The chargeback process can send shivers down the spine of retailers, especially those selling online. This mechanism serves as protection for consumers, allowing them to safeguard against potential fraud, damaged products, and other possible issues. At the same time, it’s a nightmare for merchants, who may face unexpected losses due to disputes.
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We’ve already discussed the main causes of chargebacks and the numbers involved, but do you know how this process works in practice? It can happen in up to three cycles, involving the card-issuing bank, the acquiring bank (which processes the card transactions), the merchant, and the customer.
First cycle
- The credit cardholder initiates a dispute. The time frame for filing a request usually ranges from 45 to 180 days, depending on the card.
- The card issuer contacts the payment processor, who informs the merchant about the dispute. At this point, the consumer receives a temporary credit for the transaction amount.
- The merchant can accept the chargeback. In this case, they will lose the transaction amount, the temporary credit will be confirmed in the customer’s account, and the process will end.
- If the merchant disagrees with the dispute, they can submit evidence proving that the service/product was delivered satisfactorily. This can include photos, delivery receipts, invoices, and communications with the customer. At this stage, the merchant also receives a temporary credit in their account for the disputed transaction amount.
- After reviewing the customer’s request and the merchant’s evidence, the card issuer decides whether the chargeback is valid. If the decision is in favor of the merchant, the temporary credit in their account becomes permanent, and the customer will be charged for the transaction on their bill. If the decision favors the customer, the credit in the customer’s account becomes permanent, while the temporary credit to the retailer is reversed.
Second cycle
The second chargeback cycle occurs when there is a new dispute over the same transaction. This can happen due to new information provided by the customer or a change in the reason for the dispute, for example. The process is similar:
- The card issuer informs the acquiring bank about the new chargeback.
- Again, the merchant has the option to accept or challenge the request. If they challenge it, they have another opportunity to provide more evidence to support their case.
- The card issuer makes a new decision. If it favors the merchant, the charge is confirmed for the customer. If the decision favors the customer, the retailer must pay the chargeback amount and the process fees, while the buyer’s temporary credit becomes permanent.
Third cycle or arbitration
Arbitration is the final stage of a chargeback process. At this point, the evidence from both parties is presented to a card association, which will make the final decision to resolve the dispute. The association is an organization that banks are part of, agreeing, among other things, to follow the rules in arbitration processes.
However, it’s important to note that it’s rare for a chargeback case to reach this point. This is because the fees charged by associations to analyze each case are high, as well as the time and effort involved. Therefore, merchants and banks typically only escalate to this final stage if the transaction in question is of significant value. After the association’s decision, the losing party is responsible for paying the fees.
Conclusion
Understanding the chargeback process better makes it clear that the best protection for a merchant is to be equipped with as much evidence as possible. This way, if a dispute arises, they’ll have a better chance of proving that the service or product was delivered satisfactorily. Beyond the financial loss, receiving too many chargeback requests can harm a retailer’s reputation with credit card companies.
From the customer’s perspective, there are, of course, those who exploit the process maliciously, seeking to gain an advantage, such as a refund for a product that was correctly delivered. However, it’s important to emphasize that the chargeback mechanism increases consumer trust in online purchases, as they know they have an extra layer of protection in case of issues. Researching a seller’s reliability and taking simple online security measures is also essential.
Get in touch with the StarsPay sales team now via email at [email protected] and find out how we can make a difference for your business.
