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. You can also contact the Lightspeed Payments support team for additional assistance.
To help you understand the typical chargeback process, let's start with the definitions of a chargeback’s key players:
- 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 support team: Support agents are responsible for facilitating chargeback communications between the merchant and the acquirer.
Now that you know the key players, 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.
- 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 our Lightspeed Payments support team.
- Our Lightspeed Payments support team contacts the merchant to advise them of the chargeback.
- The merchant either accepts the chargeback or works in conjunction with the Lightspeed Payments support team to dispute it, sending evidence as required.
- Our Lightspeed Payments support 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 if the cardholder or the merchant won the dispute. If the merchant wins the dispute, they are refunded for the disputed amount. If the merchant loses the dispute they must absorb the disputed amount.
This chargeback process is provided for your information, but you can depend on the Lightspeed Payments team to guide you every step of the way.
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, this doesn't mean there's nothing you can do to mitigate their frequency. This section lists preventative measures you can take as a Lightspeed Retailer to help reduce their occurrence.
Why is it important to take preventative action?
Your chargeback rate (or chargebacks-to-transactions ratio) is typically calculated with the following equation:
The equation can vary slightly from one card network to another, but every card network will track this metric. If your chargeback rate exceeds a certain threshold (again, this can vary by card network), 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.
There is no foolproof method to prevent all chargebacks, but we've compiled a list of some good practices.
Card present transactions
- Use a clear billing descriptor.
- A billing descriptor is the information that appears next to the charge from your shop on your customer's bank statement. The Lightspeed Payments team will establish your billing descriptor so that it is descriptive and easily recognizable to help prevent 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 may return as a chargeback.
- Print or email informative sales receipts.
- Make sure your sales receipt clearly identifies your store, location, phone number, and the items purchased. This will help remind a customer 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 sales policy, return policy, and terms and conditions are not only available and communicated, but easy to understand and follow. If working with you to resolve a situation is easier than filing a chargeback, a customer is less likely 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 layaway, special order, or shipment, you'll have evidence to prove that a sale is legitimate. If you check a piece of identification, do not keep that information once the customer's identity is confirmed. We also recommend collecting signatures 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 when they sign.
- If delivery of a product is delayed, advise your customer in writing.
- Offer an alternative product or to cancel the transaction altogether.
- Train your employees.
- Make sure your employees understand and consistently practice the preventative measures above.
Card not present transactions
Card not present transactions refer to situations where the card is not physically present when the transaction is processed. This can include payments taken online or over the phone. Fraudsters employ a variety of tactics to exploit this situation’s security vulnerability. We recommend contacting Lightspeed Payments if you recognize any of the following scenarios:
- Multiple transaction attempts that come from the same IP address but different cards.
- A fraudster could be testing various cards to determine which works.
- Buyers who appear overly concerned about shipping details and shipping speed.
- Fraudsters worry about shipping because they fear the goods will not leave the warehouse before the real cardholder detects the fraudulent transaction on their card.
- Repetitive orders.
- For example, many purchases for the same item, but in various colors or sizes. The items are perhaps being purchased for resale.
- Transactions with the same shipping address but billed to different cards.
- Even though this is not sophisticated fraud, fraudsters may still attempt this tactic. Always check shipping addresses and card addresses as a rule.
- Transactions using the same card for different shipping addresses.
- This approach is similar to the one above, except that a fraudster may have shared a card number or may be shipping 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 purchase an item at a lower dollar amount in an effort to identify these thresholds.
- A customer who can’t provide identifying information.
- This should raise suspicion on phone orders, especially.
- Multiple cards used to pay for the same order.
- This is similar to the scenarios above where a fraudster might try 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.
- Customers who are indifferent to shipping prices.
- A fraudster is primarily concerned with shipping goods as fast as possible to avoid detection, so high shipping prices do not deter them.
- In-store pick-up orders.
- By confirming a customer's identity and/or requiring a signature when a customer arrives at your 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 the customer’s identity is confirmed. We also recommend collecting signatures 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 when they sign.
- Customers who are indifferent to company policies.
- A fraudster does not care about refund limits, exchange policies, or return policies.
If you are concerned about your chargeback rate and have already carried out the preventative measures outlined above, contact the Lightspeed Payments support team to discuss your options and what else you can do to reduce the number of chargebacks filed against you.
Despite taking all the recommended preventative steps, you may have a chargeback filed against you. If a chargeback is filed against you, you will be notified via email and the Lightspeed Payments support team will contact you to discuss your options.
Disputing a chargeback
Before disputing a chargeback, we recommend contacting your customer in an attempt to resolve the situation directly, rather than involving the banks and credit card network. If you arrive at an agreement with your customer, ask them to send you an email confirming the agreement in writing.
If you cannot reach a resolution with your customer, we recommend disputing the chargeback. When you dispute a chargeback, you have the 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 type of evidence you should provide will depend on the reason the chargeback was filed. Any chargeback filed against you is 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 but the transaction was completed anyway.
Consumer Dispute: Chargebacks initiated by the cardholder in regards to product, service, or a merchant issue (for example, shipped goods were not received).
Fraud: Fraudulent transactions.
Processing Errors: Disputes including Duplicate Charge, Incorrect Charge Amount, and other similar situations.
The Lightspeed Payments support team will guide you with recommendations on the type of evidence to supply for your circumstances, but some common examples 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 that the transaction in dispute has already been refunded.
- Proof that your policies and terms and conditions were conveyed to the customer.
Any evidence you gather to dispute the chargeback must be submitted by the deadline or you will automatically forfeit the dispute. Supply your evidence to the Lightspeed Payments support team, who will submit the evidence to the appropriate parties on your behalf.
If the chargeback is 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 we recommend disputing a chargeback if you have compelling evidence to submit, you may encounter a chargeback that is difficult to contest or you may decide that the amount in dispute is not worth your time and effort. If your chargeback rate is healthy, you can choose to accept the chargeback and absorb the cost of the disputed funds. Simply inform the Lightspeed Payments support agent that you do not wish to dispute the chargeback and they will communicate your decision to the relevant parties.