TL;DR: A chargeback is a payment reversal by the cardholder’s bank, while disputes are customer complaints on specific transactions. Merchants remediate disputes directly with the customer through a refund or other arrangements, but chargeback remediation involves transaction re-presentment. That means providing compelling evidence that counters the customer’s claim.
Analysts at the Euromonitor have said that “global economies will continue to face multiple macroeconomic headwinds. That includes geopolitical uncertainties, inflation, and tightening financial conditions.”
If we’re tracking forward the learning curves from 2020, what should be top of mind for you, as an eCommerce merchant, is that with tightened financial conditions comes elevated online scams. And industry records show that chargebacks are becoming one of the most common online scams today.
Research shows that the cost per chargeback could reach $200 this year, with the average net recovery rate remaining at 12%.
This piece will answer all the chargeback dispute FAQs from our readers. But before we dig in, here are more numbers on chargeback trends for your consideration:
- Friendly fraud increased by 20% - 30% in 2022 and accounts for up to 70% of all credit card fraud, per AXIOS.
- 25% of transactions U.S consumers made with crypto resulted in a chargeback, Merchantfraudjournal says.
- False chargeback disputes now contribute to $125 billion in annual chargeback losses for merchants globally.
Chargeback vs Disputes vs Refund vs Representment. What does it all mean?
If you’re new in the industry, the terms are literally overwhelming.
What is a dispute?
What is a chargeback?
What is chargeback representment?
Is a chargeback the same as a refund?
What is the difference between a chargeback and dispute?
…we’re here to answer all the questions and clarify things for you quite nicely.
What is a Chargeback?
A chargeback is when a cardholder disputes a credit card transaction and requests payment reversal from their bank. They seek this remediation through the chargeback-dispute process, where the issuer reverses a payment because of the cardholder's complaint after some due diligence.
For the most part, cardholders initiate such complaints when they don't recognize a bill on their account, if the seller billed the buyer excessively when someone made a transaction without their authorization, or if they did not receive their goods or services.
So, what is a dispute?
A dispute is a customer grievance about a specific transaction. Customer disputes precede chargebacks. A dispute is essentially the customer's complaint to their bank or credit card issuer that leads to a payment reversal by the institution.
Even though “chargeback” and “dispute” are often used interchangeably, they don’t quite mean the same time. Think of a dispute as the preliminary stage of the case. And a chargeback as the maturity stage of ultimate transaction cancellation.
Some people also use "chargeback dispute" to refer to the entire process, while others call it chargeback. Let’s draw further differentiation between the terms.
Chargebacks vs. Disputes: What is the difference between a chargeback and dispute?
Recall that a chargeback occurs when a bank reverses a transaction payment.
As we noted earlier, the chargeback mechanism is a consumer protection instrument through which cardholders reverse unjust, fraudulent, or incorrect billings on their payment card.
A customer dispute, in contrast, is a disagreement or complaint that a buyer has with a business.
Ideally, the customer sends an email or other communication to the business to raise the dispute. And the company works with the buyer to resolve such a dispute.
Thus, the sharp distinction between chargebacks and customer disputes is that while businesses can remediate customer disputes directly with the cardholder, chargeback remediation involves third parties, such as banks, the card network, etc. Also, chargebacks attract fees and can lead to complex issues like loss of payment processing rights.
Banks place chargeback fees to cover their administrative cost of processing the dispute. And chargeback fees can vary depending on the cardholder's bank or the card network (more on this in a subsequent passage).
Chargeback vs Refund vs Reversal
The main difference among chargeback, refund, and reversal lies in who initiates the transaction and how it is processed. A chargeback is initiated by the customer and involves the bank reversing the transaction after the customer disputes the charge on their credit card. A refund, on the other hand, is initiated by the merchant and involves them returning the customer's money directly, often as a result of a return or exchange.
Understanding the Chargeback Representment Cycle
Chargebacks have a significant financial impact on merchants. Not only do merchants lose money from the transaction, they often incur fees from the card processor or bank. A $1 chargeback can cost the business at least $3.
Again, if a merchant receives too many chargebacks, their processor or bank may terminate their merchant account. If you can’t process payments, how in the world will you make any money?
Chargeback representment is a strict, systematized procedure for fighting invalid chargebacks. Chargeback representment involves submitting evidence, such as proof of delivery or a copy of the sales receipt, to the customer's bank to demonstrate the transaction’s legitimacy.
Understanding the crucial steps you need to take for each stage of the representment cycle is essential as it helps recover transaction revenue and optimize your systems effectively.
How the long-winding chargeback representment process works.
- Dispute Filing
The cardholder initiates the chargeback process by filing a dispute with the card issuer. Generally, the card issuer will send an email or a letter to the cardholder, asking them to provide additional information.
- Due Diligence Time
The credit card provider or bank will investigate the dispute and determine whether or not the chargeback is valid or invalid.
- Notifying the Merchant
The credit card provider or bank will inform the merchant of the chargeback dispute. At this point of receiving the notification, you have one of two choices:
- Accept the chargeback, which closes the loop.
- Respond by disputing the customer’s claim. You will need to provide additional documentation to counter the cardholder’s claim.
- Responding to the Dispute
Effective chargeback response requires that you provide compelling evidence that the charge was valid. It is important to remember that any documentation provided by the merchant must have the cardholder's name and address listed, such as an itemized receipt, proof of delivery, and credit or refund amount.
