Chargeback Lifecycle
Chargebacks are forced reversals initiated by the cardholder's issuing bank. Understanding the chargeback lifecycle is essential for merchants, processors, and payment facilitators.
What is a Chargeback?
A chargeback occurs when a cardholder disputes a transaction with their issuing bank, and the issuer reverses the transaction—pulling funds from the merchant's account.
Common reasons for chargebacks:
- Fraud (card stolen or compromised)
- Merchant error (duplicate charge, wrong amount)
- Product/service issues (not received, not as described)
- Subscription disputes (cancelled but still charged)
- Processing errors (technical issues)
Financial Impact
Chargebacks cost merchants both the transaction amount AND a chargeback fee ($15-$100). Even if the merchant wins the dispute, they often don't recover the chargeback fee.
Chargeback Lifecycle Phases
┌─────────────────────────────────────────────────────────────────────────────┐
│ CHARGEBACK LIFECYCLE │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ PHASE 1: FIRST CHARGEBACK (Day 0-120 from transaction) │
│ ───────────────────────────────────────────────── │
│ │
│ Customer Issuer Network Acquirer Merchant │
│ │ │ │ │ │ │
│ │ "I didn't │ │ │ │ │
│ │ make this │ │ │ │ │
│ │ purchase" │ │ │ │ │
│ │───────────▶│ │ │ │ │
│ │ │ Initiate │ │ │ │
│ │ │ Chargeback │ │ │ │
│ │ │──────────────▶│ │ │ │
│ │ │ │─────────────▶│ │ │
│ │ │ │ │─────────────▶│ │
│ │ │ │ │ │ │
│ │ │ │ │ $100 + $25 │ │
│ │ │ │ │ debited │ │
│ │ │ │ │ │ │
│ │
│ Merchant has 10-30 days to respond with evidence │
│ │
│ │
│ PHASE 2: REPRESENTMENT (Merchant fights back) │
│ ───────────────────────────────────────────── │
│ │
│ Merchant submits evidence: │
│ • Signed receipt / delivery confirmation │
│ • AVS/CVV match records │
│ • Communication with customer │
│ • Product/service evidence │
│ │
│ If issuer accepts evidence → Funds returned to merchant │
│ If issuer rejects → Proceed to pre-arbitration │
│ │
│ │
│ PHASE 3: PRE-ARBITRATION │
│ ──────────────────────── │
│ │
│ Second round of evidence review │
│ Higher stakes - losing party pays fees │
│ │
│ │
│ PHASE 4: ARBITRATION (Final) │
│ ─────────────────────────── │
│ │
│ Network makes final decision │
│ Fees (2024-2025): │
│ • Visa: $500 filing fee (up from $350 in 2020) │
│ • Mastercard: $350-$500 depending on chargeback type │
│ • Pre-arbitration fees: $50-$100 additional │
│ Losing party pays these fees │
│ Decision is binding │
│ │
│ │
│ COMMON CHARGEBACK REASON CODES: │
│ ─────────────────────────────── │
│ │
│ │ Code │ Reason │ Common Cause │ │
│ ├──────┼───────────────────────────┼─────────────────────────────┤ │
│ │ 10.4 │ Fraud - Card Absent │ Stolen card used online │ │
│ │ 13.1 │ Merchandise Not Received │ Shipping issues │ │
│ │ 13.3 │ Not as Described │ Quality disputes │ │
│ │ 13.6 │ Credit Not Processed │ Refund not issued │ │
│ │ 13.7 │ Cancelled Merchandise │ Subscription issues │ │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
Phase 1: Initial Chargeback
Timeline and Windows
CHARGEBACK INITIATION WINDOWS
─────────────────────────────────────────────────────────
Transaction Date: Day 0
│
▼
┌───────────────┐
│ │
Day 1-120: Customer can dispute
│ (up to 120 days for most reason codes)
│ (up to 540 days for fraud claims)
│
└───────────────┘
│
▼
Issuer files chargeback
│
▼
Merchant notified: 10-30 days to respond
What Happens When Chargeback Filed
- Cardholder contacts issuer: "I didn't make this purchase" or "Item never arrived"
- Issuer investigates: Reviews transaction, cardholder history
- Issuer files chargeback: Sends dispute to network with reason code
- Network routes to acquirer: Acquirer forwards to merchant
- Funds debited immediately: Merchant account debited for transaction + fee
- Merchant notified: Receives chargeback notification with reason code and deadline
Financial Impact
CHARGEBACK DEBIT EXAMPLE
────────────────────────────────────────────
Original transaction: $100.00
Merchant received (net): $97.50 (after processing fees)
Chargeback filed:
• Transaction amount: -$100.00
• Chargeback fee: -$25.00
• ─────────────────────────────
Total debited: -$125.00
Merchant's net position: -$27.50
(They received $97.50, but paid out $125.00)
If merchant WINS representment:
• Transaction amount: +$100.00
• Chargeback fee: Usually NOT refunded (-$25.00)
• ─────────────────────────────
Net position: -$25.00 + processing fees
Even winning costs money!
