Chargeback 101: Credit Card Chargebacks Explained

Disputes with customers are never fun. This is especially true when it comes to chargebacks. Below, we’ll walk through the basics of the chargebacks process, what usually causes them and the steps you can take to prevent chargebacks from happening.

In this article:

What Is a Chargeback?

A chargeback happens when a customer disputes a charge from your business and asks the card issuer to reverse it. Card chargebacks are meant to protect consumers from unauthorised transactions but they can mean big headaches for businesses.

When a chargeback happens, the disputed funds are held from the business until the card issuer works things out and decides what to do. Unfortunately, this can be a complicated and time-consuming process involving a lot of paperwork and documentation. (Unless you work with a payment service provider like Square — more on that later.)

Accept Apple Pay and contactless cards everywhere.

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Does Square Have Chargeback Fees?

No, Square doesn’t charge a fee for chargebacks.

The Chargeback Process Explained

Generally speaking, the chargeback process can differ between payment processors and it traditionally takes 120 days to be resolved. Here at Square we use our proprietary machine learning models to predict, and stop, many fraudulent transactions before they happen. We also keep you informed of the status of your chargeback via convenient in-app alerts in your Square Dashboard.

For educational purposes, here is an overview of the general chargeback process with most major processors:

Step 1: A purchase occurs – All chargebacks start with a customer making a purchase, either in-person, in-app or online.

Step 2: Customer initiates the chargeback – After the customer reviews their credit card statement at the end of the month, they may notice a charge they didn’t authorise. The customer then contacts their credit/debit card company (known as the issuing bank) asking to investigate the charge in question.

Step 3: Issuing bank reaches out to the merchant’s bank – Once a customer initiates the chargeback process, the customer’s bank will reach out to the merchant’s bank asking them to provide proof that the customer purchased goods or services. This can include things like: invoices, receipts, proof of delivery—or anything else the merchant has to prove that the purchase was valid.

Step 4: Decision time – After reviewing all the proof provided by the merchant’s bank, the cardholder’s bank must decide whether or not the purchase was actually valid.

Step 5: Customer is informed – At this point, the customer must accept the proof provided by the acquiring bank and either pay for the goods, or continue to dispute the purchase and begin a process known as arbitration. If the acquiring bank determines the purchase was not valid, then the cardholder (customer) will receive a refund for the transaction.

Credit Card Chargebacks: Some Common Causes

Here are some of the most common chargeback culprits:

1) Fraudulent transactions

If someone sees a charge from your business but never bought anything from you, it could mean that there’s fraud at play. This will likely instigate a chargeback. To protect your business from this type of chargeback, it’s a good idea to have a point of sale (POS) that can accept chip cards and contactless payments like Apple Pay, which are the most secure ways to pay. UK retailers have been able to enjoy the security advantages of chip and PIN since January 2005, when the liability shift ensured retailers who accepted this payment would be protected in the case of fraud. That’s all the more reason for small businesses getting off the ground to have a chip and PIN reader as part of their business essentials.

2) Shipping problems

If a customer never received an item in the mail, that could land you a chargeback. To prevent this situation, make sure you have a streamlined delivery system in place with tracking numbers at the ready.

3) Technical problems

If your website isn’t working properly, or customers fumbled something in the checkout process (user error), they may have been accidentally charged for something they didn’t intend to buy. Be sure to integrate a reputable POS and e-commerce system that has an easy-to-navigate checkout process.

4) Credit not processed

Another common reason for chargebacks is a mishap (or confusion) during the return or credit process. That is, customers return something expecting a refund and don’t see that credit in their bank account right away. To help avoid this, make sure you have a reliable system in place for handling returns and credits. Also, make a point to clearly state your returns or cancellation policy to customers when they’re buying or returning something. That way everyone is on the same page.

5) Problems with items

Sometimes customers issue a chargeback if they’re dissatisfied with a product or service for one reason or another. Chargebacks for professional services can be the most difficult to arbitrate for this reason, as the quality of a service is widely subjective.

