Chargebacks

What is Chargeback?

A chargeback is a charge that is returned to a payment card after a customer successfully disputes a transaction to try to get their money refunded. Chargeback has an important role in the payment ecosystem especially in the cards industry. The ability to raise disputes/chargebacks gives the customers confidence in debit and credit card payments.

But what does this mean for your business? Oftentimes, chargebacks caused downsides to the merchants. They can be a huge, costly headache for the merchants who have to deal with them. Many consumers ask for chargebacks over problems that chargebacks were never intended to address, or dispute transactions without even attempting to contact the merchant first.

Disputes/chargebacks don’t mean merchants can’t do anything about it. With chargebacks on the rise, merchants, and businesses are now equipping themselves in order to fight chargebacks. Explained below are the things merchants need to know about chargebacks, how they work, and how to prevent them.

Chargeback vs Refunds

Although similar, chargeback is not the same as refunds. Here are the key points that differentiate chargeback from refunds :

What can cause Chargebacks?

There are several reasons why a customer might go directly to their card issuer rather than contact the seller and ask for a refund. The circumstances usually involve identity theft, unauthorized transactions, or fraud. To clarify, the merchant needs to contact the customer and confirm the chargeback reason, which can be either:

1. A buyer does not want to use the product
2. The product does not meet the expectations of the buyer
3. The buyer is not happy with the service of the merchant
4. A buyer does not recognize the purchase of the product which could be because the cardholder’s card was stolen, or because of social engineering

Another case is when a cardholder intentionally raises a dispute in an attempt to keep the goods/purchase without paying for them. This is often recognized as ‘friendly fraud’.

When a customer raises a chargeback to their bank, Xendit will get a notification from the acquiring bank about the chargeback. And we'll let you know about the chargeback details.

Who will be liable for the Chargeback?

When you enter into an agreement to accept credit card payments, you also agree to abide by the rules and regulations set forth by the card networks (e.g Visa/Mastercard). These rules outline the rights, responsibilities and procedures for handling chargebacks.

Chargeback serves as a protective mechanism for cardholders, ensuring they can dispute unauthorized or problematic transactions. As a merchant, if a chargeback is filed and validated, you are typically held liable for the disputed amount.

Here's a brief overview for clarity,

• 3D Secure (3DS) Transactions:
  • 3DS is an additional security layer for online credit and debit card transactions. When a transaction is authenticated using 3DS, the cardholder is prompted to provide a password or other form of authentication, ensuring that they are the legitimate cardholder.
  • A successful authenticated 3DS transaction shifts liability from the merchant to the issuing bank in most fraudulent chargeback cases (merchant can still be responsible for reasons such as good/services not delivered, etc).
  • This means that if a fraudulent transaction is successfully challenged by the cardholder, the issuing bank usually bears the loss instead of you, the merchant.
• Non-3DS Transactions:
  • Transactions not authenticated using 3DS lack this extra layer of security. As such, liability for any subsequent chargebacks will remain with the merchant as you have agreed to take on the risk of processing non-authenticated transactions. In other words, without the protection of 3DS, you have a higher risk of bearing the financial burden of fraudulent transactions.
  • Xendit's advice for merchants wary of these augmented risks is to eschew all non-3DS transactions henceforth.

For more information on Authentication, please refer here https://docs.xendit.co/credit-cards/authentication/3ds

When using Xendit’s (MID), Xendit will place a hold on the merchant’s balance responding to the chargeback amount related to the merchant (as stated in Xendit T&C chapter 4.A.9 (ID), chapter 5.9 (PH)).

Merchant will be responsible and liable for the chargeback/dispute as Xendit is not responsible for or liable to Merchant for any losses incurred in connection with any authorized and completed Charges or Transactions that are later the subject of a Chargeback, Refund, or Reversal, which are submitted without authorization or in error, or in violation of any law, rule or regulation, or the terms and conditions of the Agreement.

Upon receiving a high chargeback count/ratio, Xendit has the right to temporarily or permanently stop merchants from processing Cards or payments altogether with Xendit, and merchants will also be responsible for any fines/penalty that is imposed by the card network.