Phase 2: Representment (Fighting the Chargeback)
Representment is the merchant's opportunity to provide evidence that the transaction was legitimate.
Compelling Evidence by Reason Code
┌─────────────────────────────────────────────────────────────────┐
│ EVIDENCE REQUIREMENTS BY CHARGEBACK TYPE │
├─────────────────────────────────────────────────────────────────┤
│ │
│ FRAUD CHARGEBACKS (10.4, 83 - "I didn't make this purchase") │
│ ───────────────────────────────────────────────────────────── │
│ Strong Evidence: │
│ • Signed delivery receipt with cardholder signature │
│ • AVS and CVV match │
│ • IP address matching cardholder's location │
│ • Device fingerprint matching previous purchases │
│ • 3D Secure authentication passed │
│ • Photos of cardholder receiving goods │
│ • Communication from cardholder's email address │
│ │
│ Weak Evidence: │
│ • Generic tracking number (no signature) │
│ • Merchant's terms and conditions │
│ • General fraud prevention measures │
│ │
│ │
│ MERCHANDISE NOT RECEIVED (13.1) │
│ ────────────────────────────────── │
│ Strong Evidence: │
│ • Delivery confirmation with signature │
│ • Tracking showing delivered to cardholder address │
│ • Photo proof of delivery │
│ • Confirmation from shipping carrier │
│ • Communication acknowledging receipt │
│ │
│ Weak Evidence: │
│ • Shipping label created but no delivery proof │
│ • Tracking showing "in transit" │
│ │
│ │
│ NOT AS DESCRIBED (13.3) │
│ ─────────────────────── │
│ Strong Evidence: │
│ • Detailed product descriptions from listing │
│ • Photos of actual item sent │
│ • Customer communication showing satisfaction │
│ • Return policy showing customer didn't attempt return │
│ │
│ │
│ CREDIT NOT PROCESSED (13.6 - "I returned it but no refund") │
│ ──────────────────────────────────────────────────────────── │
│ Strong Evidence: │
│ • Refund confirmation (already processed) │
│ • Return policy showing customer didn't follow procedure │
│ • Communication denying return request (with reason) │
│ • No return received (tracking proof) │
│ │
│ │
│ CANCELLED MERCHANDISE (13.7 - Subscriptions) │
│ ──────────────────────────────────────────── │
│ Strong Evidence: │
│ • Proof services continued after "cancellation date" │
│ • Cancellation policy showing customer didn't follow process │
│ • Communication showing customer knew billing would continue │
│ • Usage logs after cancellation request │
│ │
└─────────────────────────────────────────────────────────────────┘
Representment Package Checklist
REPRESENTMENT SUBMISSION CHECKLIST
─────────────────────── ──────────────────
□ Cover letter summarizing why chargeback should be reversed
□ Copy of transaction receipt/invoice
□ For Card-Present:
□ Signed receipt (if available)
□ EMV chip read confirmation
□ Terminal ID and transaction details
□ For Card-Not-Present:
□ AVS match documentation
□ CVV match documentation
□ 3D Secure authentication results
□ IP address and geolocation data
□ Device fingerprint
□ Delivery Confirmation:
□ Tracking number
□ Delivery signature
□ Photo proof of delivery
□ Delivery to verified address
□ Customer Communication:
□ Email correspondence
□ Chat logs
□ Support ticket history
□ Any acknowledgment of receipt/satisfaction
□ Return/Refund Policy:
□ Posted policy at time of transaction
□ Proof customer accepted terms
□ Evidence customer didn't follow policy
□ Service/Product Evidence:
□ Description of what was provided
□ Digital goods: Download/usage logs
□ Services: Proof of completion
□ Photos of physical goods
□ Previous Transaction History:
□ Prior successful transactions with same card
□ Pattern of legitimate purchases
Win Rates by Evidence Quality
| Evidence Quality | Typical Win Rate | Notes |
|---|---|---|
| Strong evidence (signed delivery, 3DS, AVS/CVV) | 60-80% | Best chance of winning |
| Moderate evidence (tracking, some auth) | 30-50% | Case-by-case basis |
| Weak evidence (generic response, policies) | 10-20% | Rarely successful |
| No response | 0% | Automatic loss |
Always Respond
Even if evidence is weak, always respond to chargebacks. A weak defense (10-20% win rate) is better than no defense (0% win rate). Plus, it shows you're engaged and may deter future frivolous chargebacks.
