What is a Chargeback and How Does it Work?

Topic: PCI DSS (Thu 15th Mar 2018)
What is a Chargeback and How Does it Work?

What is a Chargeback?
A chargeback is a transaction reversal which serves as a form of consumer protection from fraudulent activity committed by both merchants and consumers. Chargebacks arise when a customer purchases a product or service and later raises a dispute with their bank. This can be because the customer hasn’t received the product or service they paid for, or that the item/service didn’t match the description at the point of sale (POS) or if a business has ceased trading.

How does a chargeback work?
The cardholder files a dispute with their issuing bank who in turn contacts the merchant’s acquirer (via the card scheme). Sometimes the cardholder will contact the merchant directly first to seek a refund and only start the chargeback process if a refund isn’t available.

The merchant will receive a written notification from their acquirer with details of the chargeback. Sometimes this includes a request for information (RFI) from the card issuer to determine the authenticity of the chargeback. The merchant may not receive an RFI for all chargebacks, for example, if there was a process error, say the merchant had taken payment above their floor limit without obtaining a valid authorisation code when required.

The acquirer will let the merchant know when the chargeback will be debited from their merchant account (offset against settlement funds) unless the transaction is successfully disputed.

Can I dispute a chargeback?
The merchant can dispute a chargeback if they provide evidence that the transaction was authentic to the acquirer.

Conditions of a Chargeback
• Time limit - There is a time limit, usually 120 days on chargeback claims. When this starts can depend on specific circumstances, but it’s usually from the day the merchant became aware of the issue. There is also a cut-off point of 540 days from the initial transaction being processed.
• Online/shop purchase – when dealing with tangible goods that the customer purchased from the merchant’s high street shop or online, the merchant has 120 days from when they first became aware of the problem, up until 540 days after the initial transaction.
• Flight purchase – If an airline ceases trading after a customer booked their flight, there would be a breach of contract from the day the flight was due to depart. However, if the airline informed the customer at an earlier date that the flight wouldn’t be going ahead, the contract breach that allows for the chargeback wouldn’t apply.

Who is involved in the Chargeback process?
• The cardholder
• The merchant
• The acquiring bank
• The issuing bank
• The card networks

Chargeback VS Section 75 of the Consumer Credit Card Act
Chargebacks aren’t enshrined by law but are part of Scheme Rules which many participating banks subscribe to. With Section 75, customers can apply for a refund on faulty items, purchases or services that didn’t meet their requirements - providing customers used their credit card and the transaction cost was between £100 and £30,000 they can claim against their credit card. There are conditions that apply though, for example, consumers can’t get a refund if they purchased several items that cost less than £100 individually even if they total more than £100. However, consumers may be eligible if the items were bought as part of a deal, e.g two vases for £100. Section 75 can also be used if the merchant has ceased trading.

To make a claim, consumers are able to either get in touch with their credit card provider and the retailer.

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