In the bankcard industry, the term chargeback is a dreaded one. Chargebacks often result in revenue loss for merchants, and even if they can be disputed, the process tends to be long and arduous. And yet, there is an even worse form of chargeback: a bank chargeback.
These forced credit returns are even more dangerous because you rarely realize they are happening until it’s too late, and because the bank handles them, they leave you with little avenues for disputes. However, that doesn’t mean there’s nothing you can do.
In this article, you’ll learn more about bank chargebacks, what sets them apart from regular chargebacks, and how to deal with them.
What is a Chargeback?
A chargeback is a forced return tied to a credit card transaction that a client believes is invalid. This may sound straightforward, but the actual process can become highly intricate.
Payment card users have a federally mandated right to chargebacks. A normal chargeback is initiated when a cardholder alleges an invalid transaction. The bank then disputes the transaction on behalf of their customer, and the cost of the sale is deducted from the merchant and reimbursed to the cardholder.
This would result in the loss of both the merchandise and its cost. You will also lose any shipping and processing fees, fines, and administrative fees. All of these losses might quickly pile up.
The initial effect of a chargeback is the reversal of the debit or credit card charge and the return of the payment amounts to the consumer. Chargebacks were implemented as a means of protecting consumers against fraud.
For you, the merchant, the chargeback procedure is time-consuming and expensive. Ultimately, you should implement solutions and procedures to prevent all types of chargebacks, including bank chargebacks.
How Do Bank Chargebacks Differ from Regular Chargebacks?
Bank chargebacks are disputes brought by the issuing bank of the cardholder. Unlike a traditional customer disagreement, the underlying motives and procedures are distinct. However, for the merchant, the result is the same: lost income, increased costs, and a greater chargeback rate.
A normal chargeback involves the reversal of a transaction due to an error or omission in the processing. This could be anything from a tech issue to a merchant mistake or even a fraud claim.
When clients file a chargeback, they normally contact the credit card issuing bank. This is how and why you, as the merchant, wind up in a protracted chargeback process.
A bank chargeback occurs when the bank that issued the customer’s credit card discovers problems in merchant transaction processing. Typically, the cardholder and the merchant are unaware that a chargeback has been made or is being handled. This can have significant repercussions for you, including the time and cost to investigate the chargeback, managing the customer’s dissatisfaction upon learning that their transaction has been canceled, and ensuring that you do not lose this customer. Consistent with their name, bank chargebacks are frequently handled at the banking level. Neither the buyer nor the seller may be aware that a chargeback is being processed. The issuing bank and acquiring bank frequently collaborate to resolve these conflicts.
At some point, the claim will be resolved, and as with any other dispute, the cash will be moved from your account to the cardholder’s account in most circumstances.
Even if you were unaware of the chargeback until after the event, you would still be required to pay the associated fees. Moreover, unlike a typical chargeback, you will rarely have the ability to contest the bank’s decision.
Why Do Banks Do Chargebacks?
Chargebacks from banks are usually caused by errors or problems with the transaction detected by the bank. As a preventive measure, these are seen by the issuing bank as a way to be protected from further problems in the future.
Normally, these bank chargebacks occur when the bank identifies a problem with the transaction. To protect itself against future problems, the issuing bank is taking this precaution.
A bank will initiate a chargeback procedure when one of the following transaction errors is identified:
- Declined Authorization: a transaction was issued for an authorization request declined.
- Requested/Required Information Illegible or Missing: this can include an address, CCV code, or valid expiration date.
- Expired Card: this is very common and can occur with involuntary chargebacks.
- No Authorization: the authorization process was invalidated, and authorization for the purchase was not provided.
- Late Presentment: the transaction was received after a specified period (typically 30 days), and now the account number is blocked or no longer valid.
- Non-Matching Account Number: the account number used does not match an account number on file with the issuing bank.
- Incorrect Transaction Code, Currency, or Domestic Transaction Processing Violation: the wrong currency or transaction code was used.
- Incorrect Account Number or Transaction Amount: the wrong account number was used, or the merchant entered an incorrect amount.
- Merchant Fraud: An issuer of credit cards suspects the merchant is making fraudulent transactions. This may occur when your chargeback ratio exceeds a certain threshold.
- Duplicate Processing: one transaction was processed multiple times for the same credit card account number.
Each card issuer maintains its chargeback reason codes for tracking these and numerous other chargeback reasons. If you’ve chosen to manage bank chargebacks on your own, you must be familiar with these different cause codes and understand how to defend against these chargebacks. Follow these links to discover more about the chargeback cause codes for the following credit card companies: Visa, MasterCard, American Express, and Discover.
Even though the anomaly may appear innocent to you, the bank may nevertheless pursue a chargeback. From their perspective, a bank chargeback is only preventative; they view it as a means of avoiding future difficulties.
Suppose, for instance, a transaction utilizes a different account number than the one on file with the issuer. There could be a valid explanation, but the issuer does not know what it is. The bank files a chargeback “just in case” rather than taking a risk.
Issuers view bank chargebacks as a preventative measure to safeguard against potential issues.
Some reason chargeback codes are used solely for bank chargebacks, such as the “Late Presentment Chargeback” code (4834 for Mastercard and 12.1 for Visa). This reason code is only ever used when a transaction is processed late.
On the contrary, cardholders are unlikely to be aware of a processing deadline. It is exclusively the bank’s responsibility to monitor time limits.
How Can You Prevent Bank Chargebacks?
As previously stated, bank chargebacks are significantly more difficult to defend against than customer disputes. If you prove that a customer disagreement was unfounded, you can contest the chargeback through representation. Obtaining a reversal through the process of representation may enable you to recoup a portion of the lost earnings (all fees would still apply, of course).
However, it is uncommon for an issuer to reverse a bank chargeback without a technical error. Since the issuer is the one that identifies the error, you would need an ironclad case to reverse their judgment. In many cases, there is no option to contest the chargeback.
The main line is that avoiding bank chargebacks at all costs is preferable. Fortunately, most bank chargebacks are the consequence of simple errors on the merchant’s part. Therefore they are almost entirely avoidable.
Apparent inconsistencies can result in substantial income loss. Reevaluating your rules and procedures is one of the most effective strategies to reduce risk. Ensure that you adhere to established best practices for accepting payment cards in card-not-present situations:
- Always request authorization and never attempt to bypass a declined card.
- Strictly adhere to proper network processes and regulations.
- Grant credits and cancellations as soon as the customer asks.
- Pack and ship purchases quickly.
- Ship merchandise before depositing the transaction.
- Deposit sales/credit receipts within one to five days of the transaction date.
Self-examination is one of the most difficult yet essential steps you must take to eliminate internal chargeback triggers. The only approach to discovering problem-causing business rules and practices is to conduct a thorough, unwavering analysis of your company.
Conclusion
Chargebacks are the worst of them all. They are mostly handled internally, and you rarely have time to dispute a bank chargeback or learn it is happening in the first place. Following the proper network process and regulations should reduce instances of this type of chargeback. Because they are based on inconsistencies and errors, strengthening your anti-fraud measures is your best recourse.
