Rules and regulations within the industry are constantly changing, and chargeback processing is anything but a straightforward subject. There are numerous pieces of the puzzle to consider, from associated fees and required documentation to time frames and reason codes.

All of it is enough to make one feel overwhelmed.

This post will break down the main touchpoints of chargeback processing. We’ll help both financial institutions and merchants better streamline their operations and manage chargebacks.

How Does the Chargeback Process Begin?

The chargeback life cycle begins when a cardholder disputes a transaction on their card. The case moves to the issuer, who opens an investigation into the cardholder’s claim to determine its validity and whether it needs to be forwarded to the acquirer. Although less common, an issuer can also file a bank chargeback if they find a problem with a transaction.

Cardholders have a specific window of opportunity in which to file a chargeback. These limitations are dictated by their claim and the brand of the credit or debit card. Mastercard and Visa both give cardholders 120 days from the date of the purchase to dispute a charge in most cases (some exceptions apply).

The issuer make the final decision to either validate the transaction or side with the cardholder, then forwards the chargeback to the acquiring bank. The acquirer reviews the case, then withdraws the funds from the merchant’s account. The merchant is provided documentation about the chargeback, which typically includes a Chargeback Debit Advice Letter.

Upon receiving the chargeback documentation, the merchant must decide whether nor not to accept the dispute. They have the option to fight back through representment if they still believe the claim was filed falsely. In this scenario, they have a very short turnaround to submit their response; typically less than 30 days from the day the cardholder first filed the chargeback.

This would realistically give the merchant around ten days to investigate the claim, gather evidence, draft a response, and submit their documentation.

What Documentation is Required?

As we already mentioned, one of the ways merchants can fight chargebacks is through the representment process. To do this, banks need strong evidence to create a reasonable doubt about the consumer’s claim.

A chargeback case must be won by providing compelling evidence, and different reason codes require different documentation.  Several examples of compelling evidence include:

• Tracking information
• Delivery confirmation receipts
• Sales receipts
• Signed orders or contracts
• Transcripts of any communications merchants have with the cardholder
• Photographs of the cardholder with the product

Merchants need to tailor the evidence to the specifics of the cardholder’s claim based on the reason code assigned to the case. Reason codes often do not reflect the reality of the actual case, due to a practice known as friendly fraud. However, the cardholder’s underlying claim must still be addressed.

A chargeback rebuttal letter is also required with the submission. The letter summarizes the case, explains all the evidence presented, and shows why the cardholder’s claim is invalid.

What Fees are Included?

Even when merchants decide to fight the chargeback, they will be responsible for associated fees, which are nonrefundable. These fees cover the costs carried by the banks. As such, the acquiring bank and the processor will both play a part in determining the final amount owed.

Like documentation, the cost will also depend on the circumstances of the case. For example, the type of goods or services offered by the merchant can affect price. In general, the fee for one chargeback is around $20. However, merchants must be careful not to be labeled “high risk,” which will inevitably increase the initial price per chargeback as much as $50.

Unfortunately, even if a merchant wins the representment case, the bank will still keep the amount of the fee collected. If a merchant is already struggling under excessive chargebacks, you can see how these associated processing costs can drastically impact their finances and reputation.

Using Chargeback Processing to Your Advantage

As we’ve seen, chargeback processing is a complex topic. Both banks and merchants ought to understand that reason codes don’t always tell the whole story. In order to effectively fight chargebacks, a comprehensive strategy including human forensic expertise and machine learning must be employed.

One of the best ways for merchants to ensure that they keep costs low while winning chargeback cases is to build a detailed and secure system for filing transaction information. They need to have access to all important documentation whenever compelling evidence is required and be prepared to present their case to the acquirer in a timely manner.

Despite these challenges, it is possible to leverage the chargeback process to reduce costs and recover revenue.