877-203-6624 support@payarc.com
Select Page

If you’re an online merchant, you probably know that fraud in card-not-present (CNP) transactions is on the rise, increasing from 2.8 billion in 2014 to 4 billion in 2017. That means that more and more consumers might be the victims of online fraud — or they are fraudsters themselves. For online sellers, the question isn’t if you’ll be involved in a credit card dispute, it’s when. The best way to protect yourself and reduce chargebacks is to understand the process, and then know what steps you can take to prevent both legitimate and fraudulent credit card disputes. Here’s your step-by-step guide to the credit card dispute process.

Step 1: Dispute

Your customer files a dispute with their credit card company. There could be many reasons the customer decides to do this: bank errors, unissued refunds, an incorrect or double billing. Sometimes they want a refund and figure this will be the fastest way. Or, they could be the victim of credit card fraud.

Whatever the reason, the consumer files a report with their issuer. This usually is a simple process for the cardholder and can happen quickly online. If it seems like their information is compromised, they’ll receive a new card.

Step 2: Review

The issuing bank will review the charge and the information the cardholder has provided. At this point in the process, they will decide if the dispute is valid or invalid. If the charge is invalid, the process ends there and the issuer tells the cardholder the dispute was denied. If the issuing bank things the dispute is valid, then the consumer gets a credit for the disputed amount. The money flows from the merchant’s commercial bank account to the issuing bank.

Step 3: Handoff

Now the chargeback dispute goes to the merchant’s sponsoring bank — your bank. They will first provide funds to the issuing bank, then investigate the charge. Sometimes they will inform the merchant at this point of a pending chargeback request. If they find that the disputed charge isn’t valid, they’ll decline the chargeback and inform the issuing bank. If they find it’s valid, they’ll forward it to the merchant. If you’re the merchant, this is usually the first point in the process that you’ll have all the information about the disputed transactions.

Step 4: Merchant Decides

At this point, the merchant can either accept the chargeback or fight it. If the merchant wants to challenge the dispute, they submit a response to the acquirer. This response generally involves the merchant gathering compelling evidence that the disputed charge is valid. Examples of this evidence include shipping verifications, past transaction history, email communication and social media interactions. However, investigating a dispute also take a lot of time, so many merchants just let the chargeback go through rather than fight it, since it doesn’t seem worth the effort — particularly if the product wasn’t valuable.

The merchant’s acquiring bank will review the response, and either accept or decline it.  If they side with the merchant, they send it back to the initial customer’s issuing bank, who then reviews it.

Step 5: Decision

The issuing bank makes a decision either in favor of the merchant or the customer. If the customer wins, the chargeback is upheld and the cardholder keeps the refund. If the merchant wins, the issuing bank declines the chargeback, and takes funds from the issuer and sends to the acquiring bank, where it goes back into the merchant’s account.

Sometimes, the cardholder will dispute the decision. At this point, the process begins again from Step 1.  If the merchant wins again and the cardholder won’t drop it, the process moves to arbitration. Now the merchant is automatically charged with a $250 fee, which will only be returned if the merchant wins again.

Unfortunately for merchants, you’ll likely have to pay some fees regardless of whether or not you win in the dispute. The process can also take months, and it’s designed to protect consumers, meaning the odds of winning most dispute cases aren’t in your favor. Chargebacks are, unfortunately, part of life as a business owner.  But the good news is there are simple ways to protect yourself and avoid getting into this situation in the first place:

  • Be clear about your shipping return policies, and make it easy for the customer to contact you. Sometimes a chargeback will result when the customer wanted to return something and couldn’t, or when a customer thinks they aren’t going to receive an item that’s en route. Being open about this information and easy to contact can help reduce the chances of a chargeback.
  • Also be clear and honest about your product, so there are no surprises for your customer. This can also cut back on returns.
  • Keep detailed records, follow all processing protocols, and hang onto all receipts.
  • Make sure your customers know what name will appear on their billing statement. If they don’t recognize your business, they might think they’ve been fraudulently charged and begin a credit card dispute.

Chargebacks are both damaging and tedious, so you don’t want to have too many of them. Not only do they represent lost revenue, but they also dent your reputation and can get you classified as a high risk merchant if you have too many. Your best bet is to understand the option you have when you’ve been hit with one, and take steps to reduce the chances of a chargeback in the first place.