The Geek’s

Guide to
Chargebacks
All You Need to Become an Expert
in Chargebacks and Friendly Fraud
 table of contents
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Terminology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Chapter 1: Just What Exactly is a Chargeback?. . . . . . . . . . . . . . . . . . . . . . . . . 5
Chapter 2: The Players and the Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Chapter 3: How Long Will it Take, and How Much Will it Cost?. . . . . . . . . 21
Chapter 4: So Where are all These Chargebacks Coming From?. . . . . . . 24
Chapter 5: Risks, Ratios, and Repercussions. . . . . . . . . . . . . . . . . . . . . . . . . 30
Chapter 6: Why Merchants are Losing the Chargeback Battle . . . . . . . . . 35
Chapter 7: Challenge the Status Quo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Step 1 Prevent Chargebacks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Step 2: Representment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Step 3: Not to Sound Redundant, but You Need Help . . . . . . . . . . . . . . 45
Keep Geeking Out. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
About Us . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
 Geek Out!

Are you a geek?

Once upon a time, being a geek meant using but be forewarned: this guide will get a little
a pocket protector and wearing glasses taped technical. It can’t be helped. Chargebacks are
together with a Band-Aid. Nowadays, however, messy (we’ll explain as we go along).
people proudly “geek-out” about whatever they
That said, if you’re looking for a quick definition
like. According to the dictionary, geeking simply
or a casual overview of chargebacks, you might
means being very interested in a subject and
be better off checking out the information in
knowing a lot about it.
our blog.
If you downloaded this guide, it’s probably safe to
If you want the whole story, though, get ready to
say you want to learn more about chargebacks,
geek out on chargebacks.
right? Well, you’re in luck, because that’s exactly
what we get geeky about. (PS You should check out our blog either way.
Lots of good info there, too. Just, you know, not
Everything you need to know is right here. And
quite as geeky ...)
everything means … well, everything. We’ve tried
to break it down into understandable chunks,

3
 Terminology
Before we get started, let’s talk about what we’re talking about.

Like many other professions, chargeback management comes with its own jargon, some of which may
be misunderstood (or never heard of) by the average merchant.

Chargeback: A forced refund performed on Dispute, or Customer Dispute: A formal

behalf of the customer. complaint from the customer that a mistake was
made on their account. Disputes usually escalate
Issuing Bank, or Issuer: The bank (Chase, BoA, to chargebacks.
Capital One, etc.) that issues credit cards to
Friendly Fraud: A chargeback filed without
customers.
a legitimate reason, in order to obtain an
Acquiring Bank, or Acquirer: The bank unwarranted refund.
authorized to accept (acquire) card payments
Representment: A way for merchants to
on behalf of the merchant.
challenge chargebacks they believe were caused
Card Network: Companies that create and by friendly fraud. Merchants can challenge invalid
manage the major credit card brands: Visa, chargebacks by “re-presenting” transactions to
Mastercard, Discover, and American Express. the issuer, along with compelling evidence.

Most of this we’ll cover in detail later in the book. These quick definitions are just to give you a little
head start before we dive in. One other note: Visa, the largest credit card network, uses slightly
different terminology. We’ll point out some of these differences as we go.
4
 CHAPTER 1
Just What Exactly is
a Chargeback?

5
 Just What Exactly is a Chargeback?

The Geek Speaks!

For most of us, credit cards are an
indispensable part of daily life. According As we shall see, it’s possible to contest a
to statistics, 83% of American adults have chargeback after the fact. In the original
at least one card. The average is carrying chargeback, however, merchants have
3.8 cards. no say-so in the matter.

In the US in 2021:
During a normal credit card purchase, funds
Payment cards made up
57% of all payments are removed from the customer’s account and
transferred to the account of the merchant.
There are currently A chargeback is the reverse of that: money
531,540,000 active credit cards
from a completed purchase is taken from your
account and returned to the cardholder.

A good number of these transactions end

up reversed. Sometimes that means the
consumer returns a purchased item for
a refund. More and more often, however,
customers are “charging back” transactions
through their bank.

6
 Just What Exactly is a Chargeback?

So a chargeback is basically a refund?

It kind of seems that way on the surface, but the answer is an absolute NO.
Chargebacks and refunds are two completely different animals. In addition to
merchants having no input into the reversal, here are some other differences:

REFUND CHARGEBACK
Customer deals directly with merchant Customer complains to the bank

Goods returned to seller No incentive to return

for possible resell goods to merchant

Merchant often recovers Merchant hit with additional

interchange fee chargeback fees

No damage to Hurts merchant’s chargeback-

merchant’s reputation to-transaction ratio

Typically processed within days May take months to resolve

Merchant knows when Funds taken from merchant

funds are dispersed with no warning

7
 Just What Exactly is a Chargeback?

Not All Chargebacks

Start with the Cardholder
Sometimes, chargebacks are initiated by That said, these aren’t the norm. It’s much
the bank. These are not based with disputes, more common for chargebacks to start with
per se, but rather discrepancies that render the cardholder bringing an issue to the bank’s
the original transaction null and void: attention through a disputed transaction.

