Chargebacks cause real pain for sellers. But why does this happen? Why is the process so expensive, time-consuming, and requires a lot of action? The lifecycle of each chargeback depends on several factors, such as the reason for the chargeback, the quality of the evidence the buyer and seller have provided, and the deadlines of the card networks and others involved in the process. In this article, we’ll explore what is a chargeback, its step-by-step life cycle, and you’ll get some tips on how to streamline the process.
The Step-by-Step Guide to the Chargeback Life Cycle
Many sellers assume that the life cycle of a chargeback is fairly simple. The customer disputes the transaction with the bank, the merchant enters into a dispute, wins, and that’s it. However, that is not the truth. Depending on the reason for the dispute, as well as different situations, there may be several ways in which things develop. Below are the steps that occur during a chargeback.
The first stage is when the buyer decides to ask the issuing bank for a chargeback. This may be because the merchant did not perform the service properly, or the merchant could not identify the transaction on the bank statement and found it fraudulent. The cardholder contacts the bank to cancel the transaction.
Issuer Investigates Claim
After receiving the claim, the issuing bank reviews it. They may request additional information from the customer to identify the transaction and get to the bottom of the details. If everything the customer reported is correct, the issuing bank moves on to the next step.
Issuer Files a Chargeback
The issuing bank cancels the transaction. This forcibly deducts the amount from the acquirer and transfers it to the buyer’s account. This is called a conditional refund. After that, the issuing bank sends a notice to the acquirer about the revocation of the payment, stating the reason code in the notice and providing the data received from the buyer.
Acquirer Reviews the Case
The acquiring bank verifies the information received from the issuer and sends it to the seller, attaching the accompanying claim data.
Merchant Decides to Fight
After receiving the notice and accompanying information, the seller must decide what to do next. They may accept a chargeback if they agree with the buyer’s statement or decides to fight back if he believes the customer’s information is false.
Compile and Submit Representment Case
If the seller decides to fight, he collects evidence to refute the buyer’s claims. Evidence may include a copy of the transaction, a tracking number, an order delivery notice, records of communication with the buyer, etc. Once all the information has been collected, it should be given to the acquiring bank.
Acquirer Submits Representment
The acquirer receives the information from the seller and passes it on to the issuing bank, along with evidence and a cover letter describing all the steps regarding the order.
Issuer Reviews the Case
The issuer examines the case details, comparing the information from the buyer and the seller. Whichever version is more convincing, the issuing bank will make its decision.
Issuer Returns Funds to Merchant
If the truth is on the seller’s side, the issuer cancels the conditional refund that was given to the buyer. These frozen funds are returned to the seller’s account. In the best-case scenario, this may be the end of the chargeback process. However, if the issuing bank rules in favor of the buyer, the case could have a sequel.
After the issuing bank upholds its chargeback decision, the seller may file a second chargeback, otherwise known as pre-arbitration.
Acquirer Reviews the Case
The process is repeated. The acquirer receives information from the issuer, studies it, and sends it to the seller. It also contains all the transaction details and information from the issuer and the buyer.
Merchant Decides to Fight
After receiving all the information, the seller decides either to accept the chargeback or to dispute it again. However, in order to fight it a second time, it is important to provide more evidence than what was done the first time.
The seller sends all the necessary information and evidence to the acquiring bank again. But in this case, all the information goes to the card network ( Visa or MasterCard). After that, the card network, not the issuer, starts the arbitration process.
The card network looks at all the data the issuer and acquirer provided to decide which side is right.
Card Network Issues Ruling
In the end, the card network makes the final decision and takes the seller’s or buyer’s side. The case is then closed and cannot be appealed. However, if one of the parties in the process has important new evidence, arbitration can begin again. In that case, the party who initiates the case must go to court.
The Bottom Line
If you look at the step-by-step process of processing a chargeback, there doesn’t seem to be anything complicated about it. However, the process and the nature of the chargeback can negatively affect your business. First, it is quite a costly event because, in addition to the amount, the company pays additional fees that may exceed the transaction’s amount.
Second, a large number of chargebacks can have a bad effect on a company’s merchant accounts. They could be fined or even blocked by the bank or card network. Therefore, preventing chargebacks and providing customers with first-class service are important.