Chargeback Flow

When a cardholder raises a dispute/chargeback, the process might be different depending on the card network, but typically follows a standard scenario as shown below :

1. The dispute begins when a cardholder raises a chargeback directly to the issuing bank. The issuing bank will then review the transactions and decide whether or not the customer has grounds to file a chargeback.
2. If the issuing bank decides to grant the cardholder the chargeback, the bank will notify the card network (e.g. VISA, Mastercard, JCB, AMEX), and the network will forward it to the acquiring bank (the merchant’s bank).
3. Once received by the acquiring bank, the acquiring bank will then forward the chargeback to Xendit as the merchant’s payment facilitator.
4. Xendit will put a hold on the merchant's balance in the Xendit dashboard responding to the total chargeback amount and fees. The merchant will then be notified of the chargeback by Xendit and can choose to accept or challenge the chargeback by providing a defense document. Merchants must defend the chargeback within a certain time frame depending on the card network’s policy.
5. The issuer will then review the defense document and decide whether to accept/reject the defense. If accepted, Xendit will return the funds back to the merchant.

If you as a merchant are using your own MID to process Cards payments with Xendit (Xendit as PG / Switcher), Acquirers will forward the chargeback directly to you and you will need to work the evidence together with the Acquirer.

Fighting the Chargebacks

When determining a judgment for a chargeback, transparency will prevent you from losing. Transparency means that you have recorded and maintained all interactions with the cardholder, details of the transaction, and anything that will confirm that the cardholder acknowledged/is aware of the product that they were purchasing. Some examples of evidence that you can provide:

Physical Goods

One way to help you in this situation is to offer substantial evidence or compose a rebuttal letter that effectively outlines why the chargeback should be reversed.

Purchase Details and Documentation:

• Proof transactions were authorized by the cardholder or card holder benefited from sale/service e.g. proof of purchase, order receipt showing cardholder’s name, billing/shipping address, mobile number, etc.
  • this could also be any of the following;
    • Screenshot of the invoice/payment reference from Xendit (external ID/order ID) with the reference details from the merchant that match
    • Screenshot of the invoice of the product that the cardholder bought + screenshot of the product
• Provide documentation showing that transactions were “AVS ''Y” or “M” during checkout and that the item was sent to the cardholder's verified address (bill to/ship to address matched).
• Proof of shipment or tracking number to show the item was delivered to the buyer’s address.
• Photographs, emails, or other evidence that the cardholder has received or is using the goods or services they purchased.
• Item was picked up (buyer/cardholder requested for the item to be shipped to a different add)
  • If the purchased goods were to be picked up from the merchant’s location: A signature, copy of identification, or other identifying information provided by the cardholder at the time of pickup.
  • If the buyer requests for the item to be shipped to a business address:
    • Proof that the cardholder was employed at that address at the time of delivery.

Adherence to Policies and Communication:

• Proof of disclosed cancellation policy and customer agreement
• Proof of disclosed cancellation policy and that the customer actively agreed to the policy at the time of the purchase.
• Proof that the cardholder did not cancel the goods/service.
• Proof of notice of cancellation/return policy and agreement.
• Other relevant clauses on your Terms and Conditions

The more relevant the evidence that you send, the more likely that your claim will be re-assessed and overturned . If Xendit does not have enough evidence that support a successful reversal of the chargeback, we will request additional documentation. A certain period will be given (depending on the issuing bank) to submit all documentation to us.

Digital Goods

One way to help you in this situation is to offer substantial evidence or compose a rebuttal letter that effectively outlines why the chargeback should be reversed. In this scenario, if you're selling digital goods such as games, downloadable materials, ebooks, etc., here are examples of evidence you can provide:

Purchase Details and Documentation:

• An invoice showing customer details or proof that the transaction was initially authorized (Name of the cardholder, e-mail address, mobile number) collected during checkout or from your own dashboard or if available.).
  • this could be a screenshot of the invoice/payment reference from Xendit (external ID/order ID) with the reference details from the merchant that match.
• Description of digital goods, including purchase and download timestamps.

Customer Engagement and Usage:

• Proof of cardholder’s download and use of goods.
• Proof of download, records of previously undisputed transactions, user name, the consistent IP address being used, geographical location, device ID, name, etc.
• ​​Network or server data that proves the cardholder downloaded the product or logged in to use it.
  • Screenshot of the invoice/payment reference from Xendit (external ID/order ID) with the reference details from the merchant that match,
  • This can include the cardholder’s IP address and location data, information about the device used,
  • confirmation that the cardholder has a verified customer profile on the merchant’s site, proof that the cardholder accessed digital goods or services through that profile after the transaction date, and
  • transaction data showing that the cardholder has made previous, undisputed transactions with the merchant.
• Additional relevant personal information is linked to the cardholder.

