Understanding the Chargeback Process to ward off Credit-card Fraud

By Gary Bordeaux

Special to the Financial Independence Hub

Proper accounting and cash flow management is critical for both big and small business owners. This seems obvious enough, but when we move from accounts receivable into the world of refunds and chargebacks, the water can begin to get muddy, and it can be more difficult to keep track of where you stand. The first action to take towards fixing and preventing the problems this can cause is to understand what chargebacks are, and what to expect when you are presented with one.

The two types of Chargebacks

If you’re a new entrepreneur, you may be asking “what is a chargeback?” A chargeback is a form of fraud dispute that comes in two basic methods. First, a chargeback can be a transaction that is reversed due to activity that may be fraudulent designed to protect a consumer a business or both. In the second type of chargeback, the credit card company demands a vendor replace or make good a loss incurred by the consumer due to a fraudulent charge.

It’s important to mention early that a refund is very different from a chargeback. A refund is instigated by one or both parties, and usually involves the re-exchange of an item for its purchasing price or value. Chargebacks are inherently fraud mitigation processes that may have additional fees that must be paid by the party deemed at fault, usually the retailer.

Who is involved and what is the process?

The key players in the chargeback process begin with the customer, who usually is the one to dispute a charge. They file a complaint with their credit card’s issuing bank, which may be their local branch or a national finance company that has provided them with their card. The issuing bank takes the concern up with their issuing bank processor, which will verify the account balances of the customer and then approve or reject transactions that have come through any of the four major card networks (MasterCard, Visa, Discover, or American Express).

The card networks are responsible for settlement. Their next step is working with an acquiring bank (or acquirer) that accepts funds for the retailer from the buyer. They are responsible for the settling of additional fees like processing, interchange, or network fees. Their merchant account processor does just what their name implies: process payments for the merchant. These go into the merchant commercial bank account, which is simply the retailers’ account; the destination for funds. But this is where funds can be pulled for chargebacks and given back to the customer.

Reason Codes

When dealing with Chargebacks, it’s important for a business to be familiar with reason codes. Reason codes are the shorthand for the card networks, and signify why a charge has been disputed, resulting in a chargeback.

Reason codes are alphanumeric and have four major categories, with over a hundred codes.

Important information about types of Fraud

Lots of factors are in play when the card networks work to determine whether fraud necessitates a chargeback. As they do so, they will likely encounter one of three standard types of fraud. First, there is true fraud, where an unauthorized user has gained access to compromised payment information. These are often caught immediately by the issuer. The somewhat misleading term “friendly fraud,” refers to fraud that occurs when someone (a family member or friend) makes a purchase that the card holder wasn’t aware of. The purchase was legitimate, but the means under which it is made are not. Lastly, chargeback fraud is particularly nefarious because it involves a request for a chargeback on a fraudulent or non-existent purchase.

Outcomes

Chargeback situations all lead to one of three outcomes. Either the claim is determined to be true fraud, friendly fraud, or an issue with the product or service. The reason code will reflect this. In cases of product/service issues, the merchant generally takes the loss. The other two cases, however, are worth investigating and not writing off … in three quarters of cases that are seen through, merchants prevail. It may well be worth your time to not accept a loss.

Gary Bordeaux is a real estate professional and company owner based in Portland, Maine. As a retired real estate agent, he spends his time and energy investing, and writing about what he has learned. His goal is to help entrepreneurs and small business owners achieve their full potential.

 

 

 

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