Most merchants are familiar with the concept of chargebacks and how harmful they can be to businesses when left unchecked. That said, there is some confusion concerning bank chargebacks, and how factor into the equation.
For the sake of defining our terms, let’s go back to the beginning. In the case of a standard chargeback, a cardholder is claiming that a transaction is invalid. The claim goes to the issuing bank, who disputes the transaction on their customer’s behalf. This results in the cost of the sale being withdrawn from the merchant’s account and returned to the cardholder.
In contrast, a bank chargeback is a type of dispute filed against the merchant by the issuing bank when they identify an error or anomaly in a transaction. There are certain differences in the process that we’ll explore later in this article.
Whether the chargeback is initiated by the cardholder or the bank, the result is the same for merchants: lost revenue, added fees, and a higher chargeback rate. This has negative ramifications for financial institutions as well; as the merchant’s profits drain away, it becomes harder to sustain a business. Plus, if the merchant is unable to cover the cost of a dispute, the liability falls on the acquirer with whom they do business.
Bank Chargebacks are Always Bad News
A bank chargeback is initiated by the issuer instead of the customer. Bank chargebacks are often handled at the institutional level, which means that the merchant and consumer could be completely unaware that a chargeback is even being processed.
With a standard chargeback, merchants get the opportunity to challenge the dispute through the representment process if they believe the cardholder’s claim is invalid. However, they rarely get the same opportunity when faced with a bank chargeback. In the event of a dispute, the issuer is the one empowered to rule on which party is liable. Thus, an issuer would not submit a bank chargeback if they were not already convinced that there was a good reason to do so.
Unfortunately, if the issuing bank rules in favor of the consumer, funds will be taken from the merchant and returned to the cardholder. This could be detrimental to a merchant who had no knowledge of the chargeback until being hit with the unexpected fees.
As we’ve seen, financial institutions have an interest in helping merchant clients avoid disputes at any cost. The best way to do this is by educating them on transaction anomalies to avoid, as well as helping them understand the bank chargeback process and prevention techniques.
What Exactly is a Transaction Anomaly?
Bank chargebacks can be triggered by any error in the original transaction. Even if it’s not something currently causing an issue, it will be flagged if it has the potential to cause future trouble.
Below is a list of the most common causes of bank chargebacks. We recommend that financial institutions educate merchants on each potential trigger:
- Expired Card/Account: The merchant might have processed a transaction using an invalid or expired account number or cardholder information.
- No Authorization: The merchant didn’t obtain the required authorization before processing a transaction.
- Declined Authorization: The merchant still proceeded with a transaction even though they were denied authorization by the bank.
- Incorrect or Nonmatching Account Number: The account number submitted with the processed transaction does not match the account number on file.
- Multiple Authorization Requests: The merchant submitted more than one authorization request for a single transaction.
- Duplicate Processing: A transaction was processed and submitted more than once on the same account.
- Late Presentment: The merchant didn’t present the transaction within the timeframe allowed and the authorization expired.
- Merchant Fraud: The merchant submitted a transaction request without obtaining valid authorization from the cardholder.
Remember: what appears a glaring problem to banks might not register the same response with a merchant. This is why it’s so important for merchants and institutions to hold open lines of communication, and for merchants to be aware of possible chargeback triggers.
Help Merchants Prevent Bank Chargebacks
As mentioned earlier, bank chargebacks are rarely overturned. This is why the best advice to give merchants is to focus on preventing the kinds of minor errors that lead to significant revenue loss.
The first step merchants can take to reduce risk is to review their policies and procedures. The following best practices ought to be implemented in all card-not-present transactions:
- Merchants must adhere to all the proper network processes and regulations.
- Authorization should always be requested.
- Merchants should never attempt to bypass a declined authorization request.
- All sales/credit receipts should be submitted for processing within the correct timeframe
- Credits and cancellations ought to be granted as soon as the customer asks.
- Purchases should be packed and shipped quickly to ensure they arrive in good condition.
- Merchandise should be readied for shipping before depositing the transaction.
Ultimately, merchants need to be prepared to take an honest and unbiased look at their operations. Self-examination is one of the most crucial actions to take to eliminate internal bank chargeback triggers. For merchants can perform this work effectively, though, they will likely need help and guidance on the institutional level.