No authorization What’s frustrating is that this can happen

Declined authorization days or months beyond the original
purchase. While the customer may have a
Expired payment card
legitimate complaint, the chances of the
Late presentment of transaction
chargeback being unwarranted are growing
Non-matching account number at a frightening rate.
The common denominator in all these Before we explore why that’s happening, let’s
examples is YOU: merchants can avoid most look at the rationale for creating the whole
bank chargebacks by simply following card chargeback system in the first place.
regulations and best practices.

8
 Just What Exactly is a Chargeback?

Chargebacks: A Brief History As a consumer protection mechanism,

Once upon a time–around a half-century the system still functions fairly well. Of
ago–bank credit cards weren’t really a thing. late, however, the use of chargebacks has
Oh, they existed; they just hadn’t gained the morphed into something else.
widespread acceptance (and profitability)
the networks were hoping for. US customers
in particular were suspicious of this new Enter the Internet
payment method.
Chargebacks worked fine for
The Fair Credit Billing Act of 1974 attempted
decades, but the internet completely
to address these issues by creating what we
upended the way we shop, work,
now know as a chargeback. The chargeback
and communicate. For the most part,
option reassured consumers in two ways.
that’s been a good thing.
 rotection against criminals:
P
While eCommerce is now a major
If purchases are made using stolen card
sales channel, chargebacks haven’t
data, the cardholder won’t be held liable.
changed. Savvy consumers have since
 rotection against merchant abuse:
P learned to leverage the system for
Fear of chargebacks gives merchants an illegitimate refunds (it’s called friendly
incentive to provide honest service. fraud; we’ll cover it in detail later).

9
 Just What Exactly is a Chargeback?

Do We Still Need Chargebacks?

Yes. Yes, we do. There are still criminals By 2023, an estimated 60% of chargebacks will
be likely cases of friendly fraud.
in the world, and there are still a few
unscrupulous merchants. As we’ve
False declines—orders rejected for possibly
seen, chargebacks play a crucial role in
being fraud—cost US merchants nearly $34 in
safeguarding cardholders from both threats. lost sales for every $1 of fraud they prevented.
But ironically, what was once a tool to
protect consumers has become a weapon Roughly 40% of those who commit friendly
cardholders use to victimize merchants. fraud will make another attempt within 60 days.

Are things really that bad? Again, the

answer is YES. Here are a few mind-blowing
So if the chargeback fraud has become this
statistics that illustrate the threat that
much of an issue, why isn’t everyone working
friendly fraud chargebacks represent.
to stop it? To answer that question, we’ll need
to dig a little deeper into the chargeback
Conservative estimates show global
system itself.
chargeback costs could hit $117.47 billion
or more by 2023.
Recommended Reading
For every $100 in direct fraud costs, merchants Chargeback Definition
indirectly lose an average of $360 through Chargeback vs. Refund
ancillary costs such as fees and overhead. What is a Bank Chargeback?
The History of Chargebacks
10
 CHAPTER 2
The Players and
the Process

11
 The Players and the Process

The Players
If you’re looking to become a chargeback The Networks
geek, you’ll be in good company; The The people behind the brand
chargeback process involves multiple names commonly associated
parties, all obsessed with their primary area with credit cards: Visa, Mastercard, etc. Each
of expertise. company has its own network of banks that
are authorized to issue branded cards. Each
The Cardholder
network also has its own guidelines that
It starts when a cardholder uses
regulate every part of a credit card transaction.
a credit or debit card to make
a purchase. Everything’s cool until that The Issuer
cardholder disputes the transaction and The issuing bank provides—or
asks the bank to file a chargeback. issues—credit cards to customers.
The bank must be a member of one or more
The Merchants
card networks in order to issue cards for that
SHOP

We’re largely talking about

brand. A card may have a Visa or Discover
retailers here: merchants doing
logo on it, but it will also have the logo of the
business in brick-and-mortar stores (card-
issuer–Wells Fargo, Bank of America, Ally, and
present transactions), online (card-not-
so forth. Cardholders deal with the bank, not
present transactions), or some combination
the card network.
of the two.

12
 The Players and the Process

The Acquirer Processors and Gateways

The bank where you have your The payment processor gathers
merchant account is called the the essential information and
acquiring bank. The acquirer must also belong moves the funds from the issuing bank to
to a card network, but it has two main roles. the acquiring bank. Online merchants will
• Providing the merchant account that also need a payment gateway, which is like
allows your business to accept credit a secure tunnel for passing the customer’s
card payments. money between banks. Think of it as a virtual
point-of-sales terminal, encrypting data
• Playing intermediary between the
before transmission to the acquiring bank.
business and the network.

The Geek Speaks!

A bank can serve as both an issuer and
an acquirer. The title has more to do
with the service being provided than
which institution is involved.

13
 The Players and the Process

The Process
We’ve already explained some of the parties involved in chargebacks, but all the ways
they interact with each other can be … well, confusing doesn’t begin to cover it.

Cardholder files Issuing bank sends Merchant card

transaction dispute with dispute to merchant processor forwards
issuing bank card processor dispute to merchant

SHOP

Reject Accept

Merchant prepares Merchant accepts the

supporting documentation dispute, and the funds are
in response and submits it withdrawn from the
Merchant accepts or to merchant card merchant’s account.
rejects dispute processor.

Continued on next page

Pre-arbitration Sides with the merchant
14
Issuer reviews the docu- Issuer reviews the
mentation and sides with documentation and sides
 in response and submits it withdrawn from the
Merchant accepts or to merchant card merchant’s account.
rejects dispute processor.
The Players and the Process

Pre-arbitration Sides with the merchant

Issuer reviews the docu- Issuer reviews the

mentation and sides with documentation and sides
the cardholder, filing a with the merchant.
Processor submits the case
second chargeback (called
to the issuer, who either
pre-arbitration).
accepts representment, or
files a pre-arbitration.

SHOP

Arbitration Accept

The dispute progresses to Merchant accepts the

arbitration. issuer’s decision, and the
Merchant reviews the
funds are withdrawn
pre-arbitration and either
from the merchant’s account.
accepts it, or appeals to
card scheme.

Card network reviews the case, and makes a final decision.

Wow! Even geeks can get overwhelmed by that road map. Let’s break down each stage
of the chargeback process and figure out what’s really going on.
15
 The Players and the Process

Filing the Initial Claim

It all starts when the cardholder calls the
bank to dispute a transaction. The exact
process for initiating a chargeback will
depend on the issuer, but they follow a
similar path.

What’s important to note is that, overall,

filing a customer dispute is simple and
relatively painless. That’s actually a
problem: despite the differences between
the two, many consumers continue to view
chargebacks as just another type of refund.
validity of the cardholder’s claim. If they did
There are rules and guidelines for filing a so, it would likely reveal that the merchant
chargeback, but they’re often ignored. For was never contacted. But under-staffed
example, the bank expects the customer departments may not perform as much due
to first try to resolve the dispute with the diligence as they should.
merchant. Research suggests that less than
It’s normal to want to protect the customer
15% of cardholders actually do.
relationship, but by taking shortcuts, banks
The banks share some of the blame here. could be enabling consumers to steal from
They’re required to fully research the merchants.

16
 The Players and the Process

The Geek Speaks!

Transferring Funds
Claims may be rejected immediately This forced removal of funds generally
if the issuer believes they are isn’t a formalized process, and the
unwarranted. Maybe the merchant has bank is under no obligation to inform
already issued a refund, or perhaps the the merchant ahead of time. In many
bank obtained additional information to cases, the merchant first learns of the
refute the claim. chargeback when money disappears
from the merchant account.
On the other hand, if the bank feels
the cardholder has a valid case, a
temporary refund will be applied to
the cardholder’s account. And where
does that refund money come from?
Spoiler alert: right out of your merchant
bank account.

The issuer also charges

an administrative fee:
$20 - $100 per chargeback
but can go much higher

17
 The Players and the Process

But What if They’re Wrong? So What Makes

Just because a customer claims to Evidence “Compelling”?
have been cheated doesn’t necessarily The acceptable (or required) forms of
mean it’s true. That’s why the compelling evidence can vary depending on
chargeback system offers a built-in the card brand, the bank, and other factors.
way for merchants to fight back. Examples of compelling evidence might be:
Merchants have the right to challenge Order forms
any chargeback filed against them. The
Online authorization or agreement to terms
process is called representment, because
the acquiring bank literally re-presents Tracking numbers or delivery confirmation
the original transaction to the issuer,  ommunication that indicate the
C
along with evidence to counter the consumer is satisfied with the purchase
cardholder’s claim.
 hotographs showing the cardholder has
P
Sometimes, your acquirer can the item or received the service
provide the essential documentation
without your help. Usually, though, In addition to sufficient compelling evidence,
it’s on you to provide what is termed you’ll need to send a detailed rebuttal letter
compelling evidence to show the that outlines the defense and explains the
transaction was valid. attached documentation.

18
 The Players and the Process

Making a Decision
The issuing bank will look at the merchant’s
rebuttal letter and evidence and make a
decision. One of three things can happen:

VICTORY!

Your evidence convinces the bank to reverse
the claim and return the funds to your
account. This is known as a chargeback
reversal (in Visa terms, a dispute reversal).

DEFEAT!

Your argument fails to persuade the issuer.
The chargeback stands, and the cardholder
credit becomes permanent.

WE’RE NOT SURE YET …

Second chargebacks are formally
The issuer files a second chargeback: called pre-arbitration by Visa, but
essentially they admit your counterclaim has Mastercard uses the term arbitration.
merit, but they’re still not fully convinced.

19
 The Players and the Process

Some of the most common reasons for a One Last “Last Chance”
second chargeback include: When a second chargeback is filed,
• The issuer changed the reason code, the case moves to arbitration.
shifting the reason for the claim. Arbitration gives the merchant one last
opportunity to refute the chargeback.
• The issuer obtained new information to
The process is similar to the first
support their case.
challenge, which means submitting
• Your documentation was incomplete, more evidence.
or the evidence was insufficient or
With a second chargeback, the card
inappropriate for the reason code.
network–not the bank–reviews and
The original chargeback fee won’t be judges the case. Their ruling is final.
refunded, whether the initial claim is
reversed or not. Sorry about that.

Recommended Reading
Second chargebacks and arbitration are
Chargeback Process
costly, even if you win. Unless the transaction
Compelling Evidence
amount was substantial, challenging a second
Pre-Arbitration Chargeback
chargeback is usually not worth the cost.
Chargeback Arbitration

20
 CHAPTER 3
How Long Will it Take, and
How Much Will it Cost?

21
 How Long Will it Take, and How Much Will it Cost?

Let’s say you get hit with a chargeback, but

you think you can prove it’s unwarranted.
What do you do first? Card Network
Time Limits
The most important thing is to get moving.
Every part of the chargeback process has a
strict time window; you’re fighting the clock
from the word “Go!”
30 days 45 days
Consumers have a limited time to file per phase per phase
disputes, while banks and merchants have
response deadlines for each stage of the
process. These limitations ensure that cases
get settled quickly. At the same time, they 30 days 20 days
aren’t exactly fair. per phase per phase

With few exceptions, cardholders can typically

Chargeback deadlines are
file a dispute up to 120 days from the original locked down tight … mostly.
transaction or expected delivery date. For more detailed information
on time limits check out this
For merchants and acquirers, the chargeback
article on our blog.
process is broken into phases, which differ
based on the network and other factors.

22
 How Long Will it Take, and How Much Will it Cost?

Don’t Get Optimistic

About Deadlines Acquiring bank charges
$20 - $100 per claim
Having 30-45 days to respond to a chargeback (higher for “high-risk” merchants)
doesn’t sound so bad, does it? Unfortunately–
and this is important–it is the CARD From a merchant’s chargeback history to
NETWORKS who give you that much time. the type of industry, many elements go into
chargeback fee calculations. The price tag may
You’re also bound by the rules of issuers,
not be the same between merchants, either: A
acquirers, and processors–any of which can
merchant with minimal disputes may pay less
cut your time window to give themselves a
than one with 100 chargebacks per month.
little more slack.
Per-chargeback fees may seem relatively low,
Also note that the deadlines are based
and can lull merchants into a false sense
on when the response is RECEIVED …
of security. As we’ll see in a later chapter,
not just on when it was sent. All in all, the
however, the costs of chargebacks go far
merchant’s actual response window may
beyond that one-time fee.
be as small as 5 or 6 days.

Fees Recommended Reading

Every chargeback comes with a fee that
Mastercard Chargeback Time Limit
helps pay the administrative costs and other Visa Chargeback Time Limits
extra expenses the bank has to cover. Again, American Express Chargeback Time Limit
chargeback fees are not refundable, even if Discover Chargeback Time Limit
the case is reversed. Chargeback Fees
23
 CHAPTER 4
So Where are all These
Chargebacks Coming From?

24
 So Where are all These Chargebacks Coming From?

No matter how many chargebacks you’re

getting, you probably think you know where A list of major reason codes can be found on
they’re coming from. After all, a cardholder our website as well as downloadable quick
reference sheets for each card network.
must have a reason to file a dispute, right?

Well, yes: the customer must have a reason,

such as saying an item wasn’t delivered. Over-relying on reason codes is one of the big
The bank then marks the dispute with a roadblocks to managing chargebacks. But if
reason code that correlates to that reason. the code is wrong, how do you know the real
reason for a chargeback?
Reason codes are a form of shorthand
that explain why a chargeback was filed. Chargebacks can happen under many
Response time limits, required evidence, circumstances, but if you look past the smoke
chargeback eligibility, and more can be and mirrors, all chargebacks can be traced to
impacted by the reason code, so it’s important one of three different sources:
that all parties are on the same page.
SHOP

Here’s the problem: as it turns out, reason

codes are notoriously unreliable at
showing the true source behind a claim. Criminal Merchant Friendly
Fraud Error Fraud
Miscommunication, misunderstanding,
and in some cases, deliberate misleading Let’s look at these sources one at a time.
often result in miscoded claims.

25
 So Where are all These Chargebacks Coming From?

The Geek Speaks!

Criminal Fraud
What it is There are electronic ways of detecting
Most people associate fraud with criminals. cybercrime, but cybercriminals are
And we can all agree that a cardholder
just as sophisticated as the good
guys, adapting quickly to anti-fraud
shouldn’t have to pay for something they
technology.
didn’t purchase. But merchants, not crooks,
foot the bill when chargebacks are filed to
recover funds lost to criminal fraud.
Malicious malware: Also through
How it Happens phishing, scammers secretly download
Hackers don’t need a physical credit card to information-stealing apps on the
commit fraud; all they need is the account user’s device.
data. So how do they obtain it?
Radio-frequency identification (RFID):
Phishing: Through email or social Chips in credit cards enable hands-free
media, fraudsters get victims to follow transactions, but hackers may be able to
a seemingly innocent link, then steal intercept the signal.
usernames, passwords, and more.
Identity theft: Crooks pilfer documents
Data breaches: Hackers raid merchants’ from users’ home, mailbox, or garbage,
data files, then fraudsters buy the then use the info to create new accounts in
information for pennies on the dark web. the victim’s name.

26
 So Where are all These Chargebacks Coming From?

The Geek Speaks!

SHOP

Merchant Error
What it is Cybercrime gets a lot of press, but only
When it comes to chargebacks, you may a fraction of cases stem from criminal
be your own worst enemy. Anyone can fraud. A higher percentage is caused by
make the occasional mistake, but roughly
merchant error.
one in five chargebacks can be traced to a
merchant misstep.

How it Happens That’s just a short list. There are scores of

The real danger comes from errors in factors that could cause disputes without
your policies and procedures that can your knowledge. Happily, merchant error
trigger chargebacks, causing trouble chargebacks are 100% preventable … if
repeatedly because they’re not recognized you can find them.
as problems:
And that’s the problem: the triggers are
L apses in customer service there, but you’re too close to the issue
U
 nclear or complicated refund policies to see them. Chargebacks911’s Merchant
Compliance Review was specifically
I naccurate product descriptions
designed to help you identify and eliminate
B
 ad billing descriptors missteps that could lead to disputes.

27
 So Where are all These Chargebacks Coming From?

The Geek Speaks!

Friendly Fraud
Criminal fraud and merchant While friendly fraud can happen on
errors combined still aren’t responsible for card-present transactions, the bulk
the greatest number of chargebacks. So
of it comes from card-not-present
purchases. Online complaints often
where are the rest coming from? Welcome
require minimal evidence to support
to the world of friendly fraud.
the claim.
What it is
You know what friendly fraud isn’t? Friendly. Sometimes, simply contacting the bank to
The name comes from the idea that the inquire about a transaction can kick off the
damage is caused by “friendly” parties, like chargeback process, whether the cardholder
your customers. meant to do so or not. Here are some other
Friendly fraud occurs when a cardholder scenarios where unintentional friendly fraud
accidentally or deliberately charges back may occur:
a legitimate transaction. It is often called A cardholder forgets they authorized a
“chargeback fraud” because consumers family member to make a purchase. The
misuse the chargeback process to obtain an consumer calls the bank to report what
undeserved refund. they believe is fraud.

How it Happens A merchant doesn’t post a charge until the

Odd as it may seem, consumers can commit order ships, causing the amount to show
friendly fraud without even realizing it. up a month after the initial purchase. Not
28
 So Where are all These Chargebacks Coming From?

remembering a charge on that date, the

cardholder disputes the transaction. Some parties make a differentiation between
(unintentional) friendly fraud and deliberate
A cardholder does not recognize what is chargeback fraud. Either way, if a customer
actually a legitimate purchase, because files a chargeback on an authorized purchase,
the descriptor used on the statement is it falls under the umbrella of friendly fraud.

not identifiable as a brand name.

Unintentional friendly fraud, however, is almost Unlike merchant errors or criminal fraud,
excusable compared to deliberate chargeback friendly fraud is notoriously difficult to prevent
abuse on the part of the cardholder: mostly because it happens post-transaction.
There’s really no way of knowing it’s going to
A customer experiences “buyer’s remorse,”
happen–until it does.
and thinks a chargeback is easier than
requesting a traditional refund. Errors can be caught before the transaction
happens. Other types of fraud can be
The primary cardholder doesn’t want to
prevented by eliminating triggers. But friendly
pay for a purchase made by another family
fraud might not manifest until months after the
member (family fraud).
transaction occurs.
A traditional refund is not available for
some reason (usually because the time Recommended Reading
period for a return has expired).
eCommerce Fraud
The original intention was to get Merchant Error Chargebacks
something for free (Cyber shoplifting). Friendly Fraud
29
 CHAPTER 5
Risks, Ratios,
and Repercussions

30
 Risks, Ratios, and Repercussions

So we’ve established that chargebacks costs are based on the amount of a risk a
happen, and that they cost merchants a merchant poses. And the primary way that
bundle. If the bank or card network gets risk is measured is through a calculation
involved, however, it means even more known as a chargeback rate, or ratio.
costs … potentially to the point of closing
It’s a pretty simple equation, really: the
down your business.
number of first chargebacks filed this
OK, that sounds a little ominous, but it’s a very month, divided by the total transactions
real possibility. So how can you tell if your from either last month (for Mastercard)
business is in trouble? Let’s talk about ratios. or the current month (for Visa).

When you open a merchant account, the

Total chargeback
bank agrees to take on a certain amount cases per month Chargeback
of financial risk. It makes sense for them to Total transactions
= Rate
per month
closely monitor their investment.

The card networks are watching, too.

Other circumstances–the types of goods or
Chargebacks have a negative impact on
services sold, average monthly sales or ticket
their brand reputation, so they want to be
amount, using free trials or subscription
aware of the first sign of trouble.
billing, and more--can also be part of the
While all this watching may seem a little equation. The main factor in calculating
creepy, it does have a purpose: acquirers’ risk, however, is whether or not you have an
fees, network finds, and other processing excessive chargeback ratio.
31
 Risks, Ratios, and Repercussions

The Geek Speaks!

How Excessive Is “Excessive”?
Each card network establishes a limit to the At one point, the accepted industry
number of chargebacks they’ll allow. Your threshold was 1%, but the limits are
chargeback ratio is constantly compared to really whatever the networks say they
this predetermined threshold. are. Just getting close to the line can
mean trouble.
So how much is too much? In this context,
“excessive” refers to approaching or
exceeding the network’s limit. If your Merchants achieving and maintaining a
chargeback ratio starts making the compliant chargeback rate for a certain time
network nervous, you may end up in a (typically 3 months) may be allowed to exit
chargeback monitoring program, which the program. Remain out of compliance for a
takes monitoring–and processing costs–to a year, and you could lose your card-processing
whole new level. privileges entirely altogether.
The High Cost of Monitoring
If your business is forced into a monitoring Being in these programs is costly:
program, you’ll be required to develop a Fines average $50 per chargeback
detailed chargeback-reduction strategy, Review fees can run up to $25,000
called a chargeback mitigation plan. This Those are just costs from the network;
plan should both identify the root cause of processors, acquirers, and even issuers
your chargeback problem and outline an may tack on additional fees.

appropriate plan to correct it.

32
 Risks, Ratios, and Repercussions

The Geek Speaks!

Striking the MATCH
So, what if you weren’t able to rein in The card brands may step in if a
chargebacks, and your account was merchant cannot lower chargebacks.
terminated? Are you dead in the water? Not Since that means extra trouble and
necessarily, but to get back in the game, expenses for banks and processors,
you’ll probably have to work with a high-risk acquirers are likely to terminate an iffy
payment processor. account long before the merchant hits
the network’s thresholds.
In addition, you’ll likely wind up on the
MATCH (Member Alert to Control High-
Risk) list. This “blacklist” is another tool
acquirers use when determining the risk Being on the list makes it challenging to open
of taking on a new merchant. a different merchant account. And again,
you’ll be working with a bank that specializes
Several actions can lead to a terminated in high-risk merchants, and that costs you
account that lands you on the MATCH list: more. Because getting off the list requires so
money laundering, fraud convictions, or much effort, it’s much smarter to avoid being
filing for bankruptcy, for example. Excessive listed in the first place.
chargebacks is one of the most common
ways merchants get on the list. It’s one of
the most frustrating, too, since you didn’t
actively do anything “wrong.”

33
 Risks, Ratios, and Repercussions

The Geek Speaks!

When High Rewards Are
Worth High Risk Generally, the United States, Canada,
Some merchants are well aware that they Japan, Australia, Western Europe, and
are high risk, but they take it in stride. That’s Northern Europe markets are seen as
because some potential rewards are worth less risky as compared to the rest of
the gamble. the world.

These aren’t businesses that are labeled

high-risk because of their actions. Rather, For example, entering a new foreign market
we’re talking about merchants who choose may bring on high-risk status (and fees), but
to work in a higher-risk environment, if the market is lucrative enough, the end
hoping for a big payoff. may justify the means. Likewise, a recurring
payments business model is often labeled
high-risk, but having a regular monthly
income may offset the potential costs.

Recommended Reading
Chargeback Rate
Excessive Chargeback Programs
MATCH List
Closed Merchant Account

34
 CHAPTER 6
Why Merchants are Losing
the Chargeback Battle

35
 Why Merchants are Losing the Chargeback Battle

eCommerce is a competitive arena. Many • You’ll pay double the fees. Remember all
merchants are winning the eCommerce war, those fees (interchange, processing, etc.) you
but can’t hold the line against illegitimate paid for the original transaction? Chargebacks
transaction disputes. mean you won’t get those back, either. You’re
essentially paying for selling a product that
In part, this is because chargebacks don’t just
you end up giving away.
attack on one front. A big chargeback problem
is actually made up of several smaller • Other parties profit at your expense.
problems that all need to be addressed: Banks, processors, card networks and more
are also fined for chargebacks; those fees
1. The Cost
will eventually trickle down to you. In the
The most immediate threat from
end, you could pay 10 times the original
chargebacks is the cost, but you
chargeback fee. Everyone above you in the
may be unaware of just how much money is
chain is benefiting from your profit loss.
at stake. We’ll spell it out for you.

• Y ou’ll have to refund the customer. That’s

an obvious loss, but it’s just the beginning.

• You won’t get the product back. Returns

are the pits, but if someone files a
chargeback, they may not be required to
return the merchandise.

36
 Why Merchants are Losing the Chargeback Battle

The Geek Speaks!

2. Getting Kicked While
You’re Down Some merchants can bypass the need
The fees, fines, and other losses– for working directly with an acquirer
plus the extra costs associated with high- by working with an Independent Sales
risk processing–are the card networks’ way Organization. ISOs are a type of broker
of deterring chargebacks. All these fees for banks and processors. Because
come about because you're struggling with ISOs are not banks, they aren’t subject
chargebacks–which by definition means to some of the same limitations, but
you’re already facing financial losses. All they might charge higher fees.
these extra costs could be enough to sink
your business for good.
Here’s something else: as we covered earlier,
the issuing bank is supposed to do a little
SHOP
3. Trashing Your Reputation fact-checking before escalating a dispute
Given the revenue challenges
to a chargeback. If you have a reputation
that come with chargebacks,
as a merchant who receives legitimate
protecting your reputation might seem to
chargebacks, it’s easy for the bank to justify
be low on the priority list. Unfortunately, it’s
doing less due diligence when they see
not that simple. If you have a reputation as
your name on a dispute. That leads to
a chargeback magnet, the best acquirers
more chargebacks … and the whole thing
are going to give you the cold shoulder.
snowballs at your expense.

37
 Why Merchants are Losing the Chargeback Battle

4. You’re Confused 5. Consumers Are Confused, too

Even savvy retailers struggle with While there are plenty of cyber
chargeback management, and it shoplifters out there, friendly fraud
usually comes down to three simple mistakes: is often committed by individuals who don’t
realize they’re stealing. This makes it even
•T
 he problem is not acknowledged. You
harder to combat. Whether friendly fraud is
can’t expect chargebacks to decline if you
malicious or not, you still pay.
don’t change your business practices. You
have to acknowledge the problem—and
then deal with it. 6. Fraudsters Are Smart
The growth in eCommerce has
•T
 he wrong problem is targeted. A lot of
opened more opportunities for
friendly fraud is filed under false pretenses,
consumers, but fraudsters also benefit. Card-
and very little of it falls neatly into one
not-present commerce is growing faster than
reason category. Friendly fraudsters often
the advancement of anti-fraud technology.
use phony reason codes, which means you
Fraudsters are manipulating tools that the
could waste a lot of resources fighting the
outdated chargeback system was never
wrong problem.
designed to combat.
• The wrong approach is used. Chargeback
management requires a multi-faceted
dynamic strategy to handle a range of
issues. A “one size fits all” approach simply
won’t be effective.
38
 Why Merchants are Losing the Chargeback Battle

7. Friendly Fraud Feeds • Merchants don’t appeal cases because they

on Itself assume chargebacks are just a cost of doing
The biggest obstacle merchants business.
face in combating chargebacks isn’t any of
• Banks aren’t compelled to change their ways
the reasons above: it’s the combination of
because merchants don’t dispute enough
all of them, and how the various problems
chargebacks.
feed on themselves. By the same token, the
blame for the problem doesn’t rest on any • Without a consequence, consumers keep
one party. filing bad chargebacks, and the cycle starts
all over.
Four main stakeholders are involved in the
chargeback process: the merchant, the The system is set up for quick resolutions,
cardholder, the network, and the issuer. but little is being done to correct the problem
Basically, friendly fraud runs rampant long-term.
because these heavy hitters aren’t playing
nicely together.
Recommended Reading
• Consumers’ actions aren’t sufficiently
Chargeback Costs
scrutinized by the bank while filing Friendly Fraud Costs
illegitimate chargebacks. Customer Disputes

39
 CHAPTER 7
Challenge the
Status Quo

40
 Challenge The Status Quo

If you’ve read this far, you’re probably You have tools: use them
thinking that the chargeback situation looks Criminal fraud may not be the #1 cause of
pretty bleak. Don’t lose hope yet, though: chargebacks, but you’ll still need a prevention
there are ways merchants can fight back. strategy. Several readily available tools have
proven effective:
Effective chargeback management depends
on two key components: prevention and • AVS (Address Verification Service) checks
representment. In this chapter, we’ll look the billing address used against what the
at ways to prevent chargebacks from issuer has on file.
happening, and explore why it’s worth
• Security codes (CVV) on payment cards help
challenging them when they do happen.
show the buyer has possession of the card.
Step 1: Prevent Chargebacks • 3D Secure 2.0 performs risk-based
Chargeback prevention is a huge authentications in a second or less.
undertaking, and this brief overview barely
• Chargeback alerts give merchants the
scratches the surface. That’s why we wrote
opportunity to refund customer disputes
yet another nifty eBook you can download
before a chargeback is officially filed.
for free. 50 Insider Tips for Preventing
Chargebacks is a geeked-out guide to • Automated network inquiry programs
stopping those pesky chargebacks. help resolve inquiries before they become
chargebacks.
Here are some ideas to get you going.

41
 Challenge The Status Quo

The Geek Speaks!

Be available to customers
If customers feel that contacting you Chargeback abuse has become so
is faster, cheaper, and easier than a widespread that even merchants in
chargeback, they’re more likely to take that historically low-risk verticals are having
option. Make sure your contact information trouble with high chargeback ratios.
is obvious anywhere a customer might look:
on websites, on invoices, on social media,
and on all correspondence.
Tighten up your policies
Turbocharge your customer service Complicated, hard-to-find policies for returns
Every phone call may be a chance to and refunds make it that much easier for
prevent a chargeback, so have a human customers to bypass you and contact the
being answer the phone, ideally within 3 bank with a problem. Be sure your policies are
rings. Respond quickly to contacts from clear, concise, and easy to understand. Make
other channels, too–even negative ones. them as prominent and accessible as your
contact information.
Be proactive with consumer information
Missed a shipping deadline? Item out of Look for other missteps, too
stock? Most people understand that problems When you’re checking your policies, go ahead
can arise, but keep the customer in the loop. and reexamine your procedures. Oversights,
Without an explanation, they may assume innocent mistakes, and minor missteps can
the worst, get angry, and turn to the bank. significantly increase chargeback risks.

42
 Challenge The Status Quo

The whole truth, and nothing but What about friendly fraudsters?
With eCommerce, merchants have an extra As we’ve seen, friendly fraud is near
responsibility to provide accurate details, impossible to detect beforehand. Almost,
exact specifications, and clear photos of but not quite. These red flags aren’t sure signs
the merchandise they sell. Insufficient, or of fraud, but they are potential warnings:
misleading information leads to unhappy
New customers.
customers ... and that leads to chargebacks.
Orders with several of the same product.
Recurring payments need Big-ticket items.
recurring attention
 rders on different cards, but shipped
O
A subscription-based business model can
to the same address.
be great for you and your customers. To
 ultiple orders on one card, shipped
M
avoid surprises, however, be sure customers
to multiple addresses.
understand the terms of service before they
sign, and make cancellation easy. Orders from high-risk countries.

Don’t let them get away with it.

The Geek Speaks! When you challenge every illegitimate
chargeback, you’ll gain a reputation as a
Recurring billing chargebacks are
especially dangerous. Fraudsters could merchant who insists on fair play. Issuers are
potentially win a reversal for the total more likely to take a closer look at customer
they’ve paid since signing on. claims, and fraudsters are more likely to find
an easier target.
43
 Challenge The Status Quo

The Geek Speaks!

Step 2: Representment
Despite your best efforts, there will always In a few cases, the cost of fighting a
be a few chargebacks that slip past your chargeback will outweigh the potential
prevention efforts. That’s when it’s time to ROI. Consulting a professional may save
fight back. you time and money.

Again, consistently representing friendly fraud

can have long-term preventative effects. The
immediate benefit, of course, is monetary: • Pay attention to the reason code.
when you win, you recoup revenue that Different codes may require different
would otherwise be lost to the fraudster. compelling evidence.

Representment is not easy, but the right • Work fast. Merchants have minimal time
tactics can improve your odds: to create a representment case.

• Set up a detailed chargeback management • In addition to evidence, you’ll need a

system to keep pertinent documentation carefully crafted letter explaining how
(sales receipts, delivery confirmations, the evidence proves your case. And yes,
emails, and similar items) on file. we have a free downloadable Rebuttal
Letters guide that covers that, too.

The right evidence is useless if you can’t find • Learn from your mistakes. If your
it. A simplified filing system can make finding challenge is unsuccessful, identify where
and retrieving documents as easy as pie.
you went wrong.
44
 Challenge The Status Quo

Step 3: Not to Sound

Redundant, but You Need Help
So to recap: chargebacks–particularly your field, but chargebacks are a field all their
friendly fraud–are an expensive pain in the own. To be successful, you need experience,
butt. That said, there are many ways you expertise, and access to a wide range of
can both prevent chargebacks and fight specialized information. In other words, you
back when they happen. really need expert help.

Typically, however, that’s only going to Run the numbers for yourself
work on the “low hanging fruit”: the easily Not convinced? Pull out your calculator and
preventable chargebacks caused by get geeky for a minute. Run the numbers.
obvious mistakes and mismanagement. How are chargebacks currently impacting
Even that alone will take time and your bottom line? Look back at all the hidden
resources, and statistically speaking, you costs and fees we’ve covered. Try to get an
are only going to win the easiest cases … objective idea of your situation. We’ll wait.
if you win any at all.
All done? Is it worse than you thought? Not
Most types of chargebacks can only be
to be pessimistic, but in our experience, it’s
countered with intensive management
probably even worse than THAT. And there’s
strategies that surpass DIY tactics.
only so much you can do on your own.
And face it: you didn’t go into business to Just staying on top of the latest trends and
fight chargebacks. You may be an expert in network regulations can be a full-time job.

45
 Challenge The Status Quo

Most merchants–even chargeback geeks– a flexible approach that can adapt to the
find it far more cost-effective to outsource ever-shifting fraud landscape.
the task.

The right chargeback expert will help you

Recommended Reading
expose and then prevent merchant errors
Fraud Detection and Prevention Tools
that can trigger disputes. They’ll help you
Customer Service Best Practices
lower your chargeback-to-transaction ratio
Recurring Billing Chargebacks
and then keep it low. Together, you’ll create The Chargeback Representment Process

Chargebacks911® provides a data-driven technology platform designed for end-to-end

chargeback management. That means our clients retain more revenue and recoup profits
they never should have lost. And it’s all backed by the only performance-based ROI
guarantee in the industry.

Let the experts at Chargebacks911 handle your chargebacks, so you can spend your time,
money, and energy scoring new clients and satisfying your current ones. Contact us for
a free ROI analysis: if we can’t help improve your bottom line, we won’t ask for your
business. You really don’t have anything to lose … contact us today.

46
 Keep Geeking Out
While this concludes our witty commentary, your chargeback education
doesn’t stop here. If you’d like to speak directly to a certified chargeback geek
or take a look at our super technical chargeback ROI analysis, let us know.
About Us
Chargebacks911 provides cutting-edge, highly-scalable enterprise solutions and
specialized consulting for chargeback compliance, risk mitigation, and dispute
management to acquirers, card issuers, and large-scale merchants. The company’s
dynamic technologies and tactical data analysis help decrease the negative impacts of
chargebacks and disputes, thereby increasing customer retention and revenues.

For more information, please visit www.chargebacks911.com.

US: UK:
18167 US Highway 19 N. Vantage House
Clearwater, FL 33764 6-7 Claydons Lane
877.634.9808 Rayleigh, Essex, SS6 7UP
[email protected] +44 (0) 2037 505550

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