III. Second Chargeback and Second Reversal Phase (MasterCard only):

Once a Reversal (and the subsequent debit) is received back at the Issuing Bank, they will then forward the “Merchant’s Letter” back to their Cardholder for a response. If the Cardholder wishes to pursue the dispute further, they then send in a “Rebuttal Letter” back to the Issuing Bank and if the Issuing Bank feels that their response is valid, will submit a Second Chargeback. A Second Chargeback functions just like a First Chargeback, except a Chargeback fee is not assessed and the disputed amounted is immediately debited out of the Merchant’s business checking account. The Merchant is sent another letter explaining what, if any, documentation is required to pursue this dispute further. This “Second Chargeback” phase of the dispute is then considered “Resolved to the Merchant” and will remain closed until the Merchant responds back to the letter sent to them. If the Merchant does indeed respond to the letter sent to them a ‘”Second Reversal” phase of the dispute is opened. An Acquirer Chargeback Analyst will then review the letter and one of two scenarios will occur: (more…)

II. First Reversal Phase:

If the merchant does indeed respond with a “Merchant Letter” back to the Acquirer, a “Reversal Phase” of the dispute is opened and a Chargebacks Analyst will review the Merchant Letter and will see if the merchant’s response and the overall dispute qualify to be “Reversed” back to the Issuing Bank. At this point, one of two scenarios will occur:

1. If the Chargebacks Analyst deems the Merchant’s response as invalid, they will close out this phase as “Request Denied” and will mail a letter to the Merchant explaining why the Chargeback cannot be reversed back to the Issuing Bank at that time.
2. If the Chargeback Analyst deems the Merchant’s response as valid, the Acquirer “Reverses” the Chargeback back through the Association and eventually back to the Issuing Bank along with a debit for the disputed amount. The Acquirer is then credited for the amount in dispute and in turn credits the Merchant’s business checking account. The Chargeback fee remains on the Merchant’s account as this is a fee charged by the Associations as a cost for processing the Chargeback. This “First Reversal” phase of the dispute is then considered “Resolved To the Issuing Bank” and will remain closed unless the Issuing Bank initiates a “Pre-Arbitration” notification (Visa) or a Second Chargeback (MasterCard).

Most everyone who has a merchant account understands that a chargeback results when a customer successfully disputes a sale that has been paid by credit card. A customer can initiate a chargeback with their issuing bank based upon a wide variety of things. There are about 35 reasons why a chargeback can be initiated by a consumer. Examples include improper or broken goods, product not received, and services not as described, cardholder did not authorize transaction, error in amount, and incorrect transaction date.

What most merchants don’t understand is how exactly the chargeback process works. In a three part post, I’ll include the details of how a chargeback is handled by the issuing bank, Acquirer, and Association (Visa & MasterCard) from start to finish.

I. First Chargeback Phase:

A Cardholder writes a letter or fills out a “Dispute Resolution Form” and submits it to their Credit Card Issuing Bank. The Issuing Bank then processes a chargeback along with the “Chargeback Documentation” (i.e. Cardholder letter) through the corresponding Association (Visa or MasterCard) and is then credited the disputed transaction amount. The Acquirer or “Merchant Bank” then receives notification of the Chargeback upon receipt of the “Chargeback Documentation” and is subsequently debited for the disputed transaction amount. At this point the Acquirer’s internal database assesses the Merchant a “Chargeback fee”. Acquirer’s systems then run the Chargeback through a series of simple filters to check to see if the Merchant issued credit and for certain technical errors. At this point one of two scenarios occurs: (more…)