Chargeback Dispute: What, When, Why, and How
What is a chargeback dispute?
A chargeback dispute is a process through which a merchant can combat illegitimate chargeback claims.
When a cardholder notices an unauthorized charge on their card, they can notify their card issuer and file for a chargeback, meaning they request a refund directly from the bank rather than the merchant. But in some cases, an individual files a chargeback on a purchase despite having authorized and received it. This chargeback abuse, often referred to as friendly fraud, accounts for about 50% of chargebacks according to Riskified data.
Friendly fraud is often difficult to prevent, and the only way to retrieve lost revenue is to dispute suspected chargebacks. This requires merchants to provide compelling evidence (CE) that the cardholder did indeed authorize the purchase.
Why and when to dispute a chargeback
Aside from the immediate consequences of revenue loss, merchants can put themselves at risk of facing other repercussions if their chargeback rate exceeds the set threshold. Their credit card network may place them in an excessive chargeback program that comes with heavy fines, they could be forced to switch to a high-risk merchant account with high processing fees, and in rare cases a merchant’s account might even be terminated.
A chargeback dispute tends to be worth it when the merchant is certain the transaction was legitimate, when there is clear compelling evidence, and when the transaction total is large enough to justify the effort. But without insight into the full transaction process and cardholder data, it can be difficult to determine which chargeback is a good candidate for dispute. As lost disputes mean even more processing fees, merchants who don’t have chargeback guarantee coverage may be hesitant to take on the risk.
Chargeback dispute process
When a customer files a chargeback, the issuing bank decides whether or not it’s justified. Once the chargeback is approved, the money goes back to the cardholder, the charge is forwarded to the merchant from their acquiring bank, and the merchant must accept losses. But if a merchant believes the chargeback was wrongfully issued, they can choose to challenge it by providing evidence about the order that proves it was legitimate. This process is called dispute resolution.
There are five steps to the chargeback dispute process:
- Step 1: Cardholder files a chargeback
- Step 2: Issuing bank reviews the claim and, if it’s determined to be valid, sends it to the acquiring bank
- Step 3: Acquiring bank reviews the chargeback and, if it’s deemed valid, they will notify the merchant. If it’s deemed invalid, they will decline it and notify the issuing bank
- Step 4: Merchant reviews the chargeback and either accepts or files a dispute, supported with compelling evidence
- Step 5: If the evidence is deemed compelling, the issuing bank rejects the claim and the customer is charged. If the evidence is deemed not compelling, the credit will be taken from the acquiring bank
Chargeback dispute challenges
Successfully disputing chargebacks can take anywhere from weeks to months, and the process is complicated and resource intensive. Merchants who don’t use automated solutions might struggle to keep track of card policies, codes, and submission windows.
Chargeback rules vary between credit card companies – different companies have different chargeback regulations and procedures, although the basic process stays pretty similar across the board. They might have different time frames for their dispute process – one may allow consumers up to 60 days to file a chargeback while another may accept a chargeback 120 days after the transaction. Some card companies may even fine merchants who do not respond within these time frames.
Something else to consider is payment gateway: once a chargeback is submitted to the gateway issuer, merchants have 7-30 days to respond. If they don’t submit their documents by the time this window closes, they automatically lose the dispute.
Beyond facing repercussions with banks and credit card companies (increase of fees, monitoring programs), racking up too many chargebacks can also hurt a merchant’s reputation. Perceiving an eCommerce brand as vulnerable to fraud tends to lower customer confidence in shopping at that store. A Riskified survey found that almost 50% of consumers would not shop again at a store after experiencing an incident of fraud.
Aside from the technicalities, having to choose, compile, and submit compelling evidence for each chargeback dispute makes for quite a heavy workload. While banks typically require little proof from consumers when authorizing a chargeback, merchants must collect a good amount of compelling evidence to prove they are in the right.