Chargeback Disputes #1 – Guilty Until Proven Innocent

Let’s start by defining a “Chargeback” – A chargeback (also known as a reversal) is a form of customer protection that is provided by the card issuing banks, which allows their cardholders to file a complaint regarding fraudulent transactions on their statement.

The first thing to understand about a chargeback is this – the moment you begin accepting card payments you are at risk.  The card issuing banks are determined to protect their cardholders and even if you (as the merchant) do everything right, there is a good chance you’re going to lose your dispute.  Does this mean you should just roll over?  Absolutely not.  But you must always remain aware that the risk is there, that it’s real and that it’s a question of when and not if.

What is the Risk?

The risk is losing the products or services that have already been sold, the payment, the fees incurred for payment processing, additional money for chargeback penalty fees and possibly even commissions for currency conversions.  To top it all off, merchant accounts receiving too many chargebacks will end up labeled by credit card companies as fraudulent; which is potentially damaging to the image and the existence of your business.

What is the Process?

A chargeback is initiated when a cardholder files a complaint with their card issuing bank and their bank begins an investigation.  What does this mean for you, the merchant?  It means that if you do not (or cannot) prove the legitimacy of the transaction being disputed to the card issuing bank’s satisfaction, they will refund the original value to their cardholder and take back the entire value of the transaction from your bank account, plus an additional fee.  The additional fee can range from $0 – $100 depending on the merchant bank sponsoring your processing platform.

What are the Results?

Credit card issuing banks take chargebacks seriously – not only do they levy fees, but they can hold merchant remittance (deposits to your account from your payment processing terminal) for up to three months to cover the determined fraud.  They may also decide to increase your processing rates if they choose to label your account “risky.”


  • While most banks have a policy against handling disputes that are more than six months old, your sales may be reversible for up to two years. If your transactions are more vulnerable to chargebacks, you should be saving your documentation for two years.
  • A cardholder can dispute a transaction up to 3 times – even if you win the first dispute, there is no guarantee that you will win again.

As a credit card holder, we all appreciate that this protection exists.  With identity theft and fraud on the rise, none of us wants to get hit with paying for items and services we didn’t receive or purchase.  However, at the end of the day, someone is left “holding the bag” and the harsh truth of the matter is that it’s most often the merchant.

The most common circumstances and reasons for a merchant to receive chargebacks are:

  • Fraudulent Transactions
    This occurs when it’s determined that the credit card was used without the authorization and consent of the cardholder. In such cases, the merchant is held solely responsible.
  • Credit Not Processed
    This is when the customer reports having returned the merchandise and requested a refund, but has not received a credit to their account. In these situations, merchants are also held liable for the charges.
  • Item Not Received
    This is a common reason for chargebacks, particularly for online businesses. It happens when the customer complains that they have not received the item they paid for by credit card.  And again, the merchant is charged accordingly.
  • Technical Problems
    Chargeback requests can also be a result of technical problems during the payment processes. One example would be when a technical problem between the issuing bank and the merchant leads to the cardholder being charged twice for the same transaction (referred to as duplicate processing). As a merchant, you want to be aware of any problems occurring during the authorization process and watch your batch settlements to be sure they balance accordingly.

Chargeback Series #2: The Way the Cookie Crumbles

Credit card institutions are focused on keeping their cardholders happy. After all, if they keep their customers appeased, they continue to use their cards to make purchases.  In fact, these institutions value their cardholders’ interests, to the point that any form of dissatisfaction or complaint almost always results in chargebacks.

Having an excessive number of chargebacks can lead to the potential termination of your processing account. This will cripple your ability to accept credit card payments and could lead to severe losses for your business. Merchant accounts that become suspended due to a high number of chargebacks are next to impossible to get restored.  Unfortunately, the credit card industry makes it easy for consumers to file chargebacks and transaction disputes, while the merchants are left with very little industry support.

The card issuing bank simply takes the word of the cardholder, without any explanations as to how the merchant got their credit card information.  There is no onus on the cardholder to back up their claim.

Whenever there is a chargeback, there is an accompanying retrieval request.  The retrieval request procedure is initiated when the customer/cardholder or a credit card institution questions a transaction.  The merchant will need to produce a copy of the sales receipt.  As a merchant, it’s your responsibility to keep sales receipts/documentation, not only for tax purposes, but for cases of sales disputes as well.  It is recommended that merchants should retain a copy of their sales receipts for a minimum of 2 years.

Retrieval requests are usually accompanied by information such as the cardholder’s account number, the date of the transaction, the reference number and the sale amount. It’s crucial that merchants respond to retrieval requests with the required documentation, within the specified time given; typical time frames are 10 days to 2 weeks.

The required documentation usually consists of a legible copy of the transaction receipt and/or any related documentation which can prove that the transaction is legitimate.  Documentation could include items such as a sales invoice, rental contract, etc..

The documentation must contain at a minimum:

  • the cardholder’s name
  • the card number
  • transaction date
  • the total sale transaction amount
  • transaction or authorization number
  • the merchant name and location
  • the cardholder’s signature (if available)

When it comes to responding to retrieval requests, timing is of the utmost importance. If you fail to respond, or if you should respond too late, the chargeback requested will be granted to the cardholder.  There is NO acceptable excuse or recourse available to merchants in cases where there was a failure to respond.  Merchants must pay attention to the communications with their processor – ignorance is not bliss.