Chargeback 101: Credit and Debit 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?
The chargeback process explained
Common causes of chargebacks
Square’s Chargeback Process Explained
EMV liability shift and chargebacks
How to prevent chargebacks
Chargeback FAQ
Detailed chargeback reason codes

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.)

How Does Square Handle Chargeback Fees?

When a payment dispute is initiated by a cardholder, the cardholder’s bank requires that the full amount of the original payment be returned to the card issuer, including the processing fees. This is why if a payment is disputed, you’ll see a hold for the full amount of the transaction – including the processing fees.

The processing fees that Square charges when the payment is initially taken go towards transferring funds from the customer’s credit card to your Square account. These fees are not related to the costs of contesting the dispute on your behalf. If you do not agree with the cardholder’s claim, we will challenge the disputed charge. If the dispute is resolved in your favour, you will receive the full amount back, including the processing fees. If the dispute is resolved in the cardholder’s favour, the full amount will be held indefinitely.

It is important to note, Square does not charge any additional fees for receiving a payment dispute on your Square account. While Square does pay a fee for every chargeback that is processed on your account, we do not hold you liable for those fees.

It’s also worth noting that a refund is different from a payment dispute. Square covers the processing fee in the case of a refund, your customer still receives the total amount they paid at no additional cost to you. There are no fees associated with issuing a refund, and you can choose to issue a refund if a customer reaches out to you with a complaint in order to prevent unnecessary payment disputes.

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.

Common Causes of Chargebacks

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 an electronic point of sale (EPOS) that can accept chip and PIN cards and contactless payments like Apple Pay, which are the most secure ways to pay. Irish retailers have been able to enjoy the security advantages of chip and PIN since spring 2005. Small businesses getting off the ground should also have a chip and PIN reader as part of their business essentials.

2. Shipping problems
If a customer never received an item in the post, 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 “Dublin Bakery”, but your business’ name is registered as D.B. Enterprises. When customers see a mysterious charge by D.B. Enterprises, they 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 favour, the transaction stands. If the bank rules in the customer’s favour, you will need to pay the fee.

How to Prevent Chargebacks

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

• Keep proof of all credit and debit 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.
• Respond 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?
What is a chargeback fee or chargeback settlement fee?
Is there a chargeback time limit?
Are debit card chargebacks handled in the same way?
How do I write a chargeback rebuttal letter?

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 here in Ireland, where there’s no equivalent to the UK’s Section 75 rules.

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 includes:

• Receipts or invoices
• Proof of delivery confirmation, particularly with signatures
• 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

For Visa
For Mastercards
For American Express

Chargeback Reason Codes List for Visa

Chargeback Code	Chargeback Reason
10.1	EMV Liability Shift Counterfeit Fraud
10.2	EMV Liability Shift Non-Counterfeit Fraud
10.3	Other Fraud — Card Present Environment
10.4	Other Fraud — Card Absent Environment
10.5	Visa Fraud Monitoring Program
11.1	Card Recovery Bulletin
11.2	Declined Authorization
11.3	No Authorization
12.1	Late Presentment
12.2	Incorrect Transaction Code
12.3	Incorrect Currency
12.4	Incorrect Account Number
12.5	Incorrect Amount
12.6	Duplicate Processing/Paid by Other Means
12.7	Invalid Data
13.1	Merchandise/Services Not Received
13.2	Cancelled Recurring
13.3	Not as Described or Defective Merchandise/Services
13.4	Counterfeit Merchandise
13.5	Misrepresentation
13.6	Credit Not Processed
13.7	Cancelled Merchandise/Services
13.8	Original Credit Transaction Not Accepted
13.9	Non-Receipt of Cash or Load Transaction Value

Detailed Chargeback Reason Codes List for Mastercard

Mastercard chargeback codes fall into four categories:

• Authorization
• 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 Authorization Not Obtained
4812	Account Number Not on File
4831	Transaction Amount Differs
4834	Duplicate Processing
4835	Card Not Valid or Expired
4837	No Cardholder Authorization
4840	Fraudulent Processing of Transaction
4841	Cancelled Recurring Transaction
4842	Late Presentment
4846	Correct Transaction Currency Code Not Provided
4847	Requested / Required Authorization 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

Chargeback Reason Codes List for American Express

Chargeback Code	Authorization Errors
A01	Charge Amount Exceeds Authorization Amount
A02	No Valid Authorization
A08	Authorization Approval Expired
Chargeback Code	Type: Fraud
F10*	Missing Imprint
F14*	Missing Signature
F22	Expired or Not Yet Valid Card
F24*	No Card Member Authorization
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 Card Deposit 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 Authorization
Code	Type: Chargeback Programs
FR2	Fraud Full Recourse Program
FR4	Immediate Chargeback Program
FR6	Partial Immediate Chargeback Program

*These American Express chargeback cordes require an inquiry first.