Chargebacks: Step by Step

Step 1: Customer makes a purchase. Whether that’s in person, via an app, or online.

Step 2: Customer initiates the chargeback. After the customer reviews their credit card statement at the end of the month, they may notice a charge they didn’t authorize. The customer then contacts their credit card company (known as the issuing bank), asking them to investigate the charge in question.

Step 3: Issuing bank reaches out to the merchant’s bank. Once a customer initiates the chargeback process, the customer’s bank reaches out to the merchant’s bank, asking it to provide evidence to refute the claim. This can include things like invoices, receipts, proof of delivery, or anything else the merchant has that proves that the purchase was valid.

Step 4: Cardholder’s bank accepts or rejects chargeback. After reviewing all the proof provided by the merchant’s bank, the cardholder’s bank must decide whether the purchase was valid.

Step 5: Customer accepts payment or moves to arbitration. At this point, the customer must accept the proof provided by the acquiring bank and either pay for the goods or continue to dispute the purchase and begin a process known as arbitration. If the acquiring bank determines the purchase was not valid, then the cardholder (customer) receives a refund for the transaction.

Step 6: Arbitration. If the issuing bank and merchant bank fail to come to an agreement, as a last resort, they enter what’s called the arbitration process. The arbitration process is governed by the issuing credit card company, and its decision is final.

The credit card company (Visa, American Express, etc.) reviews the proof provided by the parties and has the last word on who must pay for the charges. If a merchant loses the arbitration process, they may choose to seek recourse and repayment in a court of law, at their own expense.

Prevention is Key

Chargebacks are a costly and unfortunate part of running a business for merchants who accept credit cards but there are ways merchants can minimize chargebacks. It involves taking steps and utilizing tools that can get them ahead of game.