Understanding Chargeback Cycles: A Comprehensive Guide for Merchants

By Brandon Banks

Welcome to our comprehensive guide on chargeback cycles, designed to assist you in making informed decisions regarding the prevention and reduction of chargebacks. In this post, we’ll cover the different steps that take place during a chargeback, such as when money changes hands, actions necessary from your end, and what is happening with cardholders at each stage. Now let’s dive into this information-packed journey!

Chargeback Overview

Before we delve into the chargeback cycle, let’s quickly define what a chargeback is. A customer may dispute any purchase made on their card and request that the bank refund them these funds. This process is known as a chargeback and involves deducting money from the merchant’s account.

To learn more about why chargebacks happen, read our article: What Every Business Needs To Know About Chargebacks

Cycle 1: Dispute

This first cycle is where a customer disputes a charge on their credit card statement. During this cycle, you — the merchant — will receive a notification from your acquiring bank about the chargeback. The following is an overview of the entire cycle:

1. A cardholder initiates a dispute with their issuing bank.
2. The issuing bank investigates the dispute.
3. If the dispute is valid, the issuing bank withdraws the transaction amount from the merchant’s account and credits the cardholder.

Be aware that chargeback fees may apply, ranging from $15 to $100 per case, depending on the payment processor, card brand, and acquiring bank. You will need to check with your acquiring bank, as well as card association agreements for precise timeframes and fees.

Cycle 2: Representment

The second cycle is where the merchant has an opportunity to defend the chargeback. Here’s what happens:

1. Merchant reviews the dispute and gathers evidence to support the transaction.
2. Merchant submits the evidence to their payment processor.
3. The payment processor reviews and forwards the evidence to the issuing bank.

As an example, let’s say the cardholder disputes a transaction claiming they didn’t receive the product. As a merchant, you can provide documentation such as:

• proof of delivery, including tracking information and delivery confirmation
• signed delivery receipt (if available)
• correspondence with the customer (such as emails or messages) confirming their order details or addressing concerns
• screenshots of the product listing, clearly showing the product description, price, and terms of sale

If the payment processor and issuing bank deem the evidence presented satisfactory, they will reverse the chargeback and restore the funds to your business’ account.

Be aware that you only have a short window of opportunity to respond to disputes. The time frames vary based on card brand. Here are some approximate deadlines to keep in mind for the major companies:

• Visa — merchants have 30 days to respond
• Mastercard — merchants have 45 days to respond
• American Express — merchants have 20 days to respond
• Discover — merchants have 22-40 days to respond (depending on the type of dispute)

To ensure you’re compliant with your card association agreements and to get the most accurate information on timeframes and fees, it’s essential that you contact your acquiring bank.

Cycle 3: Pre-Arbitration

If the issuing bank does not accept the evidence, they can initiate pre-arbitration. This cycle includes the following:

1. The issuing bank reviews the evidence and decides if they still disagree with the representment.
2. If they agree, the chargeback is reversed and funds are restored to the merchant.
3. If they disagree, the issuing bank submits a pre-arbitration case to the card association.

During this cycle, you as the merchant have a chance to review the pre-arbitration case and decide whether to accept or contest the chargeback. If you accept, the chargeback stands, and the process ends. If you contest, the case moves to the next cycle.

Cycle 4: Arbitration
This is the final cycle in the chargeback process, involving the card association as a neutral third party. Here’s what happens:

1. The card association reviews the case, including all evidence submitted by the merchant and the issuing bank.
2. The card association makes a final decision on the chargeback.
3. The decision is binding, and funds are moved accordingly.

Both the merchant and the issuing bank must abide by the card association’s decision. The losing party may be liable for additional fees and penalties.

Turning Knowledge into Action

Understanding the chargeback cycles is crucial for merchants to make strategic decisions, reduce chargebacks, and protect their businesses. Remember to respond promptly, gather sufficient evidence, and stay within the time limits set by card associations and acquiring banks. By doing so, you’ll be better equipped to navigate the chargeback process and maintain a healthy business.

Chargeback Management Solutions

Utilizing a chargeback management solution can relieve a substantial administrative burden. Many payment processors have built-in chargeback management, but not all. If you get frequent chargebacks, it will be worth it to invest in a quality solution that not only helps you manage disputes, but helps prevent chargebacks from happening in the first place.

Nexio’s Dispute makes managing chargebacks convenient by centralizing transaction reporting and dispute functions within a single dashboard. Receive instant notifications, analyze chargeback details, and electronically dispute chargebacks.