6) Unrecognisable business name

One of the most common reasons for chargebacks is billing clients with an unrecognisable business name. Let’s say your business sells coffee and cupcakes. Your shop is called “London Bakery”, but your business’ name is registered as L.B. Enterprises. When customers see a mysterious charge by L.B Enterprises, customers may unintentionally initiate a chargeback for what they believe was a fraudulent purchase. Avoid customer confusion by having clear, consistent branding.

If you sell with Square and are dealing with a chargeback, we’re here to help. All you have to do is provide us with some basic information regarding the payment in question, so we can fight the dispute on your behalf.

How Square Handles Payment Disputes

At Square we do things a little differently than other processors. We have a team on hand to make the disputes process as simple as possible for you.

Step 1: We notify you of the dispute.
Step 2: You decide on how you’d like to proceed. You can either accept the dispute as valid or choose to challenge it by sending us the documentation you have related to the transaction.
Step 3: The bank determines whether the purchase was legitimate or not. If the bank rules in your favor, the transaction stands. If the bank rules in the customer’s favor, you will need to pay the fee.

The EMV Liability Shift and Chargebacks

In what is known as the “liability shift,” on 1 January 2005, the nation changed how banks and processing networks handled certain types of credit card fraud. It served as a driving force for the national adoption of chip and PIN readers, easy enough for high street retail giants, but for small businesses, even those starting out over a decade later, it may seem a far more difficult task. Not any more thanks to the Square Reader and POS app.

How to Prevent Chargebacks

Although there’s no guaranteed way to prevent chargebacks, merchants can take some steps to prevent some kinds of chargebacks from happening. These include:

  • If possible, always try to obtain a customer signature for in-person purchases.
  • Require a valid government-issued IDs before every credit card purchase, and keep proof of all credit card orders.
  • Have a clear, easy-to-understand return policy.
  • Have a recognisable business name on credit card statements.
  • Use a delivery service that requires a signature upon arrival.
  • Train employees on best practices for card-present and card-not-present transactions.
  • If you’re taking online orders, be sure to use a payment gateway or online payment processor that verifies the AVS on file for the card being used.
  • Accurately describe items. Customers who receive items that are not as described have valid grounds for a chargeback.
  • Responding to customer service issues promptly and courteously.

Remember: If you do get hit with a chargeback, it’s important to respond to your bank or payment processor promptly. Many banks will simply process the chargeback for the customer if a merchant does not respond in the allotted time.

FAQ:

What’s the difference between chargebacks vs. refunds?

A refund is a transaction initiated by the merchant, repaying a customer who is dissatisfied with the goods or service purchased. A chargeback is a dispute initiated by a customer, usually for a fraudulent transaction. In a chargeback, the transaction is reversed and funds are returned to the customer by the merchant’s bank.

What is a chargeback fee or chargeback settlement fee?

A chargeback fee, or chargeback settlement fee, is an additional fee your credit card processing company may charge you, in addition to the reversed funds, if they find you at fault for a chargeback. Many payment processing companies may disallow you from accepting credit cards entirely if you have an unusual amount of chargebacks on your account.

Is there a chargeback time limit?

Most acquiring banks put a timeframe on when customers can initiate a chargeback for a purchase. For most cards, this stands at 120 days, starting from the day your customer registers the issue, though this can vary between card providers.

Are debit card chargebacks handled in the same way?

Debit card chargebacks are dealt with in a similar way to credit card chargebacks, though credit card payments may be further protected by Section 75 where disputes must be made with the credit card company rather than each individual’s bank.

How do I write a chargeback rebuttal letter?

If you’re a merchant who’s been charged with a fraudulent chargeback, you’ll be given a retrieval request, this is when the card-issuing bank of the customer involved verifies the possibly fraudulent nature of the purchase. The window of time in which to clear up any dispute is relatively short, if you do not respond promptly enough, the bank will simply grant the chargeback.

If you believe a chargeback to be fraudulent, you will need to provide the evidence that proves it. Proof you may wish to put forward for your case include:

  • Receipts or invoices
  • Proof of delivery confirmation, particularly with signature
  • Proof that the item was acceptable (the customer used the item, didn’t complain upon delivery, etc.)
  • The correct recording and delivery of the customer’s CVC or AVS

The good news is, if you sell with Square, you never need to worry about going through this alone. We will contact you for the information needed to clear the dispute and help you fight against any fraudulent claim.

