A chargeback is a dispute initiated by a customer through their bank to reverse payment on a completed transaction. As a merchant, you can choose to either dispute the chargeback by filing evidence with the cardholder’s bank, or choose to accept the chargeback and release the funds to the cardholder. Once a chargeback has been filed, the disputed funds will be put on hold until the case has been resolved.
If you process credit card transactions for long enough, you are likely to encounter a chargeback. This article will cover the chargeback process and steps you can take to protect yourself against frequent or fraudulent chargebacks.
To help you understand the typical chargeback process, let's start with important definitions:
- Cardholder: The owner of the credit card (your customer).
- Merchant: The owner of the Retail shop that processed the credit card (you).
- Issuer: The bank that issued the credit card to the cardholder (your customer).
- Acquirer: The bank that acquires payments for the merchant (you).
- Credit card network: The credit card brands (Visa, Mastercard, Amex, Discover) that determine the guidelines of their chargeback process.
- Lightspeed Payments team: Support agents are responsible for facilitating chargeback communications between the merchant and the acquirer.
Chargeback process steps
Now, let's break down the steps in a typical chargeback process. We use the term “typical” because the chargeback process can vary depending on the banks involved. Reach out to the Lightspeed Payments team if you need assistance navigating the process.
- The Cardholder files a chargeback with the Issuer.
- The Issuer communicates the chargeback to the Acquirer. At this point, the Merchant is debited for the disputed amount and the chargeback fee. The chargeback fee is non-refundable.
- The Acquirer communicates the chargeback to the Lightspeed Payments team.
- The Lightspeed Payments team contacts the Merchant to advise them of the chargeback.
- The Merchant either accepts the chargeback or works in conjunction with the Lightspeed Payments team to dispute it, sending evidence as required.
- The Lightspeed Payments team communicates the Merchant's response to the Acquirer.
- The Acquirer communicates the Merchant's response to the Issuer.
- The Issuer reviews the chargeback dispute and determines whether the Cardholder or the Merchant won the dispute. If the Merchant won the dispute, they are refunded for the disputed amount. If the Merchant lost the dispute, they must absorb the disputed amount.
Retrieval request process
The retrieval request process is the same as the chargeback process, except the disputed amount and chargeback fee are only debited from the Merchant if the retrieval request results in a chargeback.
From the Merchant's perspective, retrieval requests are rarer than chargebacks because the Issuer and Acquirer typically resolve the request without their involvement and only involve the Merchant if the retrieval request results in a chargeback.
Although retrieval requests and chargebacks are a natural part of credit card transaction processing, there are some preventative measures you can take as a merchant to help reduce their occurrence.
Why it’s important to take preventative action
Your chargeback rate (or chargebacks-to-transactions ratio) is typically calculated with the following equation: Total chargeback cases per month / Total transactions per month = Chargeback rate (%).
The equation can vary slightly, but every card network will track this metric in some form. If your chargeback rate begins to exceed a certain threshold (may vary from one card network to another), you're in danger of being considered a high risk merchant.
If your chargeback rate is not brought back under the threshold, card networks may cease to do business with you, making it impossible to accept card transactions.
If you’re concerned about your chargeback rate and have already carried out the preventative measures outlined below, contact the Lightspeed Payments team to discuss your options and other actions you can take to reduce the number of chargebacks being filed against you.
Preventative measures for card present transactions
Use a clear billing descriptor.
A billing descriptor is the information that appears next to a charge from your business on your customer's bank statement. Your billing descriptor will be established by the Lightspeed Payments team to be descriptive and easily recognizable, preventing confusion.
Do not complete the transaction if the authorization request was declined.
If you receive a decline, do not repeat the authorization request. An unauthorized transaction can easily return as a chargeback.
Print or email informative sales receipts.
Make sure your sales receipt clearly identifies your business name, location, phone number, and what was purchased. This will help jog a customer's memory of their purchase and provide them with a means of contacting you if they have questions.
Clearly disclose your policies and terms and conditions.
Ensure that your sale/return policies (if applicable) and terms and conditions are not only readily available and actively communicated, but easy to understand and cooperate with. So long as working with you as a merchant to resolve a situation is easier than filing a chargeback, customers are unlikely to seek a resolution without you.
Require proof of identification or signatures from your customers.
By confirming a customer's identity and/or requiring a signature when a customer picks up their order, you'll have evidence to prove that a sale is legitimate. If you check a piece of identification, do not keep that information once their identity is confirmed. As for signatures, collect them on individual slips for each order rather than collecting them on a single list for all orders. This prevents customers or fraudsters from seeing the names and orders of other customers while they sign.
