Chargeback 101: Credit Card Chargebacks Explained
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?
- Does Square charge chargeback fees?
- The chargeback process explained
- Common causes of chargebacks
- 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. 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.
- If you plan to initiate a series of recurring payments, be sure to obtain a signed credit card authorization form
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.
- 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.
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 Code||Authorization Errors|
|A01||Charge Amount Exceeds Authorization Amount|
|A02||No Valid Authorization|
|A08||Authorization Approval Expired|
|Chargeback Code||Type: Fraud|
|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|
|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|
|P22||Nonmatching Card Number|
|Chargeback Code||Type: Inquiry Related Chargeback|
|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 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|
|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|
|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:
- Cardholder disputes
- Point-of-interaction error
|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|
|4835||Card Not Valid or Expired|
|4837||No Cardholder Authorization|
|4840||Fraudulent Processing of Transaction|
|4841||Canceled Recurring Transaction|
|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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