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?

A chargeback happens when a customer disputes a charge from your business and asks the card issuer to reverse it. Credit card chargebacks are meant to protect consumers from unauthorized 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. We cover all eligible chargebacks, up to $250 a month—free. Learn more about Square’s Chargeback Protection.

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Does Square Have Chargeback Fees?

No, Square doesn’t charge a fee for chargebacks. However if a payment dispute is resolved in your customer’s favor, we retain the normal 2.75% processing fee.

Most other major payment processors on the other hand, charge a non-refundable fee ranging from $10 to $25 the moment a customer initiates the chargeback, regardless of outcome. This is usually on top of the standard payment processing fees. Square is the one of the only major payment provider that doesn’t charge chargeback fees.

The 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 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 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 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. But not to worry—if you’re a Square seller and the chargeback is covered under Chargeback Protection, then Square will cover the costs of the chargeback on your behalf.

Step 6: Arbitration – If the issuing bank and merchant bank fail to come to an agreement, as a last resort they’ll enter what’s called the arbitration process. The arbitration process is goverted by the issuing credit card company, and their decision is absolutely final. The credit card company (Visa, American Express, etc.) will review the proof provided by the parties and will have 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.

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. This is particularly important in light of the liability shift (which went into effect in October 2015). If your business isn’t set up to accept chip cards, you could now be on the hook for certain types of fraudulent transactions (whereas previously the banks ate this cost). Read more in our Guide to the EMV Liability Shift.

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 shipping 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. The solution to this one is simple: Run a great business that prioritizes quality and customer experience.

6) Unrecognizable business name

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

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. 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 October 1, 2015 the nation 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, the merchant is 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 a EMV payments terminal like the Square contactless and chip reader.

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. This includes:

  • 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 recognizable business name on credit card statements.
  • Use a delivery service that requires 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. According to Visa, in 2012, online merchants lost over 11.8 billion dollars due to chargeback fraud.

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. 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. That means you’re covered—no matter how it’s resolved. Learn more about 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, 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. This ranges anywhere from roughly 60 to 90 days after purchase. Chargeback time limits vary widely depending on the issuing bank, and the chargeback code or reason. Check with the issuing banks to determine what time limits may apply to you.

Are debit card chargebacks handled in the same way?

Generally speaking, debit card chargebacks are more difficult for cardholders to dispute. If the debit transaction was processed as credit (with a signature) then the chargeback process is similar to other chargeback processes. But if the debit card transaction was approved by PIN, card holders have a smaller window in which fraud protection is available. Card-present debit transaction are considered one of the safest for merchants, which is why debit card transactions tend to be cheaper for merchants to process as well.

How do I write a chargeback rebuttal letter?

If you’re a merchant who’s been charged with a fraudulent chargeback, you may want to start the chargeback representment process. In addition to providing proof of purchase and goods delivered to the customer specified, you’ll also need to write a chargeback rebuttal letter to the acquiring bank. Before starting your letter, be sure to look up the chargeback reason code (listed below), and provide compelling proof of purchase.

In your chargeback rebuttal letter, you may want to 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 writing chargeback rebuttal letters, but we do ask our sellers to address their customer’s claim promptly in the Information Request Form that we email for every dispute. We then use that information to formulate a compelling rebuttal letter on your behalf. With Square, sellers can rest easy about frivolous chargebacks and time consuming paperwork. Even if you lose your case, all qualified chargebacks less than $250 a month are covered under our Chargeback Protection policy.

Chargeback Reason Codes

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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