If a business starts accepting credit and/or debit cards for payment, inevitably it will get a chargeback, and for any business chargeback becomes a dirty word. It would be nice if addressing chargebacks was straight forward, but that isn’t reality. Each card network — Visa, MasterCard, Discover, and American Express — has its own rules, codes, and jargon which make the process challenging to navigate. At the beginning it seems daunting, but with some knowledge and fine-tuned processes a business can come out ahead.
Let’s start from the beginning, what is a credit/debit card chargeback? Chargebacks can be initiated by a consumer, issuing bank, or a card network. A consumer contacts their issuing bank requesting the return of funds; forcibly the issuing bank of the card used by a consumer to pay for their purchase debits the merchant’s account. An issuing bank or card network can also initiate a chargeback for compliance reasons and forcibly debit the merchant’s account.
Why does a consumer initiate a chargeback? The chargeback mechanism exists primarily for consumer protection. Holders of credit cards issued in the United States are afforded reversal rights by Regulation Z of the Truth in Lending Act. United States debit card holders are guaranteed reversal rights by Regulation E of the Electronic Fund Transfer Act. Similar rights extend globally, pursuant to the rules established by the corresponding card association or bank network by country. The threat of forced reversal of funds gives merchants an incentive to provide quality products, helpful customer service, and timely refunds as appropriate. A consumer may also initiate a chargeback for unauthorized transfers due to identity theft or other fraudulent activity. Over the years, however, consumers have begun to abuse this protection by initiating chargebacks for purchases they have authorized but later attempt to reverse the charge fraudulently. This is known as friendly fraud.
Why does an issuing bank or card network initiate a chargeback? Typically the reason a merchant receives a chargeback from an issuer or a card network is because of a compliance violation. Here are a few reasons a compliance chargeback would be initiated.
- The merchant adds a surcharge for using a Visa card as a means of payment.
- The merchant bills the cardholder for a delinquent account or for the collection of a dishonored check.
- The merchant re-posts a charge after the card issuer initiated a chargeback.
- The merchant insists that the cardholder sign a blank sales draft before the final dollar amount is known.
- A merchant that does not hold a Visa account through an acquirer processes a transaction through another Visa merchant.
How does a consumer initiate a chargeback? A consumer may initiate a chargeback by contacting their issuing bank and filing a substantiated complaint regarding one or more debit items to their account.
How does a merchant respond to a chargeback? Not to be cliché, but it depends. The necessary response can differ by card network and the reason the chargeback was initiated by the consumer. Here are some of the most common reasons – unauthorized (fraud) charges, services not rendered, credit not received, item not as described, merchant charged surcharge, receipt was illegible (didn’t include required receipt elements). It is important to refer to the rules and regulations of each card network for a list of reason codes and their definitions. Based on the reason code, the card network provides the requirements necessary to respond to the chargeback to dispute the consumer’s claim.
How can a merchant reduce chargebacks? There is no silver bullet to preventing chargebacks, but you can reduce them. Reducing chargebacks requires you to be active in reviewing your chargebacks. Do your terms and conditions clearly state your refund policy? Does your receipt provide the customer with a description of the goods or services you sell? Does the descriptor of the transaction to be posted to the consumer’s card statement accurately identify you as the merchant? Are you responding to document retrieval requests from your acquirer about a consumer’s transaction? How you answer these questions and what you do to address them can certainly have an impact on your chargeback volume.
What can a merchant learn from their chargebacks? By reviewing and documenting your chargebacks and the consumer’s documentation, you can learn a number of things. The information provided with a chargeback allows you to measure key attributes about a transaction. Some of these attributes are card issuer, cardholder, chargeback reason (is one reason excessive), and transaction date (could be tied to a special event).
What are industry averages for chargebacks? Based on our analysis of three billion transactions across 18 industries, we compiled the following table of chargeback ratios (total chargebacks divided by total transactions). An individual merchant’s chargeback ratio may be higher or lower based on specific processes and strategies used to reduce and manage chargebacks. This chart should serve only as one data point in your analysis and review of chargebacks within your company.
How can a merchant be placed on a chargeback monitoring program?
Although you may respond to chargebacks, and regardless if you win or lose with your rebuttal, the card network may still place you on a chargeback monitoring program. These monitoring programs are initiated when a merchant hits thresholds set by a card network. Each card network sets these thresholds independently. In the event a merchant is on a program for a period of time, fines may be issued and ultimately a network can remove the merchant’s ability to accept that card network’s card. The calculation of a chargeback ratio can differ by card network. Here are Visa and MasterCard’s programs. Note the subtle difference of the chargeback ratio calculation between Visa and MasterCard.
Visa U.S. Merchant Chargeback Monitoring Program (MCMP):
Merchant must meet or exceed all three of the following parameters during a single month:
- 100 Visa chargebacks
- 100 or more Visa transactions
- Chargeback ratio of 1 percent or greater (defined as # of current month’s Visa chargebacks/# of current month’s Visa sales transactions)
Once a merchant has a violation, the merchant will need three consecutive non-violation months to be removed from the program.
MasterCard Excessive Chargeback Program (CMM/ECM):
Chargeback Monitored Merchant (CMM) Tier 1
- Minimum Chargebacks = 50 chargeback transactions
- Minimum Chargeback ratio of 0.50 percent or 50 basis points (defined as # of current month’s MC chargebacks divided by prior month’s # of MC sales transactions) Example: # of February CBs = 100, # of Jan sales transactions = 2,500, CB ratio for February = 100/2,500 = 4 percent.
Excessive Chargeback Merchant (ECM) Tier 2
- Minimum Chargebacks = 50 chargeback transactions
- Minimum Chargeback ration of 1 percent (defined as # of current month’s MC CBs divided by prior month’s # of MC sales transactions)
Once a CMM/ECM merchant has a violation month, they will need two consecutive non-violation months to be removed from the program.
Defining a successful chargeback re-presentment process.
A process is only good when it is implemented, repeated, measured, and continually reassessed for improvement. Look over the chargebacks you have re-presented. Which re-presentments did you win and which did you lose? What similarities are there with each group – documentation, reason code, written response, issuer, product, CVV authentication, AVS match? Based on your findings, refine your re-presentment process. As you refine, start documenting the key attributes you identified in your first assessment. By continuously measuring the outcomes as they occur, you can react quickly.
Selecting which chargebacks to re-present. The majority of merchants do not have the time to re-present every chargeback. When deciding which chargebacks to re-present, you should take some things into consideration. How much is the chargeback for? What is the reason code and what is the required documentation for re-presentment? Is the consumer a repeat offender and do they need to be added to a black list?
Chargebacks can be burdensome and costly, but they can be managed. Arm yourself with understanding why they occur and put measures into place to help prevent future ones and take steps to continually improve upon current processes.
Here are links to card network’s chargeback documents:
Visa – https://optimizedpayments.com/guides/Visa_CB_Guide.pdf
MasterCard – https://optimizedpayments.com/guides/MC_CB_Guide.pdf
American Express – https://optimizedpayments.com/guides/AmEx_CB_Guide.pdf