What all merchants must know about chargeback reason codes

What all merchants must know about chargeback reason codes

In the eCommerce industry, card payment disputes are commonplace.

Now and then, something goes wrong with an order. And by Federal law, cardholders can seek remediation from their banks if they couldn’t reach a consensus with the merchant, with a chargeback.

Filing a chargeback means they want their money back.

After their due diligence and determining sufficient reason to grant the chargeback, the cardholder’s bank can approve the dispute and assign a chargeback reason code to help the merchant know why the cardholder disputed the charge.

In that sense, chargeback reason codes are alphanumeric codes developed by card networks such as American Express, Discover, Mastercard, and Visa to outline the reason for a particular chargeback. Chargeback reason codes help streamline the dispute mediation process by communicating underlying transaction issues across the board, allowing the merchant involved to determine if the dispute is worthwhile or not.

As holiday seasons come with an uptick in chargeback fraud, now is the best time to educate yourself about chargeback reason codes: how they work, how scammers can manipulate them, and what you can do to thwart such attempts.

Understanding Chargeback Reason Codes

As noted earlier, chargeback reason codes indicate the reasons for a payment dispute. 

Card brands designed these codes for merchants to identify why customers file chargebacks and for them to know how to construct their dispute mediation strategies. 

While these codes generally highlight similar reasons for chargebacks across networks, such fraud, payment processing errors, consumer disputes, or other linear issues, there are significant variances one must not ignore. 

And the codes are constantly changing, which makes it difficult for merchants to keep up with their intricacies.

More so, the chargeback concept has not lived up with fast-paced developments in the eCommerce industry. The disconnects make it easy for cardholders to game the system and commit friendly fraud. Con artists can assign any chargeback reason code for a dispute. But that wouldn’t reflect their true intent.

Understanding all the numerous codes out there and piercing through the corporate veil of the buyer’s objective is a lot of work. That explains why most merchants’ dispute win/lose probability stays at 12% because card issuers require you to tailor your compelling evidence to each reason code.

But, don’t worry, we’re keen to help you get a hang of things quite nicely.

What Are The Most Common Chargeback Reason Code Categories?

Before we answer that question, it’s vital to underscore the importance of chargeback reason codes.

As chargebacks allow merchants to be fair and transparent in their dealings with customers and for cardholders to seek payment reversal for unjust billings on their cards, chargeback reason codes are the primary tool for merchants to fight meritless chargebacks. They help merchants make informed evaluations of the dispute ROI.

Below are the main reasons for chargebacks.

  1. Fraudulent activity

Fraudulent activity chargeback reason codes include every type of credit card fraud, such as CNP transaction fraud, card-present fraud, and missing signature fraud. But you should also know that just because the cardholder indicated fraudulent activity as the reason code does not mean actual fraud took place. Research shows that 81% of cardholders admitted they filed a chargeback out of convenience. And to overturn this category of reason code, you must demonstrate an absence of fraud, the actual cardholder or their relative performed the transaction. Or add documentation to show the cardholder is involved in foul play. 

But if the cardholder is a victim of actual fraud, you should accept the chargeback and install anti-fraud tools to pre-empt such issues in the future. 

  1. Payment Processing Missteps

There are several incidents encapsulated in this category of chargeback reason code. These include, but are not limited to, incorrect account numbers, incorrect currency, late presentment, wrong transaction codes, and double billing. 

An immediate pre-emptive action is to deploy requisite payment processing measures to ensure your systems align with industry best practices. 

Overturning any chargeback with payment processing errors requires that you provide compelling evidence of successful payment processing and authorization. And you should also include your terms of service with other relevant order processing ancillary evidence.

  1. Card Authorization Errors

Chargebacks under authorization reason codes generally fall within the following issue: unauthorized transactions, rejected authorization, a bill surpassing the authorization amount, card-not-present authorization challenges, or some other authorization noncompliance issues. 

And to overturn any chargeback under payment processing errors, you must show proof of cardholder authorization. And include previously non-disputed transactions. While using credit card authorization holds could limit future occurrence.

  1. Cardholder and Consumer Disputes

Chargebacks under this category of reason codes show the cardholder initiated the dispute for reasons such as merchandise/service not received, order significantly not as described, canceled recurring billing subscriptions, credit not processed, and many other cardholder disputes. It’s equally vital to mention that this dispute category is among the most frequent chargeback triggers in the industry today. 

To successfully overturn consumer chargeback reason codes, you must show evidence of merchandise or service delivery, include proof that the cardholder knew about any impairment or variance before making a transaction, add evidence that the cardholder didn’t cancel a recurring service before the billing cycle, credit processed according to payment terms, etc. 

