Chargeback 101: Credit Card Chargebacks Explained

Sad merchant hit with a chargeback

Disputes with customers are no 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 (or Payment Dispute)?

A chargeback, also referred to as a payment dispute, occurs when a cardholder questions a transaction and asks their card-issuing bank to reverse it. The ability to dispute a payment is meant to protect consumers from unauthorized transactions, but it can mean big headaches for businesses, especially when they’re issued in error.

When a chargeback happens, the disputed funds are held from the business until the card issuer works things out and decides what to do. If the bank rules against you, those funds are returned to the cardholder. If the bank rules in your favor, they’ll send the disputed funds back to you.
Unfortunately, this can be a complicated and time-consuming process involving a lot of paperwork and documentation. (Unless you work with a payment company like Square — more on that later.)

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Common Causes of Chargebacks and How to Prevent Them

There are a few typical culprits behind payment disputes. Fortunately, there are systems and processes you can put in place to prevent them.

Fraudulent transactions

If a cardholder sees a charge from your business but never bought anything from you, it could mean fraud is at play. This usually prompts them to file a dispute.

How to prevent this type of dispute:

Shipping, delivery, or pricing issues

If a cardholder never receives an ordered item or is overcharged for a product/service, they may file a dispute.

How to prevent this type of dispute:

  • Keep tracking numbers for every order ready and accessible.
  • Use a delivery service that requires signature upon receipt of item.
  • Make sure your listed prices are accurate and up to date.
Credit not processed

In these cases, a cardholder returns an item in expectation of a refund or account credit and receives neither. The reason for that return may vary — maybe it’s buyer’s remorse or the user’s error when purchasing online.

How to prevent this type of dispute:

  • Make sure you have a reliable system in place for handling returns and credits.
  • Clearly outline sales policies like your return, refund, or cancellation terms on your receipts and post them clearly in your store (whether that’s a brick-and-mortar location or an online store). This makes you more likely to win payment disputes should they arise. You can add policies to your Square receipt here.
  • Learn more about each card company’s refund policies:
    Visa | Mastercard | American Express | Discover
Dissatisfaction with product or service

Cardholders sometimes file a dispute if they are dissatisfied with your product or service. In the case of products, this is typically due to physical defects or an item not being as advertised. With services, the quality is more subjective and difficult to determine.

How to prevent this type of dispute:

  • Respond to customer service issues promptly and courteously.
  • Set realistic expectations. Cardholders who receive items that are not as described have valid grounds for a payment reversal.
Unrecognizable business name

Legitimate purchases can be mistaken as fraudulent due to simple confusion. Let’s say your business sells coffee and bagels. Your shop is called “San Francisco Bakeshop,” but the business name on your receipts is “SF Baker Enterprises.” If cardholders see charges from SF Baker Enterprises, a company they’ve never heard of, they may suspect fraud and, in turn, file a dispute.

How to prevent this type of dispute:

  • Avoid confusion by having clear, consistent branding on your receipts. You can change your receipt name via your Square Dashboard.
Failure to cancel subscription

Recurring payments for subscriptions are beneficial for both businesses and cardholders, but they can also create a risk for disputes. Cardholders often forget about subscription renewals and will issue disputes to retroactively cancel payment.

How to prevent this type of dispute:

  • If you plan to initiate a series of recurring payments, ensure that cardholders understand the recurring transaction agreement (RTA) that they are signing up for. If possible, provide a way for them to acknowledge their understanding and agreement with something visual like a checkbox or signature.
  • Explain the billing frequency, amount, refund, and cancellation policies in the RTA.
  • Alert cardholders prior to each charge, giving them ample time to cancel before the transaction is made.


The General Chargeback Process Explained

Generally speaking, the chargeback process can differ between payment processors, and it traditionally takes between 60–90 days to resolve. 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 alerts in your Square Dashboard.

Here is an overview of how the general chargeback process works with most major processors (we’ll get into how Square does it down below):

Step 1: A purchase occurs. All chargebacks start with a customer making a purchase, either in person, in an 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 authorize. The customer then contacts their credit 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 reaches out to the merchant’s bank, asking it to provide evidence to refute the claim. 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) receives a refund for the transaction.

Step 6: Arbitration. If the issuing bank and merchant bank fail to come to an agreement, as a last resort, they enter what’s called the arbitration process. The arbitration process is governed by the issuing credit card company, and its decision is absolutely final.

The credit card company (Visa, American Express, etc.) reviews the proof provided by the parties and has the last word on who must pay for the charges. If a merchant loses the arbitration process, they may choose to seek recourse and repayment in a court of law, at their own expense.


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, Square covers all qualifying disputes up to $250 a month — free.
Learn more about Square’s Chargeback Protection and how we manage the dispute process.


The EMV Liability Shift and Chargebacks

In what is known as the “liability shift,”, on October 1, 2015, the credit card industry changed how banks and processing networks handled certain types of credit card fraud. Businesses that swiped cards with EMV chips rather than “dipping” them in an EMV card reader could now be held liable for fraudulent transactions.

The liability shift may have caused a striking rise in chargeback abuse for card-present transactions, with some merchant service providers seeing as much as a 50% increase in EMV-related chargebacks. Some experts speculate this could be because consumers recognize that for merchants who don’t process chip cards are technically liable for any fraud that can occur after swiping a card with a chip.

That’s why it’s more important than ever to process EMV chip cards with an EMV payments terminal like Square Reader for contactless and chip.


FAQ:


What’s the difference between a dispute and a refund?

A refund is a transaction that you initiate as a Square seller to repay a cardholder who’s dissatisfied with the goods or services purchased. A dispute is a forced refund initiated by a cardholder and issued through their bank.


How will I know if a cardholder has filed a dispute?

You will be alerted of any payment disputes with a notification in your Square Dashboard and via email.


What is a dispute fee or dispute settlement fee?

A dispute fee, or dispute settlement fee, is a fee your credit card processing company may charge you, in addition to the reversed funds, if it finds you at fault for a chargeback. Square never charges you an additional fee for a dispute. Many payment processing companies may disallow you from accepting credit cards entirely if you have an unusual amount of chargebacks on your account.


Does Square have dispute fees?

No, Square doesn’t charge any additional fees for disputes. Most other payment processors charge a nonrefundable fee ranging from $10 to $25. Square only charges the normal processing fee as with any other transaction.


Is there a time limit on payment disputes?

Time limits can vary greatly depending on the credit card company and the reason for the dispute. Check with the card issuing banks to determine what time limits may apply to your specific case.


Are debit card disputes handled the same way?

Different card brands (Visa, Mastercard, Discover, etc.) have varying policies when it comes to debit transactions. Generally, if a debit card transaction was approved with a PIN, cardholders have a smaller window in which fraud protection is available.


How do I write a chargeback rebuttal letter?

The good news is that if you sell with Square, you never need to worry about writing a chargeback rebuttal letter. All we ask of our sellers is that they address their customer’s claim promptly in the Information Request Form that we email for every dispute. We then use that information to challenge your customer’s dispute with their bank. We’re your advocate.


Chargeback Reason Codes

When you receive notification of a payment dispute or chargeback you may see a code listed with it. Each card company has its own set of codes that indicate the specific reason that a cardholder initiated a dispute.

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 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 Authorization
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 Authorization
72 No Authorization
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:

  • 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 Canceled 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

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