For subscription/recurring payment

• Proof of active subscription and that cardholder failed to cancel or request for cancellation.
• Evidence showing that the cardholder didn’t try to contact you to raise some issue or cancel, like a screenshot of an empty email or phone queue with their details filled in.

Cardholder Verification and Interaction:

• Evidence of cardholder’s pre-transaction access and verification
• The cardholder’s IP address and location during the transaction
• Verification of CVV/CVC, if applicable
• Device ID and verification details
• The cardholder’s name and email linked to their account.

Adherence to Policies and Communication:

• Proof of disclosed cancellation policy and customer agreement
• Proof of disclosed cancellation policy and that the customer actively agreed to the policy at the time of the purchase.
• Proof that the cardholder did not cancel the goods/service.
• Proof of notice of cancellation/return policy and agreement.

Preventing Chargebacks

Chargeback will surely cost the merchants/businesses the disputed amount along with the chargeback fees. Aside from that, the card network will also account for all previous chargebacks against the merchant’s chargeback ratio. The card network might penalize you if your chargeback ratio gets too high. (see Dispute and fraud monitoring programs)

Therefore, preventing chargeback is more important than fighting it

Here’s how you can minimize this from happening:

• Protect Transaction with 3D-Secure (3DS)
  • Have authentication (3DS) enabled before charging to give you more protection from chargeback liability
  • For more information on 3DS and ECI please refer to this page (link)
• Allow Foreign Cards only based on the Use Case
  • Be mindful of accepting foreign cards and accept new countries on a case-by-case approach
  • Block high-risk countries
• Good Fraud Prevention Strategy
  • Manually review transactions and cancel transactions with suspicious characteristics
  • Pass your customer's billing details upon charge. Using an Address Verification Service (AVS) can make your charge much more solid
  • Remains vigilant and implement appropriate measures to identify and mitigate suspicious patterns
• Good Chargeback Management Strategy
  • Clearly state return & exchange policies on product pages, checkout screens, and order confirmations
  • Use delivery confirmation for every shipment, and use signature confirmation for expensive orders, create a transparent shipping and billing process
  • Clear acknowledgment proof from the customer's end on your TnC (e.g. have a clear customer acknowledgment (ie. signature) for a non-refundable deposit, etc)
  • Use the same business name when possible on websites, order confirmations for expensive orders
  • Keep all customer correspondence and transactional records until after the chargeback window has passed
  • Make sure to use an accurate descriptor. This descriptor will show in the cardholder’s billing statement if they make a purchase on your business. If you’re using Xendit’s MID, your descriptor will be taken from the business name you’re using upon registering with Xendit
  • Include a clear product description on your website
  • Respond to customers’ inquiries as quickly as possible
    

When can a transaction turn into a Chargeback?

Generally, cardholders have a 120-day window after the purchase date in which they may dispute a charge. The Chargeback process has 3 stages; Retrieval, Chargeback, and Arbitration stage.

1. Retrieval Stage: At this stage, the Issuer or the Cardholder requests for a copy of the transaction receipt to obtain information about a charge on the card before the request is converted into a Chargeback. This happens T+30 days from the date the acquiring bank receives the chargeback case, and informs Xendit, until they submit the evidence to issuing bank
2. Chargeback Stage : T+30 days from the date acquiring bank receives the news of the Retrieval Stage, informs Xendit, until they re-submit the evidence to issuer
3. Arbitrage Stage: The final step in the Chargeback stage. If both the Issuer and the Acquirer cannot resolve the dispute between the Merchant and the Cardholder/Issuer, the case will now turn over to the Card Scheme provider (Visa, MasterCard, AMEX, or Discover) to make the final decision. Arbitration is even more costly than chargeback as this involves the card network, costing about $500 per chargeback case. Arbitration happens T+30 days from the date the acquiring bank receives the news of the Chargeback Stage, and informs Xendit until they submit the evidence to the issuer

Request Chargeback Cancellation

If you've communicated with the cardholder, and they've agreed to cancel their chargeback, we'll need to submit a report to the bank, Xendit will need to have the following information:

1. Full name
2. Date of transaction
3. Amount of transaction
4. Reason for chargeback cancellation
5. A scanned identity (KTP)
6. A scanned front side of the credit card
7. Confirmation that the cardholder has informed their issuing bank about the chargeback cancellation.