Train your employees.
Make sure your employees understand and consistently practice the preventative measures above that apply to them.
Preventative measures for card not present transactions
If you accept payments for deliveries over the phone or online, be wary of:
Multiple transaction attempts coming from the same IP address but different cards.
A fraudster could be testing various cards to determine which work.
Transactions with the same delivery address, but different cards.
Even though this is not sophisticated fraud, fraudsters may still attempt this tactic. Always check delivery addresses and card addresses as a rule.
Transactions using the same card for different delivery addresses.
This approach is similar to the one above, except that a fraudster may have shared a card number or may be delivering to various locations.
Several orders using slightly different credit card numbers.
A fraudster may have purchased a list of credit card numbers and is systematically testing them.
Transactions attempting progressively smaller dollar amounts.
Issuing banks have sophisticated fraud controls. Some of these controls will decline suspicious transactions above certain thresholds. A fraudster may try to make a purchase at a lower dollar amount in an effort to figure out what these thresholds are.
A customer who has problems providing personal information.
Especially on phone orders, this should raise suspicion.
Multiple cards are being used on the same order.
This is also similar to the scenarios above where a fraudster might be trying to determine which cards work and what their purchase limits are.
Larger than expected orders.
Trust your instincts if something feels wrong.
Cards with the incorrect expiry date.
If a transaction repeatedly has different and wrong expiration dates, a fraudster might be trying to guess this number. This is a clear indication that they do not have the original card in their possession.
Pick up orders.
By confirming a customer's identity and/or requiring a signature when a customer comes in-store to pick up their order, you'll have evidence to prove that a sale is legitimate. If you check a piece of identification, do not keep that information once their identity is confirmed. As for signatures, collect them on individual slips for each order rather than collecting them on a single list for all orders. This prevents customers or fraudsters from seeing the names and orders of other customers while they sign.
Despite taking all the recommended preventative steps, it’s possible you may still have a chargeback filed against you. If that happens, you will be notified by the Lightspeed Payments team, who will discuss your options with you.
Disputing a chargeback
Having a chargeback filed against you does not mean you are without recourse. We recommend contacting the customer to discuss and attempt to resolve the situation directly, rather than involving the banks and credit card network. If you're able to arrive at an agreement with your customer, have them send you an email confirming the agreement.
Failing that, you can (and usually should) dispute the chargeback. You will be given an opportunity to provide evidence in support of the legitimacy of the transaction. If the evidence is compelling enough, you can win the dispute and have the chargeback overturned.
The kind of evidence you should provide will vary depending on the reason the chargeback was filed. Any chargeback filed against you is very likely to fall under one of the following reason codes used by the credit card networks:
- Authorization: An authorization was required but not obtained, or an authorization request received a Decline or Pickup response and the transaction was completed anyway.
- Consumer dispute: Chargebacks initiated by the cardholder in regards to product, service or merchant issue (for example, a delivery was not received).
- Fraud: Fraudulent transactions.
- Processing errors: Disputes including Duplicate Charge, Incorrect Charge Amount, and other similar situations.
The Lightspeed Payments team can share recommendations on what kind of evidence to supply for your given circumstances, but some common examples to prepare include:
- Transaction details, usually found in the Transaction Status report, such as:
- Payment Amount
- Authorized Amount
- Entry Method (e.g. Swiped)
- Card Brand
- Cardholder Name
- Masked PAN
- Customer's digital signature
- Proof the transaction in dispute has already been refunded.
- Proof that your policies and terms and conditions were conveyed to the customer.
Evidence gathered to dispute the chargeback must be submitted by the given deadline or you will automatically forfeit the dispute. You'll supply the evidence to the Lightspeed Payments team, who will submit the evidence to the appropriate parties on your behalf.
If the chargeback is successfully overturned, the funds under dispute will be returned to you and the chargeback will not be counted against your chargeback rate.
Accepting a chargeback
While disputing a chargeback is a good idea if you have compelling evidence to submit, a chargeback filed against you may be difficult to contest, or you may decide that the amount in dispute is not worth the time and effort to dispute.
If that's the case and your chargeback rate is healthy, you can opt to accept the chargeback and absorb the cost of the disputed funds. Inform the Lightspeed Payments team you do not wish to dispute the chargeback and they will communicate your decision to the relevant parties.