Business owner going over notes with client over the phone

A merchant’s perspective on chargebacks

Long gone are the days of bartering for your needed goods and services. Also on the decline is the use of cash, a trend accelerated by the pandemic. Touchless point of sale with credit and debit cards rules with consumers.

Returns are also expected to be a seamless process for the consumer. But in the event a customer feels the good or service has not lived up to expectations, arrived too late, was the wrong color, or any number of other issues, the customer wants a seamless refund. This is especially true with online orders.

But what happens if the customer and the merchant don’t see eye-to-eye on a return? Or, if the customer has exceeded the return window or simply doesn’t want to deal with the merchant directly.

In this case, the customer reaches out directly to the credit card for a refund. They bypass the merchant altogether, eliminating the possibility that the merchant would make this purchase right for the consumer. Once a credit card issuer has been notified, the frequent result is the customer files a chargeback against the charge issued by the merchant.

Merchants large and small

Large merchants generally have a dedicated accounting team that is reconciling merchant processing statements, processing fees, returns and, of course, chargebacks. But if you’re a smaller merchant, you may have never dealt with a chargeback and are not sure how to best handle them. One recent example of small businesses being taken advantage of by the chargeback process is the restaurant industry and the rise of online delivery options due to Covid.

In this scenario, fraudsters have figured out how to get a proverbial “free lunch” from unsuspecting restaurant owners. This would be an example of fraud by the consumer, not the merchant.

From a merchant’s perspective, the minute a customer processes a chargeback against you, the money for that transaction will be coming out of your bank account and will be credited back to your customer’s credit card. At this point, you’re probably out the items you sold to the customer and you’re out the money you collected for the items sold.

Equally as bad, you’re also hit with a chargeback fee by your payment processor. This can range, depending on your merchant processing agreement, from a few dollars to over $50.

Real vs ‘friendly’ fraud

The two most common categories of customer chargebacks are fraud and customer disputes. True fraud is a massive issue for card issuers, card associations and consumers, alike. It is the number one type of identity theft in the U.S. each year. Most of us have been victim to credit card theft, either by loss of the card itself or capture of our credit card information.

Most true fraud occurs in the card not present (CNP) space, where the merchant does not physically have the card in front of him at the time of purchase. Card present (CP) fraud simply means the merchant did have access to the physical card, yet fraud still occurred. It’s not a stretch to realize it’s far easier to commit fraud online then when standing in front of a merchant and your chip is swiped or read.

On the other hand, friendly fraud is not fraud at all. It’s often described as “buyer’s remorse.” In the case of friendly fraud, a customer may purchase from a merchant, decide they shouldn’t have bought the item, and then reach out to credit card issuer claiming ‘fraud,’ rather than working through the merchant for a refund.

Unfortunately, consumers have learned the fastest and easiest way to gain a refund on a remorse purchase is through their credit card issuer. This type of friendly fraud makes up a significant percentage of a business’ overall chargeback rate.

Fighting for what’s right

The first step in working to resolve a chargeback is to examine whatever data you’ve collected to understand where the fraud is coming from. Secondly, try and identify if there are there any patterns in the data?

There are third-party services available to help you manage your real fraud risk. Companies like Kount, Clearsale and Sift help you prevent a transaction from becoming a chargeback by focusing on the purchase before the transaction is processed by your merchant processor. These companies have sophisticated heuristics, developed through the analysis of millions of transactions that can detect and filter out suspicious transactions in real-time before the charge goes through and you ship your product.

If a potential fraudulent transaction can be stopped before the credit card is charged, then you’ve nipped the chargeback in the bud. These services are integrated with many of the most popular commerce engines and can be easily integrated into your own fraud strategies.

Third-party services

Other third-party services that help you resolve a customer transaction dispute before it turns into a chargeback include Verifi (owned by Visa), and Ethoca (owned by MasterCard). Verifi’s services effectively intercept chargebacks from select credit card issuers before the chargeback is processed. Ethoca’s service is based on more widely available fraud data from the card issuers themselves.

What else can you do

As a merchant, your first line of defense is to be sure you’re capturing the CVV code whenever processing an order. This can be done either online or in a call center environment. Capturing the code will help ensure the customer is in possession of the credit card at the time of purchase.

Your second line of defense is to use Address Verification Services (AVS) whenever possible. This process goes through your payment processor, on your behalf, to ensure the customer’s address is really the customer’s address and matches the address relating to the card account.

A third line of defense is a strong customer service procedure that can help diffuse a return situation before it becomes a chargeback. Subscription billers who bill multiple months can take advantage of a “cancelled recurrent transaction” chargeback. This type of chargeback is driven when a customer is billed for a subscription installment after they believe the subscription has ended.

Other lines of defense

As a merchant, you need to understand the customer experience from a customer’s vantage point. Make a purchase through your own store and merchant account and interact as if you’re a consumer and follow these steps:

  • Take a look at the merchant descriptor that shows up on your credit card statement
  • Look online and at the paper copy
  • Does the merchant descriptor show up on your credit card statement?
  • Does the merchant descriptor make sense to someone buying your products?
  • Is your phone number on the descriptor, and most importantly, is it the correct telephone number?
  • Call the number to see if the customer service experience is satisfactory. If you’re using an IVR to front the calls, is it easy to navigate? Was it easy to get a person for escalated interactions? Is the number being routed to the appropriate group of people?

These may seem like obvious things, but what you think is appropriate or correct may not be to your average customer.


Although it may seem as though the customer is the driver’s seat here, you do have rights as a merchant. You can fight the chargeback through your payment process by going through the process of “representment.” This is a process where the merchant can dispute the customer’s dispute and attempt to reclaim the charge. In simplest terms, a representment is a merchant’s dispute of a customer’s dispute.

The process of representment will vary depending on the type of card, (e.g., Visa, MasterCard, etc.), and how the transaction was processed, (e.g., CP or CNP).

In addition, the reason code for the chargeback will provide some detail to you as the merchant as to why the customer is processing a chargeback. This information will assist you in accumulating the compelling documentation needed before moving forward with the representment process. Things such as receipts, agreements, terms of use, and customer communications can all assist in winning the representment process. The process itself is usually handled through your merchant account portal.

No free lunch

If you plan to fight the dispute through the representment process, there are a few things to know.

  • The process is not free. You will pay a small fee, in addition to your time, to initiate the representment. For low ticket items, it may not be worth the cost
  • As a merchant, you have a limited amount of time to initiate a representment – usually a few weeks. After that point, your representment rights expire
  • The chargeback liability doesn’t get erased from your merchant chargeback threshold measured by the card associations. Once a chargeback is processed, it never comes off the books as far as the card associations are concerned

Being a merchant, whether only CP or both CP and CNP, is a uniquely challenging space. Knowing your rights in the chargeback progress and the avenues available to you to mitigate chargeback situations are some of the best ways to keep your business smoothly processing transactions and staying profitable.

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