Retrieval Requests
Retrieval requests (also called "copy requests") are pre-chargeback inquiries from the issuer.
┌─────────────────────────────────────────── ──────────────────────────────────┐
│ RETRIEVAL REQUESTS │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ WHAT IT IS: │
│ ─────────── │
│ A retrieval request (also called "copy request") is when an issuer │
│ asks for documentation about a transaction BEFORE initiating a │
│ chargeback. │
│ │
│ WHY IT HAPPENS: │
│ ─────────────── │
│ • Cardholder doesn't recognize the charge │
│ • Cardholder needs receipt for expense report │
│ • Issuer investigating potential fraud │
│ │
│ MERCHANT RESPONSE: │
│ ───────────────── │
│ Must provide within 10-20 days: │
│ • Copy of signed receipt │
│ • Transaction details │
│ • Proof of delivery (if applicable) │
│ │
│ IF MERCHANT DOESN'T RESPOND: │
│ ──────────────────────────── │
│ • Request escalates to chargeback │
│ • Merchant loses ability to fight │
│ • Automatic loss │
│ │
│ BEST PRACTICE: │
│ ───────────── │
│ Always respond to retrieval requests - they're a WARNING │
│ Responding often prevents the chargeback entirely │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
Retrieval Request Response Strategy
RETRIEVAL REQUEST WORKFLOW
──────────────────────────────────────────
Retrieval request received
│
▼
Gather documentation immediately
│
├─── Transaction details
├─── Receipt/invoice
├─── Delivery confirmation
└─── Any customer communication
│
▼
Submit within 48 hours (deadline: 10-20 days)
│
▼
Include MORE than requested
│
├─── Cover note explaining transaction
├─── Highlight delivery confirmation
└─── Show customer satisfaction if available
│
▼
OUTCOMES:
│
├─── Issuer satisfied → No chargeback
├─── Customer satisfied → Dispute withdrawn
└─── Issuer not satisfied → Chargeback filed
│
└─── You already have evidence ready!
Retrieval Requests Are Opportunities
Responding thoroughly to retrieval requests can prevent 30-50% of potential chargebacks. Treat them as seriously as chargebacks themselves.
