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Chargebacks: What they are and how to handle them

In this blog post, we aim to explain chargebacks in a simple manner and help you face them with confidence. By the end of this 7-minute read, you will have a clear understanding of the following issues:

1. What is a chargeback?

2. Who is involved in a chargeback?

3. What causes a chargeback?

4. How is a chargeback handled?

5. Dispute Standards for Investments and Similar Disputes.

6. What kind of compelling Evidence for E-commerce and MO/TO Transactions should you submit?

1. What is a chargeback?

The word “chargeback” is thrown around quite a lot in the e-Commerce industry. The best way to explain it is:

A chargeback represents an amount of money to be sent back to the cardholder after he disputes a transaction. This amount is equal to the sum of the purchase made by the cardholder or it can be a fraction of it depending on how much of the ordered merchandise/service was received and paid for.

Chargebacks can arise any time the cardholder disputes a transaction made at the merchant. Cardholders bring their chargeback requests to their issuing bank.

2. Who is involved in the life cycle of a chargeback?

The typical parties involved in a chargeback case are:

You can read more about each of them in our post A quick guide to payments in e-Commerce.

3. What causes a chargeback?

The causes of chargebacks in the payment industry are called “reason codes”. Although being flanked by multiple sources of chargebacks may sound like a nightmare, it can actually be a blessing in disguise. Knowing what causes chargebacks can teach a business where and how it needs to improve.

There are three main causes of chargebacks:

Fraudulent transactions - in essence unauthorised payments made by someone other than the cardholder. If a merchant suffers from a high rate of chargebacks caused by fraudulent transactions, he should improve the security level of his webshop. A good way of improving security, thus reducing fraudulent transactions, is by implementing 3-D secure in transactions or using secure tokenisation technology like Apple Pay. Want to know more about 3-D secure? Read our post All about 3-D Secure and 3-D Secure 2.0.
Fraudulent transactions come in many forms in e-Commerce. Read more about them in our post Fraud in e-Commerce.

The following aspects of products and services can lead to chargebacks:

If the first two issues are frequent, a merchant’s attention should be drawn to investigate what is lacking in his shipping department. Perhaps the routes used are improper, the staff needs some extra guidance, or a new shipping provider should be considered.

The third issue is due to the product/service having an inaccurate description or display, leading to false expectations. It is an indication that the visual or textual communication of the product is misleading. If this is the case, the merchant could look at whether:

Recurring transactions are subscription- or membership-based payments. This means that customers are automatically billed by a merchant on a regular basis.
Chargebacks usually arise when the cardholder cancels his recurring transaction scheme set up at the merchant, but the merchant finds out too late and continues to charge the cardholder.

Recurring transactions are great for maintaining long-term relationships with customers and making bookkeeping easier. However, recurring transactions can turn against a merchant if not managed correctly. If the merchant experiences many chargebacks of this kind, chances are his customers didn’t know exactly what they were getting into. To sort this out, improvements in communication should be made. For example:

overview of the different steps and actions needed to process a chargeback
Chargebacks as they happen

4. How a chargeback is handled

The issuer protects the interests of the cardholder while the acquirer those of the merchant. The cardholder and the merchant try to prove that the other is wrong, by providing proof. While cardholders usually have the upper hand when asking for a chargeback, merchants can prevail if they do their homework right and produce clear evidence in their favour.

Here is how a chargeback is handled, step by step.

Step 1. The cardholder contacts the issuer

A cardholder contacts his issuing bank by letting it know that he wants to dispute a transaction made at a merchant’s webshop.

Step 2. The issuer reviews the dispute

The issuing bank judges whether the cardholder has solid reasons to ask for a chargeback. Here are the possible scenarios for the issuer:

Let’s assume that scenario 2 is in play here.

Step 3. The acquirer receives the chargeback

The acquirer can decide either to

Let’s assume that scenario 2 is what the acquirer chooses to do?

Step 4. Merchant receives the chargeback

The merchant can:

The merchant believes the chargeback is unreasonable so he goes with option number 2. To win the dispute, the merchant must gather compelling evidence to support his claim of rejecting the chargeback and send it to the acquirer.

Examples of evidence can be:

Step 5. Acquirer receives the evidence

The acquirer has to judge whether the merchant stands a chance. Depending on its judgment, the acquirer can choose to:

The acquirer is confident in its assessment and believes that the merchant has a decent shot at winning the case. This leads to Step 6.

Step 6. The issuer receives the counterclaim

After checking the evidence provided against the chargeback, the issuer has the option to:

Assuming that the issuer still believes in the cause, the next step is to go to arbitration, however, sometimes, pre-arbitration (term used by Visa) or arbitration chargeback (term used by Mastercard) takes place before.

Step 7. Pre-arbitration/Arbitration Chargeback

Pre-arbitration or arbitration chargeback - the last option issuers have to convince acquirers to drop their counterclaim.

Usually, pre-arbitration takes place when:

If pre-arbitration/arbitration chargeback fails, meaning that the acquirer still refutes the chargeback, the fate of the case lies in the hands of the card scheme in the arbitration phase.

Step 8. Arbitration

Arbitration - The card scheme reviews the evidence put forward by both parties and decides who deserves to win and who is liable for the transaction. More often than not, the decision of the card scheme is binding and final.

5. Dispute Standards for Investments and Similar Disputes.

In case of chargebacks concerning investments, foreign exchange accounts, and similar, this Chargeback is considered as invalid at the point in time when funds are loaded into an investment, foreign exchange, or similar type of account - the Mastercard service is considered provided as described. This means that the issuer does not have a chargeback right for product not provided in relation to withdrawal of account balances and trading/investment decisions. Mastercard will not consider the terms and conditions concerning such transactions.

In case the merchant receives a chargeback with the reason code 4853 related to investments, foreign exchange accounts, and similar, then the merchant should provide supporting documents, showing that the service was provided.

Supporting Documents (or Compelling evidence) must be in English or accompanied by an English translation unless both the issuer and the acquirer share a common language. Supporting Documents must provide sufficient detail to enable all parties to understand the nature of the dispute or rebuttal.

As an additional help, Clearhaus Risk & Compliance team will gladly provide you with a template, which contains all information which has to be included in Compelling evidence, for Forex related Chargebacks.

You can read more regarding Compelling evidence in the next point (6).

6. What kind of compelling Evidence for E-commerce and MO/TO Transactions should you submit?

When receiving a Chargeback, a merchant should provide detailed argumentation and documentation that the cardholder was participating in the transaction and/or received service. This documentation is also called Compelling evidence.

We have placed the most relevant information regarding how to represent the Chargeback under each particular case, in Clearhaus Dashboard.

If a merchant has a special business model, for example, Crypto, Forex or other, please be aware that at least two of the following documents and an explanation should be applied:

Moreover, it is very important to provide the following information:

As an additional help, Clearhaus Risk & Compliance team will gladly provide you with a template, which contains all information which has to be included in Compelling evidence, for Crypto and Forex related Chargebacks.

When a merchant requires a cardholder to register prior to completing a purchase, the merchant must provide documentation confirming the cardholder or authorized user is registered to purchase goods with a password and must provide one or more of the following documentation:

If you are still in doubt if your Compelling evidence complies with the rules, please contact Clearhaus Dispute department at

To sum up

Chargebacks are troublesome and unfortunately unavoidable. They are best dealt with by preventing them as much as possible. This can be done by:

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