Chargebacks: A natural cost of doing business?

I used to think chargebacks were a cost that came naturally with the business, but I could not be more wrong. Knowing that it is possible to deal with this healthily is what can make your business grow in a controlled and safe space.

With all the technology available nowadays, it has been proven that chargebacks can be reduced or even prevented. Taking the time to understand your system and its needs will help in implementing what works best for you. This will bring balance and peace of mind so you could focus your attention on other aspects. Nevertheless, Acuitytec can assist you along the whole process.

But first, let’s understand what a chargeback is. Online merchants can face chargebacks for many reasons, initiated by the merchant, the bank, or the cardholder. One of the most frequent examples of chargebacks is when a customer has supposedly made a payment, but it was done by a fraudster who has entered another person’s payment credentials. In this case, the victim whose bank card has been used for the fraudulent payments will file a chargeback to have the illegally withdrawn funds returned. When this happens, the bank initiates a chargeback to the merchant after receiving documentation from cardholders that the specific transactions were fraudulent. In addition to the reversal of fraudulent payments, online merchants are charged an additional fee by their processing banks.

This isn’t an interesting phenomenon for merchants. Now, let’s also mention another possible case scenario: imagine if the whole process is triggered by a customer who made a transaction and wants to process a chargeback just because of poor decision-making while patronizing your business. Now that they want their money back, they will do anything in their power to back up the claim to their card provider.

These are a couple of cases that alter our perspective and lead us to think that working on prevention is worth it, not only due to the effort needed in the chargeback process but most importantly, the cost of it. Let’s begin with knowing about the roles and workflow phases of a payment dispute.

We will see five roles interacting among each other in the dispute:

  1. The Cardholder
  2. The Cardholder’s bank (also known as the Issuer)
  3. The Merchant
  4. The Merchant’s bank (also known as the Acquirer)
  5. Card brand representative

The following are the disputes’ workflow phases:

  1. Chargeback
  2. Chargeback response
  3. Pre-Arbitration
  4. Pre-Arbitration Response
  5. Arbitration

Note: some disputes could require going through the entire chargeback workflow, however, in some cases, only one or two phases may be required. Also, not all card issuers have the same policies and processes.

Nevertheless, you could find it beneficial to know about the possible phases you can face and why Acuitytec’s presence in your business aims to eliminate the entanglement of payments disputes. Thus, we’ll now go deeper into the resolution stages of chargeback. It includes:

Chargeback: the cardholder identifies a payment that they did not make, received a service or product that did not agree with what the merchant offered, or decides that they want the money back due to personal reasons. The cardholder contacts the issuing bank and presents the situation so that the payment is reversed. The issuer now must review the cardholder’s claim. If what the customer says appears to be true and the transaction is not valid, then the issuer will overturn the transaction. The money is forcibly withdrawn from the merchant’s acquirer and transferred back to the customer, giving the customer a conditional refund and notifying the acquirer of the chargeback.

Chargeback response: now the ball is in the merchant’s court to review the details provided on the claim and decide whether the chargeback is justified or not on their end. If the merchant considers that the customer is right, then a simple acceptance of the chargeback is done, and the claim can be considered resolved in this case. If this is not the case and the merchant does not accept the chargeback, it can fight back to uphold the sale. The merchant must compile any evidence it considers compelling and responds to the claim. The information provided changes from merchant to merchant since it depends on how the business operates, but it can include receipts, confirmations, communications, etc. All this should be provided to the acquirer.

Pre-Arbitration: here, we will see the merchant’s effort in responding to the chargeback along with all the evidence at hand to the cardholder’s bank. The issuer now has the responsibility of comparing both sides’ evidence and stories.

Pre-Arbitration Response: A response comes up from the previous stage. At this point, if the merchant’s evidence and arguments are strong enough, it could result in a verdict in its favor. If so, the conditional refund made during the chargeback stage to the cardholder is reversed and returned to the merchant’s account. However, if the merchant does not get a positive result, then the process continues to the arbitration stage.

Arbitration: now we have a new role stepping into the process since all the merchant’s and cardholder’s evidence and stories are submitted to the card brands directly, for them to study both sides and decide who is in the right. The verdict given is final, and no appeals will be accepted from neither party anymore.

Let’s review a couple of relevant points:

  • The information provided is for you to have a wider knowledge about the process; however, you do not have to deal with this yourself. Acuitytec can assist you with it!
  • We are here to help you also with chargeback data reports analysis, fraud detection and disputes prevention. Having a broader idea of how chargeback’s disputes work is beneficial, but it is just a part of a complex process.
  • An arbitration stage is an available option, but the best is not to get to it since it is a costly risk. However, some situations may warrant moving into this stage, like irrefutable evidence and an amount that is worth fighting for.
  • Merchants need to be aware that the number of cases they could have to deal with might be high, resulting in a huge mess to handle! Professional support on prevention is key here!
  • The workflow presented above may seem short, but it could take months or years.
  • Card brands have different ways to handle disputes, so workflows, forms, and requirements may vary from one to another.

Acuitytec Merchant Accounts Feature to avoid chargebacks

Real-Time Risk Scoring and Fraud Alerts:

  • Automate transactions rejection based on high score threshold and targeted risk alerts
  • Risk setting evolves with traffic patterns and trends
  • Tiered warning levels, frequency setup, notification type, and recipients list
  • Custom rule sets based on evolving business needs and product suite, with over 900 parameters

Capture Queue:

  • Review accounts holder details such as full name, address, phone number, and email address attached to the bank account and matches it against profile information
  • Track activity and acceptance rates from card level and type, with the ability to create actions based on decline codes
  • Avoid refunds and compensations
  • Sticky feature option for repeat customers – option to by-pass verification queries on repeat customers with the same information, thereby reducing costs

User Profiling:

  • Automated know your customer (KYC) process
  • Global engine database optimized and oriented to transactions, users, and account associations
  • Minimize user interaction

Global and Local Databases:

  • Identify high risks in and outside of your network
  • Set trust levels while effectively managing your customer’s data
  • Negative and White List Databases

Business Intelligence:

  • Reporting and analytics
  • Risk pattern assessments
  • Traffic and rules monitoring

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