Phase 3 & 4: Pre-Arbitration and Arbitration
Pre-Arbitration
If the issuer rejects representment, they can file pre-arbitration:
PRE-ARBITRATION PROCESS
───────────────────────────────────────────
Merchant wins representment
│
▼
Issuer disagrees with decision
│
▼
Issuer files PRE-ARBITRATION
│
├─── Fee: $50-$100 (added to costs)
├─── Provides additional evidence
└─── Claims representment evidence insufficient
│
▼
Merchant's options:
│
├─── Accept liability (refund and stop)
│ • Pay transaction + chargeback fee + pre-arb fee
│ • Total loss
│
└─── Proceed to arbitration
• Additional $350-$500 fee risk
• Network makes FINAL decision
• Losing party pays ALL fees
Arbitration (Final Stage)
Arbitration is the last resort and carries significant costs:
ARBITRATION COSTS (2024-2025 Rates)
────────────────────────────────────────────
Visa:
• Filing fee: $500 (up from $350 in 2020)
• Withdrawal fee: $250 (if you back out)
• Pre-arbitration fee: $50-$100
• Losing party pays ALL fees
Mastercard:
• Filing fee: $350-$500 (based on chargeback type)
• Additional review fee: $100
• Losing party pays ALL fees
American Express:
• Arbitration fee: $500
• Express handling (expedited): +$250
• Losing party pays ALL fees
DECISION TO ARBITRATE:
──────────────────────────────────────────
Only arbitrate when:
✓ Transaction value > $1,000 (otherwise fees exceed value)
✓ Evidence is exceptionally strong
✓ Establishing precedent is valuable
✓ Pattern of fraud from same customer
Do NOT arbitrate when:
✗ Transaction value < $500
✗ Evidence is weak or circumstantial
✗ Simpler to accept liability
✗ Cost of fees > transaction amount
Chargeback Reason Codes
Visa Reason Codes (Current)
| Code | Category | Description | Merchant Actions |
|---|---|---|---|
| 10.4 | Fraud | Fraud - Card-Absent Environment | Provide AVS, CVV, 3DS, delivery proof |
| 10.5 | Fraud | Fraud - Chip Counterfeit Transaction | EMV chip transaction proof |
| 11.1 | Authorization | Card Recovery Bulletin | N/A - lost/stolen card |
| 11.2 | Authorization | Declined Authorization | Provide valid auth code |
| 11.3 | Authorization | No Authorization | Obtain authorization for future transactions |
| 12.1 | Processing Errors | Late Presentment | Submit transactions timely |
| 12.2 | Processing Errors | Incorrect Transaction Code | Use correct transaction type |
| 12.6 | Processing Errors | Duplicate Processing | Prove both transactions valid or refund |
| 13.1 | Consumer Disputes | Merchandise/Services Not Received | Delivery confirmation |
| 13.2 | Consumer Disputes | Cancelled Recurring | Proof of no cancellation or continued service |
| 13.3 | Consumer Disputes | Not as Described | Product description, photos |
| 13.5 | Consumer Disputes | Misrepresentation | Accurate marketing materials |
| 13.6 | Consumer Disputes | Credit Not Processed | Proof refund processed or wasn't warranted |
| 13.7 | Consumer Disputes | Cancelled Merchandise | Proof cancellation not made or services continued |
Mastercard Reason Codes (Current)
| Code | Category | Description | Merchant Actions |
|---|---|---|---|
| 4837 | Fraud | No Cardholder Authorization | Provide signed receipt or authorization proof |
| 4863 | Fraud | Cardholder Does Not Recognize | Provide clear descriptor, transaction details |
| 4834 | Point-of-Interaction | Duplicate Processing | Prove both charges valid |
| 4853 | Cardholder Dispute | Goods/Services Not Provided | Delivery confirmation |
| 4855 | Cardholder Dispute | Goods/Services Not as Described | Product description match |
| 4841 | Cardholder Dispute | Cancelled Recurring Transaction | Proof of active subscription |
| 4854 | Cardholder Dispute | Cardholder Dispute - Not Elsewhere Classified | Case-by-case evidence |
Chargeback Monitoring Programs
Excessive chargebacks trigger network monitoring programs with severe consequences.