Kindly download the form in the following link, and provide it to the cardholder. For the purpose of information privacy of the cardholder, please direct the customer to send it to chargebacks@xendit.co.

We'll use the information as evidence for the bank to cancel the chargeback.

Chargeback results

If the acquiring bank deems that the supporting evidence is not enough, Xendit will be informed, and there will be additional time to gather more evidence. The bank will review the evidence received and notify Xendit of the chargeback results.

There are 3 chargeback results :

1. Win: If the bank doesn't notify Xendit, the chargeback is declared a win. There are no further actions for this result.
2. Lose: This is the least favorable outcome, and we'd like to avoid this if possible. But here's what might cause you to lose a chargeback:
   1. Not enough evidence: The acquiring bank considers there is not enough valid evidence of the transaction.
   2. No authentication (3DS). Certain acquiring banks require 3DS as a way to protect merchants from being liable for chargebacks. If you're skipping 3DS with Xendit, make sure you have all the other supporting evidence.
      
      If the bank declares a chargeback, the bank will notify Xendit and debit the Xendit account. After that, Xendit will notify the merchant that they will make a deduction to their dashboard balance for the chargeback liabilities. Charges for chargebacks can occur at any time according to information from the bank since the chargeback results come out.
3. Arbitration: If the bank declares further chargeback to the Arbitration stage, Xendit will notify the merchant to be able to prepare documents for evidence that are more complete than the previous documents and await information on the results from the bank.
   

The bank will notify Xendit regarding the results of the chargeback a maximum of 6 months after the date of sending merchant evidence against the chargeback to the Bank.

Arbitration

What's arbitration and how to fight it? After the first two steps of evidence verification from the bank, there is a possibility that the issuing bank deems the evidence to still be not enough. If so, the issuing bank can then raise the chargeback to arbitration.

Xendit will be informed about the arbitration step, and you'll need to make the decision whether you want to challenge the arbitration or not. If you want to challenge, then we'll require you to collect further evidence, and send it to the acquiring bank, and then the issuing bank. If you win, you'll win the chargeback. However, if you lose, you'll have to pay for the chargeback and the arbitration fee ($500).

Dispute and Fraud Monitoring Programs

Each network has its own fraud and dispute monitoring programs which are imposed to control and minimize chargebacks as they want customers to be comfortable opening credit card accounts and using them to make purchases both in person and online.

While these monitoring programs can provide merchants with specific assistance in identifying chargeback root causes and developing effective prevention plans, the fines and penalties are quite severe. For example, if you’re enrolled in a program for a certain period of time without improvements in your chargeback/dispute rates, you will be eligible for disqualification from processing the network’s payments.

Visa Dispute Monitoring Program (VDMP)

The Visa Dispute Monitoring Program (VDMP) is a system set up by Visa to incentivize merchants with high chargeback ratios to get the problem under control. Merchants who exceed Visa's dispute thresholds may be subject to fines.

Visa will look at these 2 criteria when enrolling merchants in VDMP :

• The total number of payments that have been disputed (dispute count)
• The ratio of disputed payments to all payments (dispute rate)

Visa Fraud Monitoring Program (VFMP)

This program is like a type of "probation period" for merchants. It means that Visa identifies your recent activity as risky, based on the number of chargebacks filed against you during the previous month.

Visa will look at these 2 criteria when enrolling merchants in VFMP :

• The total volume in U.S. dollars of Visa payments that are fraudulent (Fraud Volume)
• The ratio of the volume of fraudulent Visa payments to all payments (Fraud Rate)

Mastercard Excessive Fraud Merchant Program (EFM)

Mastercard EFM monitors fraud-related chargeback from e-commerce transactions at the merchant ID level. EFM is calculated based on dispute reason code 4837 - No cardholder authorization which indicates that the cardholder did not authorize the charge or reason code 4863 - Cardholder Does Not Recognize—Potential Fraud which indicates that the cardholder claims they don't recognize a card-not-present transaction.

A merchant will be identified as EFM if they meet or exceed all following four criteria:

Mastercard Excessive Chargeback Program (ECP)

Mastercard’s Excessive Chargeback Program (ECP) consists of two levels: Excessive Chargeback Merchant (ECM) and High Excessive Chargeback Merchant (HECM), and it applies to users in all supported countries. The program's purpose is to exercise oversight regarding eCommerce merchants and prevent too many chargebacks from occurring on the Mastercard network.

Last Updated on 2024-06-26