21 Aug 2024

The Chargeback Process: From Dispute to Resolution

Learn how the chargeback process works and the costly impact on businesses.
Understand the steps to resolve disputes and how to prevent chargebacks from occurring.

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Chargebacks are more common than most people think, yet still, many entrepreneurs have no clue about what exactly a chargeback process is, how it works, and why chargeback prevention is so important. Therefore, in today's article, we will talk about how a dispute becomes a chargeback and explore all the details of this process. So, without any further ado, let us dive right into this topic.

What Is the Chargeback Process?

First things first, we need to understand what a chargeback is and how it works. So, a chargeback is the process of refunding a customer after a payment dispute. As a matter of fact, it is a rather helpful feature for customers since it allows them to get their money back in case of any issue with their order. At the same time, a chargeback is not a good thing for businesses simply because the chargeback dispute process costs a lot of money, and businesses often end up losing twice as much as the initial payment. In particular, credit card chargebacks cause the following issues:

  • Revenue losses
    As we have already mentioned above, either the Mastercard or Visa chargeback process is expensive, and businesses end up paying twice as much of the amount of the original transaction.
  • Fees and penalties
    The credit card chargeback process often comes with many penalties and fees, which leads to significant money losses if you get too many disputes that result in chargebacks.
  • Damage to merchant accounts
    A lot of chargebacks can bring significant damage to your merchant accounts and even lead to your merchants' closure.
  • Approval rate reduction
    Lastly, your approval rate can decrease due to too many chargebacks, and dealing with this problem is not easy.

As you can see, chargeback operations are not particularly good for pretty much all types of online businesses regardless of their size or type, and disputes that resolve in chargebacks must be prevented.

Key Players in the Chargeback Process

Believe it or not, the chargeback flow is a rather sophisticated process that involves several participants, and each one has a quite important role. So, let us take a brief look at the key players of the payment dispute resolution process and explore what each of them does.

Primary Players
There are four primary players of the chargeback process without whom the entire procedure cannot be done at all, and those players are as follows:

  • Cardholder — the person who owns a debit or credit card used for a disputed transaction.
  • Merchant — the business that provided services or goods for the customer and received the payment.
  • Issuing bank — the bank that issued a credit or debit card for the customer.
  • Acquiring bank — the bank that processes payments on behalf of the merchant (business).

These are the primary players of any dispute process, yet there are some participants who may play a smaller role, but they still pay one. We’ll take a look at those in the following paragraph.

Secondary Players
Apart from primary players, the chargeback process also involves secondary ones, which are the following:

  • Card network — the financial organization that connects issuing and acquiring banks and therefore facilitates transactions, e.g., Mastercard, Visa, American Express, Discover, etc.
  • Payment processor — a third-party company that handles payment processing for merchants.
  • Chargeback management company — a specialized company, like Ethoca or Verifi by Visa, that helps businesses handle chargebacks and prevent revenue losses.

We want you to pay special attention to the last secondary player since chargeback management companies reliably handle chargeback processing and prevent disputes from becoming chargebacks. That eventually leads to approval rate growth, elimination of penalties, and reduction of the expenses connected with the chargeback resolution process.

The Chargeback Process: A Step-by-Step Guide

Now that we know the main players of the chargeback process flow, it’s high time we got a better understanding of how these players interact with each other. Thus, let us take a brief look at the chargeback process flow.

  1. The cardholder initiates a dispute. Once a cardholder notices a transaction they believe they did not make, they connect their issuing bank and open a dispute.
  2. The issuing bank investigates the claim. After receiving the dispute request from the cardholder, the issuing bank reviews the dispute claim and requests additional info from the merchant.
  3. The issuing bank requests a chargeback. If the issuing bank finds evidence that the transaction was illegitimate, they issue a chargeback to reverse the transaction and refund the customer.
  1. The acquiring bank notifies the merchant. Once the acquiring bank receives the chargeback request, they inform the merchant about it.
  2. The merchant responds to the chargeback. After receiving the chargeback, the merchant can either refund the customer and pay for all the fees associated with the dispute process, or if they suspect chargeback fraud, start the representment process.
  3. Card network intervenience. In case the dispute cannot be resolved between the issuing bank and the merchant, the card network company intervenes — it investigates the evidence provided by both parties and resolves the dispute.

This is basically an example of an average dispute process. It doesn’t seem too complicated at first sight, yet it costs a lot of money to the merchant since they have to cover all the fees as well as penalties, if there are any. Of course, the merchant can issue a chargeback representment process if they suspect fraud, and if they are proven to be right, they will recover lost revenue, but it’s still better and cheaper to avoid chargebacks.

Chargeback Representment

We have briefly mentioned the chargeback representment process above, but what exactly is it, as well as how and when to use it? Well, chargeback representment is one of the at first sight insignificant yet so important, especially for merchants, processes involved in the dispute procedure. This is the means that allows you to stand up for your rights in case of a dispute and avoid refunding potential fraudsters.

