the chargeback from the seller’s account. This loss includes the transaction amount and any associated chargeback fees.

3. Potential Penalties: If the merchant contested the chargeback through representment, additional fees might apply. Chargeback fees will depend on whether the merchant is high-risk and will depend on the card network.

4. Negative Impact on Standing: Losing chargebacks increases the merchant's overall chargeback ratio. A high chargeback ratio can lead to:

• Increased fees from the payment processor.
• Additional scrutiny and restrictions on the merchant's account.
• In extreme cases, potential termination of the merchant account.

This isn’t the end for merchants, though. They can arbitrate the chargebacks, though the chances of a successful outcome are low.

If merchants take the loss, they should analyze the reasons for lost chargebacks and implement strategies to reduce future disputes and protect your businesses.

FAQs Regarding the Chargeback Process

Read on to find frequently asked questions about the chargeback process.

How Much Do Chargebacks Cost Merchants?

Chargebacks can cost merchants $25–$100 per instance. This doesn’t include all the expenses used for processing fees along with production, marketing, operational, and product costs. This cost increases to several hundreds of dollars if the merchant arbitrates a chargeback.

Conclusion

The chargeback process is a complex dance between customers, banks, and merchants. Understanding these steps and participants is essential for businesses to protect themselves.

We have a tool that’ll help prevent chargebacks from happening. Learn more now.