A chargeback is a forced reversal of payment in a merchant’s account. In other words, a chargeback occurs when a payment for a product or service by a customer is reversed and the merchant’s account is deducted with the amount of a payment already made. Chargebacks can occur on account of a customer disputing a credit card charge or in case there is a technical error, such as the merchant not supplying the original bill of sale to the issuing bank. The chargeback will not immediately result in a reversal of merchant funds, and the charge will have to be proven by the customer and vice versa. For instance, if a customer claims that the product shipped is not what he or she ordered, the customer will have to prove that the product that was shipped and ordered are substantially different. In return, the merchant will need to prove that the product shipped is the same and there are no material differences.

Chargebacks can occur due to several reasons including the following major ones:

• Dual processing- when a customer is charged twice for the same order

• Defective- When the shipped product or service is defective (damaged or broken) and does not perform the purported functions as claimed by the merchant. In addition, if there is a substantial difference between the performance as promised and delivered.

• Not shipped- A customer may claim that the order shipment was not fulfilled.

• Unauthorized activity: A customer may claim that the transaction in question is either in error or not conducted by him or her at all, indicating fraud.

A charge back request must be initiated at customer’s end.

The typical process for a chargeback is as follows:

1. A customer complains to his or her credit card issuing bank about a specific transaction.

2. The credit card issuing bank registers the complaint and issues a recovery request to the acquiring bank. Along with the complaint, information relating to the transaction such as date of transaction, amount, reason for complaint (duplicate processing, etc.) must also be supplied.

3. In some specific cases when a customer report of non involvement in some specific transaction charged in his account, the credit card issuing bank can straight away issues a notification for chargeback.

4. The Acquirer forwards the recovery request to the merchant account service provider, or in case of a third party processor, the processor informs the merchant about the charge back complaint filed against him. Some third party processors such as PayPal allow the customer to check the status of the chargeback request anytime at their online “Resolution Center.”

5. The merchant account service provider marks the transaction as ‘disputed’ and forwards the recovery request to the merchant. Some merchant account providers or third processors may deduct the amount of the transaction from the merchant’s account freeze it at the merchant account provider or third party processor’s end. However, this amount will not yet be transferred to the end customer.

6. The merchant will now need to prove the legitimacy of the transaction, either through the presentation of the original credit card sales invoice or charge slip with the customer’s signature. In addition, the merchant may show delivery receipts or other documentation (product details as offered to customers), depending on the cause of the chargeback request.

7. The merchant account service provider will the review the provided documentation. If it appears that there is no fault on part of the merchant, the information will forwarded to the acquirer and the amount is added back into the merchant’s account, and vice versa. However, in case the service provider adjudicates that the merchant is not at fault, the end customer may choose not to accept this verdict and send a chargeback request for a second presentment, to which a reply needs to be provided within 45 days (usually in case of MasterCard and Visa). The exact time frame varies with different service providers as well as the cause of the chargeback request.

8. In case of 2nd presentment, the acquiring bank will need to mediate for arbitration, for which both the customer and merchant will have to file a request. At this stage, the final decision as to the chargeback will rest with the acquirer.

Chargeback communication including recovery requests are transmitted based on “reason codes,” which carry information as to the reason of request as well as the status of the chargeback.

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