  1. Miscellaneous

Banks assign miscellaneous chargeback reason codes when the chargeback reason code does not rank within the above-stated issue areas. Issuers allocate codes in their miscellaneous or general category whenever there’s no specific category available to capture the chargeback reason. Compelling evidence to overturn disputes in this reason codes category include:

  • A copy of the transaction invoice or an order form they signed;
  • Delivery approval (depending on the method of delivery used);
  • Compelling evidence of a connection between the recipient of the order and the cardholder (if possible/obtainable); 
  • Proof that the cardholder disputing the transaction is using the goods; 
  • Previous undisputed transactions utilized the same IP address, email address, physical address, and phone number.

Four Things Merchants Should Know About Chargeback Reason Codes

Knowledge of the unspoken rules of chargebacks and how to navigate them across networks is one essential business sustainability decision you’d make during this period.

Post-holiday chargebacks are the worst. And you don’t want to flush your hard-earned revenue down the dispute pipe in the New Year.

With all that said, below are six crucial secrets you must know about chargeback reason codes to make your dispute mediation better.

  • Look beyond the stated reason code to win more disputes.

I can’t over-emphasize the fact that chargeback reason codes are often misleading. So you must look beyond the stated reason code to win the dispute.

And there are many reasons for that unfortunate reality.

Due to significant disconnects in the industry, information flow isn’t always seamless. Data collected by an issuer from a cardholder could be diluted and altered as it makes its way from the issuer to the card network, then to the merchant acquirer, and perhaps to another vendor service provider or ISO before finally getting to the business owner. 

Merchants lose essential dispute contexts by the time such data gets to them. And given the limited chargeback response timelines that merchants have to deal with –many vendors struggle even to identify the original order, let alone respond effectively to disputes. And when they fail to respond, issuers assume the chargeback is legitimate and close the case with a permanent payment reversal. 

Without homogeneous standards between acquirers’ chargeback processes and the extra burden of cross-border payments, scammers will continue manipulating chargeback reason codes to commit friendly fraud. 

  • Represent ALL meritless chargebacks, regardless of the reason code.

Here’s a rule of thumb you must bear in mind: Chargeback is not a cost of doing business, and assuming they are will hurt your business in many ways.

Chargeback representment is a right accorded to merchants to ensure you can dispute false chargebacks and recover business revenue. If you, like many eCommerce vendors, still think you don’t have the right to fight some chargeback code, I’m here to let you know that’s an erroneous idea. When you determine a chargeback is unwarranted, you must gather all relevant order documentation and fight back.

  • Always tailor your chargeback response in line with the issued reason code, even if it’s a false claim.

Per industry best practices, you must have compelling evidence to dispute a chargeback. And even if you realize the cardholder applied a chargeback that has nothing to do with the transaction, you must still respond in line with that specific reason code. 

Doing otherwise or applying a one-size-fits-all statement will be counter-productive. Gather relevant evidence. And tailor your dispute response with clear reasons why the chargeback is meritless and unwarranted. 

An automated chargeback recovery tool like Chargeflow comes in handy here to ensure you can ferret documentation from over 50 data points and strengthen your case for maximum results. 

  • Chargeback reason codes can change with new information.

Another thing you should bear in mind is that the card brand involved in the dispute can also change the reason code to suit new developments. For example, suppose a cardholder filed a case about an order processing issue, and you disputed the chargeback. The cardholder then brings new evidence to light. In that case, the card brand may change the stated chargeback reason code to fit the latest information from the cardholder. Consequently, always do your due diligence on the existing reason code to be sure you’re on track with the dispute’s status at all times.

What Should You Do With Chargeback Reason Codes?

The first and obvious answer on what to do with a chargeback reason code is that you must fight all meritless chargebacks. Use it to tailor your compelling evidence accordingly.

Always remember that accepting any chargeback does not only mean you agree to the refund. You also incur fees and other incidental penalties, one of which is that you could lose your processing rights if you breach the acceptable chargeback limit.

So, it’s vital to apply the knowledge of this piece, work with your processor to ensure you don’t go against established protocols, and then use automated chargeback recovery to swing the odds of dispute recovery to your side.

We know, and research approves, that chargeback mitigation is laborious, an uphill battle with incredibly minimal success chances for merchants. Chargeback automation gives you extra wings with over 40% ROI – and your team can also focus on doing their best work, not fighting to recover lost revenue.

Content Marketing Manager at Chargeflow.

Tom-Chris Emewulu is Chargeflow’s Digital Evangelist. With 7+ years of digital marketing experience, he crafts compelling, data-driven SEO articles that put brands on page 1 of Google search. Forbes, DW, Business Insider, Businessss2Community, and many other publications have featured his works. You can find him on Social Media via @tomchrisemewulu.

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