Chargeback Management
Last Updated: 2025-02-17 Status: Complete
Chargebacks are the payment industry's consumer protection mechanism—and a PayFac's greatest operational challenge. A single merchant with uncontrolled chargebacks can cost hundreds of thousands of dollars in losses, fees, and program penalties.
Quick Reference
| Metric | Target | Critical |
|---|---|---|
| Chargeback Ratio | < 0.5% | 1.0% |
| Response Time | < 24 hours | Before deadline |
| Win Rate (fraud) | 20-30% | Varies by code |
| Win Rate (service) | 40-60% | With evidence |
What is a Chargeback?
A chargeback is a forced reversal of a payment card transaction, initiated by the cardholder's issuing bank. Unlike a refund (which is merchant-initiated), a chargeback bypasses the merchant entirely and uses the card network's dispute resolution process.
Why Chargebacks Matter for PayFacs
| Factor | Impact |
|---|---|
| Financial Loss | Transaction amount + chargeback fee ($15-100) + operational cost |
| First-Line Liability | PayFac absorbs loss before sponsor bank |
| Ratio Monitoring | Exceeding 1% triggers network programs |
| Program Fines | $10,000-100,000+ monthly during monitoring |
| Termination Risk | Excessive chargebacks can end acquiring relationship |
Chargeback Lifecycle
The dispute process follows a defined path with strict timeframes:
Key Stages
- Initiation - Cardholder disputes transaction with issuing bank
- First Chargeback - Issuer creates chargeback, funds debited from merchant
- Representment - Merchant can submit evidence to dispute the chargeback
- Pre-Arbitration - Second review if representment is rejected
- Arbitration - Final decision by card network ($500+ filing fee)
Learn more: Chargeback Lifecycle
Reason Code Categories
Chargebacks are filed under specific reason codes that determine:
- Required evidence for representment
- Timeframes for response
- Win rate expectations
| Category | Visa Codes | Mastercard | Common Causes |
|---|---|---|---|
| Fraud | 10.x | 48xx | Unauthorized use, stolen cards |
| Authorization | 11.x | 48xx | Declined auth, expired card |
| Processing Errors | 12.x | 48xx | Duplicate, wrong amount |
| Consumer Disputes | 13.x | 48xx | Not received, not as described |
Learn more: Reason Codes Reference
Representment Strategy
Fighting chargebacks requires compelling evidence matched to the reason code:
| Reason Code Type | Key Evidence |
|---|---|
| Fraud (10.4/4837) | 3DS auth, AVS match, prior orders, IP/device |
| Not Received (13.1/4855) | Tracking, delivery confirmation, signed receipt |
| Not as Described (13.3/4853) | Product photos, description, return policy |
| Duplicate (12.6/4834) | Proof both charges are valid |
Learn more: Representment Guide
Chargeback Ratio Calculation
Networks calculate your chargeback ratio monthly:
Chargeback Ratio = Chargebacks in Month / Transactions in Month × 100
- 1% chargeback ratio = Program entry for most networks
- 100 chargebacks minimum = Usually required before ratio matters
- Both thresholds must typically be exceeded
Example Calculation
| Month | Transactions | Chargebacks | