An In-Depth Look at How the Chargeback Dispute Process Works

These days, credit and debit cards provide tremendous convenience for customers and businesses alike. That said, card transactions can also result in some headaches for merchants, especially from chargebacks. Whether you’re running a local mom & pop shop or an online behemoth, it’s important to understand what chargebacks are and how the dispute process works.

Quite simply, customers can dispute charges on their debit and credit by asking their issuing bank to reverse the payment. A client might claim that the charge was fraudulent, or that the merchant never delivered the purchased products, for example.

The stakes are high and if you don’t protect your business, chargebacks could become a serious threat. Visa reports that in 2017 chargebacks cost merchants, issuers, and consumers roughly $31 billion. To put that into perspective, Coca-Cola pulled in $33 billion in revenue in 2020, while McDonald’s snagged $19.21 billion.

In other words, chargebacks are a multi-billion-dollar threat. Those organizations that proactively mitigate and dispute chargebacks can protect their revenues, and thus their business. Fortunately, by using powerful dispute management platforms, it’s easier than ever before to reduce disputes and avoid chargebacks.

That said, it helps to first understand how the dispute process works. We’ll outline the basic process below. However, some steps may vary slightly among card networks and banks. Different card networks and banks may also use different terminology.

Step #1: A Customer Disputes a Transaction

Typically, customers start the chargeback process by disputing a charge with the bank that issued their card, AKA the card-issuing bank. Banks and credit unions often offer their customers a few ways to start the chargeback process. They may provide a phone number to call, physical mailing addresses, online chat services, email, and other methods.

In many cases, chargebacks occur when a customer believes that they have been unfairly charged. For example, a customer might place an order but never receive the product. Since they paid for a product, they never received, customers will want their money back.

Someone may have also stolen a customer’s credit or debit card. Then, when looking through their statement, the customer sees a charge they don’t recognize, say a purchase on the other side of the country.

Other times, the customer made a purchase and got the product as described. But rather than paying for it, the customer seeks a chargeback, possibly in an effort to score free stuff. This is often referred to as “friendly fraud.”

Whatever the events that set the dispute process in motion, chargebacks usually result when a customer disputes a purchase. Customers typically have between 45 and 180 days to file a dispute and initiate a chargeback with their bank.

Step #2: The Issuing Bank Begins Its Investigation

After the customer has submitted a dispute, the issuing bank examines the transaction in question.

In some cases, a bank may find that the cardholder’s claim is unwarranted. They may decline the dispute before it goes any further. However, the issuing bank typically extends its customers the benefit of the doubt.

Step #3: Acquiring Bank and Merchant Brought In

If the issuing bank allows the chargeback to proceed, they will give the cardholder (their customer) a provisional credit equal to the transaction amount. The issuing bank will then notify the merchant’s acquiring bank of the dispute.

The issuing bank will have already categorized the chargeback, providing a “reason-code,” which outlines the cause of the dispute. The four major card networks (American Express, Discover, Visa, and Mastercard) define the reason codes. Merchants should pay close attention to this reason code.

The acquiring bank then debits the merchant’s account and will also tack on the relevant chargeback fees. These fees can range from $20 to over $100 per chargeback. Even if the merchant successfully disputes the chargeback (more on that later), they will still have to pay the chargeback fee.

At this point, a merchant can also choose not to dispute the chargeback and accept it. If the merchant accepts the chargeback, they’ll lose the revenue in addition to the chargeback fee. If the merchant disputes the chargeback, the process moves on to the next stage.

Step #4: The Merchant Files a Rebuttal Letter

Next up, you’ll argue for the chargeback to be dismissed. During this phase you will “re” present the charge, arguing that it was a legitimate charge. You’ll state your argument with a rebuttal letter, providing evidence that the charge was legitimate. If you successfully argue your case, the chargeback may be dismissed.

You don't need to write a long letter. In fact, keeping it to the point may help you make a stronger argument. Given how overworked some bank staffers are, they might also appreciate brevity, so skip filler content.

You’ll want to mention the reason code provided along with the contested payment amount. Most importantly, you need to put forward a well-honed argument that the transaction was legitimate. You should also furnish as much information as possible. Evidence can include signatures for delivered goods, tracking information, receipts, and any correspondence between your company and the customer.

If you sway the issuing bank, they’ll deny the customer's claim and reverse the chargeback. However, you’ll still have to pay chargeback fees. If they side with the customer, you may lose the money and also pay the chargeback fee. Either way, both the customer and the merchant can appeal the decision.

Step #5: Pre-Arbitration

The merchant or customer can appeal the chargeback and restart chargeback process, going through the same steps again, furnishing new evidence. This phase is often called a “second chargeback” or “second presentment.” However, it’s important to note that this “second” chargeback will not increase your chargeback ratio.

Step #6: Dispute Resolution with the Card Network

If the issue remains unsolved, the banks may request that the chargeback network (i.e. Visa) step in to arbitrate. Both the acquiring and issuing banks will submit evidence and the card network will then decide the outcome. If the merchant loses, they’ll have to pay additional arbitration fees. If the merchant wins, the issuing bank pays the fees.

Some Final Considerations Regarding Chargebacks

The chargeback process is rather difficult to manage. Still, if merchants fail to prevent and dispute chargebacks, it could hurt their bottom line. Ultimately, prevention is the best course of action. By providing tracking information, accurate product details, an easy return process, and taking other steps, merchants can reduce chargebacks.

Regardless, most merchants will face chargebacks at some point or another. That's where a dispute management solution comes in. With the right chargeback dispute platform, you can more easily track approaching deadlines, gather evidence, and ultimately increase the chances of winning the dispute.