Chargeback Reason Codes

Chargeback Reason Codes List for American Express Chargeback Code Authorisation Errors A01 Charge Amount Exceeds Authorisation Amount A02 No Valid Authorisation A08 Authorisation Approval Expired Chargeback Code Type: Fraud F10* Missing Imprint F14* Missing Signature F22 Expired or Not Yet Valid Card F24* No Card Member Authorisation F29 Card Not Present Chargeback Code Type: Card Member Dispute C02 Credit (or Partial Credit) Not Processed C04 Goods/Services Returned or Refused C05 Goods/Services Cancelled C08 Goods/Services Not Received C14 Paid by Other Means C18 “No Show” or CARDeposit Cancelled C28 Cancelled Recurring Billing C31 Goods/Services Not as Described C32 Goods/Services Damaged or Defective M10 Vehicle Rental – Capital Damages M49 Vehicle Rental – Theft or Loss of Use Chargeback Code Type: Processing Error P01 Unassigned Card Number P03 Credit Processed as Charge P04 Charge Processed as Credit P05 Incorrect Charge Amount P07 Late Submission P08 Duplicate Charge P22 Nonmatching Card Number P23 Currency Discrepancy Chargeback Code Type: Inquiry Related Chargeback R03* Insufficient Reply R13* No Reply M01* Chargeback Authorisation Code Type: Chargeback Programs FR2 Fraud Full Recourse Program FR4 Immediate Chargeback Program FR6 Partial Immediate Chargeback Program

*These American Express chargeback codes require an inquiry first.

Retrieved on 5/26/2016 from AmericanExpress.</sub>

Chargeback Reason Codes List for Visa Chargeback Code Chargeback Reason 30 Services Not Provided or Merchandise Not Received 41 Cancelled Recurring Transaction 53 Not as Described or Defective Merchandise 57 Fraudulent Multiple Transactions 62 Counterfeit Transaction 71 Declined Authorisation 72 No Authorisation 73 Expired Card 74 Late Presentment 75 Transaction Not Recognized 76 Incorrect Currency or Transaction Code or DomesticTransaction Processing Violation 77 Non-Matching Account Number 80 Incorrect Transaction Amount or Account Number 81 Fraud—Card-Present Environment 82 Duplicate Processing 83 Fraud—Card-Absent Environment 85 Credit Not Processed 86 Paid by Other Means

Visa chargeback reason codes retrieved from Visa.com on 5/26/2016.</sub>

Detailed Chargebacks Reason Codes List for Mastercard

Mastercard chargeback codes fall in to four categories:

  • Authorisation
  • Cardholder disputes
  • Fraud
  • Point-of-interaction error
Chargeback Reason Codes List for Mastercard Chargeback Code Chargeback Reason 4801 Requested Transaction Data Not Received 4802 Requested / Required Information Illegible or Missing 4807 Warning Bulletin File 4808 Requested / Required Authorisation Not Obtained 4812 Account Number Not on File 4831 Transaction Amount Differs 4834 Duplicate Processing 4835 Card Not Valid or Expired 4837 No Cardholder Authorisation 4840 Fraudulent Processing of Transaction 4841 Canceled Recurring Transaction 4842 Late Presentment 4846 Correct Transaction Currency Code Not Provided 4847 Requested / Required Authorisation Not Obtained and Fraudulent Transaction 4849 Questionable Merchant Activity 4850 Credit Posted as Purchase 4853 Cardholder Dispute – Defective / Not As Described 4854 Cardholder Dispute – Not Elsewhere Classified (U.S. Region Only) 4855 Non-receipt of Merchandise 4857 Card-Activated Telephone Transaction 4859 Services Not Rendered 4860 Credit Not Processed 4862 Counterfeit Transaction Magnetic Stripe POS Fraud 4863 Cardholder Does Not Recognize – Potential Fraud 4870 Chip Liability Shift 4871 Chip / PIN Liability Shift