So, basically, chargeback representment is the process by which merchants can respond to chargebacks. In other words, representment allows you to dispute a chargeback and request your lost revenue back. The main goal of representment is to show the issuing bank that the transaction in question is indeed legitimate and, therefore, it cannot be reversed.

Common Outcomes of a Chargeback

A lot of entrepreneurs believe that there are only two outcomes of any credit card dispute — either a cardholder or a merchant wins. At the same time, it’s far from being true. In fact, there are several different scenarios that can unfold after a chargeback, so let’s explore them together.

Chargeback Approved
The first scenario is when a cardholder wins the dispute, and their chargeback is approved. In this case, the issuing bank finds the cardholder’s claim valid and they issue a refund from the merchant. Of course, the merchant must refund the cardholder and pay all the fees associated with the dispute. Moreover, the merchant may also face additional penalties, especially if they have too many disputes.

Chargeback Denied
In this scenario, the merchant provides enough information to convince the issuing bank that the transaction was legitimate and wins the dispute. Thus, the chargeback is denied, yet, in many cases, the merchant will still have to pay chargeback fees (though the obligation to pay and the fees themselves depend on the terms of the arrangement with your payment processing company).

Chargeback Reversed
Another scenario in which the merchant wins is when a chargeback is reversed. Therefore, after receiving a chargeback, the merchant issues the representment process and provides all the available information to prove that the transaction was indeed legitimate. As a result of the representment, the chargeback is reversed, and the merchant gets the transaction amount back.

Chargeback Resubmitted
There is also an ongoing dispute scenario. Thus, if after the chargeback representment process, the chargeback can still be resubmitted if the evidence provided by the merchant is considered to be insufficient. This process can go on until the final decision is finally possible to reach. However, this scenario is rather rare since it is wiser and cheaper to refund a customer before a dispute becomes a chargeback simply because representation and dealing with resubmitted chargebacks are quite expensive.

Friendly Resolution
Lastly, there is a friendly resolution scenario. In some cases, a merchant and a cardholder can come to a mutual agreement without involving the issuing bank and starting a chargeback procedure at all. Such a solution might involve product replacement, return, partial refund, offering discount coupons, etc. Though this scenario is only possible if you have reliable means of communication with your customers so that they can reach out to you first before opening a payment dispute.

Tips to Prevent Chargebacks

As we have already mentioned above, it is better to prevent chargebacks than to deal with them. Yes, you can win a dispute with or even without the representment process, but the truth still remains the same — in many cases, it is cheaper to refund a customer than to proceed with the chargeback procedure.

Of course, a lot of businesses do not want to refund every customer who opens a dispute since a lot of those requests are fraudulent, and it’s silly to refund fraudsters and, therefore, help them complete their schemes. Luckily, modern merchant chargeback prevention services offer fraud protection as well. So, returning to the main question of this paragraph, which is how to prevent chargebacks, here are some working tips on preventing chargebacks of all types:

  • Use chargeback prevention solutions
    Modern chargeback prevention solutions, like the ones available within Germius,  offer reliable protection by effectively preventing disputes from resolving in chargebacks. Additionally, these services offer anti-fraud solutions that help prevent fraudulent chargebacks by blocking suspicious transactions in the first place.
  • Make clear refund and return policies
    To prevent your customers from issuing disputes, you need to make sure your refund and return policies are clear and easy to find. That will also be your evidence for the issuing bank in case a dispute still happens.
  • Notify your customers about their order status
    Some customers request chargebacks simply because they do not get any updates about their order, so they believe they were scammed. To prevent that, make sure to notify your customers about the status of their order.
  • Cooperate with reliable shipping companies only
    A lot of chargeback processes start after a customer does not receive the product they bought. To minimize the risks of your parcels not reaching your customers, cooperate with reliable shipping companies.
  • Make sure you are easy to reach out to
    Lastly, an average customer initiates a chargeback process if, in case of any issue, they cannot reach out to the seller to solve that problem. Thus, make sure you have a good support service as well as one that you are easy to reach out to. That way, you will be able to prevent a chargeback by using a friendly resolution option.

As you can see, preventing a chargeback is not too complicated, and it’s definitely possible even for small businesses. Just make sure to update your customers about their orders, keep in touch with your clients to solve any problems with their purchases, and use a reliable chargeback prevention and fraud protection service that will never let you down.

Conclusion

The chargeback flow is not too complicated, yet it is important to understand it to be able to figure out how to prevent it. The thing is, a chargeback is not a good thing for any business, whether it is a large online marketplace or a small store. Thus, knowing its workflow as well as the means to prevent it is a must for every entrepreneur. Luckily, Germius has the very solutions that will help you forget about the chargebacks for good. So, feel free to reach out and learn more about our chargeback prevention services.