- Reaching a Chargeback Decision
Based on your compelling evidence, the credit card provider or bank will make a final decision on the dispute, and either award a permanent refund to the customer or keep the charge intact.
At this point there are three possible outcomes:
- You won. The bank will reverse the chargeback and mark the case closed.
- The cardholder won. They will retain the transaction fund.
- You won but the cardholder or their bank presented new evidence that counters your claim.
Available records show that banks reject over two-thirds of chargeback cases, resulting in a second chargeback, called “pre-arbitration” or “pre-arb” chargeback.
Merchants rarely win arbitration chargebacks. In most cases, the bank makes a judgment call to close the matter. Hence, merchants resort to the legal system for debt collection. But that’s for high-value transactions.
How Can Merchants Prevent Disputes From Becoming Chargebacks?
To prevent a dispute from escalating into a chargeback, start by optimizing your customer service tools. If a customer reaches out with complaints, address their issues promptly. And follow through to ensure they’re satisfied with the solution provided.
Other vital industry best practices come in handy too. Provide clear terms and conditions on all sales and delivery documents, and communicate all return and refund policies upfront.
Use automated systems to confirm order details with customers, monitor customer accounts for irregularities, and track down and resolve any fraud issues quickly.
Monitor chargeback activity and implement strategies to prevent them by using Chargeflow to automate your disputes. With that, you can leverage chargeback analytics to identify trends and take action.
Finally, educate your customers and staff on proper dispute procedures to reduce friction.
Is a chargeback the same as a refund?
The main difference between chargeback and refund is that a chargeback is initiated by the customer and involves the bank reversing the transaction, whereas a refund is initiated by the merchant and involves them returning the customer's money directly.
Chargeback is NOT the same as a refund.
A refund is a customer-initiated process in which a merchant agrees to reverse a transaction and return funds to the customer. That can happen for many reasons, such as a customer returning an item or the merchant canceling a service.
Instead of going over the merchant’s head to seek remediation, customers deal directly with merchants in instances of refunds. The process does not involve the customer's bank or credit card issuer.
While the two concepts ultimately result in transaction reversal and payment cancelation, there are significant differences between them, as noted below:
- Involves multiple parties including cardholder, merchant, issuer, Acquirer, Card Network;
- Card networks set specific limits, after which additional fees/conditions apply;
- The merchant pays a non-negotiable chargeback fee;
- Could result in loss of processing rights;
- Takes at least 45 days to resolve.
- Involves only the cardholder and merchant;
- There are no conditional limits applied;
- The merchant pays no additional fees;
- Merchant account privileges intact;
- Can be resolved immediately.
How to Improve Your Odds of Winning a Chargeback Dispute
If you’ve read any good material on chargeback mitigation, my guess is that you’re already acquainted with this laundry list of chargeback best practices:
- Gather all of the evidence you have that supports your case.
- Don’t run out of the clock before you send your response and rebuttal.
- Provide clear and concise facts to the issuer for better understanding of the situation.
- Be prepared to provide additional evidence or documentation if requested.
- Keep track of all chargeback disputes and their outcomes.
- Stay updated on the latest chargeback policies and regulations, as they may change from time to time.
While those are genuine and useful advice, assuming you have the time, specialized knowledge, and resources to fight each customer dispute and recover lost revenue, they’re not enough. Not even close.
Look at the numbers: six out of ten chargeback cases are friendly fraud cases. So how do you use the guides above to fight such chargebacks knowing (1) the reason code provided is false, and (2) you are already seen as guilty of the crime before you send in your rebuttal letter? Friendly fraud takes away an estimated 28% of all eCommerce revenue today, and 40% of customers who commit friendly fraud repeat the act in 60 days.
That’s where Chargeflow comes in.
Using Big Data and deep integration with your business, Chargeflow produces the most comprehensive chargeback evidence in the world, custom-tailored to your store, and sends it on your behalf.
Chargeflow combines years of experience handling thousands of chargebacks and disputes to perfect the dispute cycle and deploy it at scale. The outcome? Instead of a 12% dispute recovering success chance, you’ll have at least 75% ROI benefits without lifting a finger.
Why Did I Get a Chargeback?
Chargebacks occur when a customer disputes a charge on their credit card statement. This can happen for many reasons, such as fraud, incorrect billing, unsatisfactory services, or goods that weren't delivered. It is important to review chargeback reasons and address them quickly to protect your business reputation and minimize losses.
Does a Chargeback Count Against My Ratio if I Win the Dispute?
Unfortunately, your chargeback will not count against your ratio if you win the dispute. The chargeback process is a form of consumer protection that allows cardholders to dispute a charge if they are not satisfied with the merchant’s response to their complaint. If a cardholder successfully disputes a charge and the merchant loses the dispute, then the chargeback will be reversed and the merchant will not be held liable for the charge. Therefore, the chargeback will not count against your ratio if you win the dispute.
Can You Win a Chargeback Dispute?
YES. You can win a chargeback dispute if you can provide compelling evidence that the transaction was valid and that you followed all the proper transaction procedures. This may include providing proof of delivery, a copy of the sales receipt, or other documentation. Additionally, you must respond to the dispute within the specified time frame and provide all the required information. If you’re unable to provide sufficient evidence, the chargeback may be upheld. Using Chargeflow’s automated chargeback solution makes the process seamless without any involvement from you team.