Chargeback 101: Credit Card Chargebacks Explained

Sad merchant hit with a chargeback

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. If you sell with Square, you can rest a little easier about chargebacks as we’re here to help you every step of the way. Learn more about resolving payment disputes with Square.

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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.

7) Customer saw a similar product for cheaper elsewhere

Some chargebacks occur well after purchase, when the customer sees a similar or identical product at a more affordable price elsewhere. To avoid this kind of chargeback, consider offering a “grace period” or price adjustments if you frequently sell brand name retail goods.

If you sell with Square and are dealing with a chargeback, we’re here to help. Square Chargeback Protection excuses you from liability for payment disputes, up to a total of £250 a month for card present transactions. 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. Which means you’re covered — no matter how it’s resolved.

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. More than a pretty face, the Square Reader not only makes the buying experience even easier for your customers, improving your customer service, it serves as integral to the level of security protection your business can enjoy, no matter how small your venture may be.

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.

Square Protects Sellers from Chargeback Fraud

What is Chargeback Fraud?

Chargeback fraud, also known as “friendly fraud”, occurs when a customer receives the item or goods promised, then files a claim with their issuing bank claiming the goods were never received. Although merchants can normally protect themselves from chargeback fraud by keeping exhaustive delivery records, fighting chargeback fraud can be a time consuming and tedious process.

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. [Learn more about how Square deals with payment disputes.](https://squareup.com/help/gb/en/article/5394-square-chargeback-protection

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.

Remember: Square never charges any chargeback fees. If your customer initiates a chargeback, our disputes team will fight on your behalf. We cover all eligible chargebacks for card present transactions, up to £250 a month. Learn more here.

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. With Square, sellers can rest easy about frivolous chargebacks and time-consuming paperwork.

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

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