CHARGEBACK THRESHOLDS (2024-2025)
──────────────────────────────────────────────────────────
Visa Dispute Monitoring Program (VDMP):
┌─────────────────────────────────────────────────────┐
│ Early Warning: │
│ • 0.65% chargeback ratio │
│ • 75 chargebacks per month │
│ • Warning letter, no fines │
│ │
│ Standard: │
│ • 0.9% chargeback ratio │
│ • 100 chargebacks per month │
│ • Fines: $50 per chargeback │
│ │
│ Excessive: │
│ • 1.8% chargeback ratio │
│ • 1,000 chargebacks per month │
│ • Fines: Up to $25,000/month │
│ • Risk of merchant account termination │
│ │
│ Fraud Monitoring Program (separate): │
│ • 0.9% fraud chargeback ratio │
│ • Additional fines and monitoring │
└─────────────────────────────────────────────────────┘
Mastercard Excessive Chargeback Program (ECP):
┌─────────────────────────────────────────────────────┐
│ Early Warning: │
│ • 0.65% chargeback ratio │
│ • 50 chargebacks per month │
│ • No fines, monitoring begins │
│ │
│ Standard: │
│ • 1.0% chargeback ratio │
│ • 100 chargebacks per month │
│ • Fines: Start at $1,000/month │
│ │
│ Excessive: │
│ • 1.5% chargeback ratio │
│ • 300 chargebacks per month │
│ • Fines: Up to $25,000/month │
│ • Mandatory remediation plan │
│ • Risk of termination │
└─────────────────────────────────────────────────────┘
CALCULATION:
Chargeback Ratio = (Chargebacks / Total Transactions) × 100%
Example:
• 10,000 transactions/month
• 95 chargebacks
• Ratio: (95 / 10,000) × 100% = 0.95%
• Status: Visa VDMP Standard threshold exceeded
MATCH List
Merchants terminated for excessive chargebacks are added to the MATCH list (Member Alert to Control High-risk merchants). Being on MATCH makes it nearly impossible to get a new merchant account for 5 years.
Platform/PayFac Chargeback Management
┌─────────────────────────────────────────────────────────────────┐
│ PAYFAC CHARGEBACK RESPONSIBILITIES │
├─────────────────────────────────────────────────────────────────┤
│ │
│ 1. FINANCIAL LIABILITY │
│ • PayFac is liable for sub-merchant chargebacks │
│ • Must maintain reserves to cover chargeback risk │
│ • Debit sub-merchant account or hold reserves │
│ │
│ 2. MONITORING & ALERTING │
│ • Track chargeback ratios per sub-merchant │
│ • Alert sub-merchants approaching thresholds │
│ • Escalate high-risk accounts │
│ │
│ 3. REPRESENTMENT SUPPORT │
│ • Provide tools for submitting evidence │
│ • Templates for compelling evidence │
│ • Auto-response for retrieval requests when possible │
│ │
│ 4. RISK MITIGATION │
│ • Identify high-chargeback verticals │
│ • Enhanced due diligence for risky merchants │
│ • Terminate merchants exceeding thresholds │
│ • Maintain overall chargeback ratio <0.75% │
│ │
│ 5. REPORTING & ANALYTICS │
│ • Chargeback dashboards for sub-merchants │
│ • Reason code trending │
│ • Win/loss rates by evidence type │
│ • Early warning alerts │
│ │
└─────────────────────────────────────────────────────────────────┘
Best Practices for Chargeback Prevention
Prevention Strategies
CHARGEBACK PREVENTION CHECKLIST
────────────────────────────────────────────
□ CLEAR BILLING DESCRIPTORS
• Use recognizable merchant name
• Include website or phone number
• Test how it appears on statements
□ EXCELLENT CUSTOMER SERVICE
• Easy refund process (better than chargebacks)
• Respond quickly to customer inquiries
• Proactive communication about delays
□ DELIVERY CONFIRMATION
• Always get signature for high-value items
• Use trackable shipping
• Photo proof of delivery
□ FRAUD PREVENTION
• AVS and CVV matching
• 3D Secure for CNP transactions
• Device fingerprinting
• Velocity checks
□ CLEAR POLICIES
• Return/refund policy on website and receipt
• Terms and conditions accepted at checkout
• Cancellation process for subscriptions
□ TRANSACTION ACCURACY
• Capture promptly after authorization
• Don't charge before shipping
• Correct amounts (no surprise fees)
□ DOCUMENTATION
• Save all transaction records (7 years recommended)
• Email confirmations with transaction details
• Customer communication logs
□ RETRIEVAL REQUEST RESPONSE
• Respond to ALL retrieval requests
• Within 24-48 hours
• Thorough documentation
See Also
- Failure Scenarios - Void vs refund vs chargeback
- Complete Transaction Example - Normal transaction flow
- Transaction Lifecycle Overview - Core concepts
References
- Visa Claims Resolution (VCR) - Official Visa dispute process
- Mastercard Chargeback Guide - Mastercard dispute procedures
- Visa Dispute Management Guidelines for Merchants (PDF) - Best practices and evidence requirements
- Verifi CDRN - Chargeback prevention network
- Ethoca Alerts - Pre-chargeback notification service