This is the latest installment in The Official Merchant Services Blog’s Knowledge Base effort. Well we want to make the payment processing industry’s terms and buzzwords clear. We want to remove any and all confusion merchants might have about how the industry works. Host Merchant Services promises: the company delivers personal service and clarity. So we’re going to take some time to explain how everything works. This ongoing series is where we define industry related terms and slowly build up a knowledge base and as we get more and more of these completed, we’ll collect them in our resource archive for quick and easy access. Today’s term is:

Chargeback

Chargeback typically refers to the act of returning funds to a consumer. The action is forcibly initiated by the issuing bank of the card used by a consumer to settle a debt. Essentially what happens is a consumer disputes a transaction, and the credit card company’s bank responds by taking the money back from the Merchant and returning it to the consumer.

Customers dispute charges to their credit card usually when goods or services are not delivered within the specified time frame, goods received are damaged, or the purchase was not authorized by the credit card holder — the latter being the most common reason for a chargeback.

The chargeback mechanism exists primarily for consumer protection. To start a chargeback a consumer will contact their credit card company and ask for a chargeback. The dispute process then begins. During the dispute process he merchant will have to provide proof they rendered service properly. If the merchant can’t provide sufficient evidence, the credit card company debits the transaction amount from the merchant’s account and credits it to the consumer’s account. Additionally, the credit card company charges the merchant a chargeback fee as a penalty.

With each chargeback the issuer selects and submits a numeric reason code. This feedback can help the merchant and acquirer diagnose errors  and improve customer satisfaction. The code also helps the merchant better investigate the transaction in order to find proof during the Dispute Process. Reason codes vary by bank network, but fall in four general categories:

• Technical: Expired authorization, non-sufficient funds, or bank processing error.
• Clerical: Duplicate billing, incorrect amount billed, or refund never issued.
• Quality: Consumer claims to have never received the goods as promised at the time of purchase.
• Fraud: Consumer claims they did not authorize the purchase or identity theft.

For transactions where the original invoice was signed by the consumer, the merchant may dispute a chargeback with the assistance of the merchant’s acquiring bank. The acquirer and issuer mediate in the dispute process, following rules set forth by the corresponding bank network or card association. If the acquirer prevails in the dispute, the funds are returned to the acquirer, and then to the merchant.

The merchant’s acquiring bank accepts the risk that the merchant will remain solvent over time, and thus has an incentive to take a keen interest in the merchant’s products and business practices. Reducing consumer chargebacks is crucial to this endeavor. To encourage compliance, acquirers may charge merchants a penalty for each chargeback received. Payment service providers, such as PayPal, have a similar policy. In addition, Visa and MasterCard may levy severe fines against acquiring banks that retain merchants with high chargeback frequency. Acquirers typically pass such fines directly to the merchant. Merchants whose ratios stray too far out of compliance may trigger card association fines of $100 or more per chargeback.

For More Information

To find out more about Chargebacks and to gain some Chargeback Tips, be sure to CLICK HERE and read The Official Merchant Services Blog entry from January 9, 2012.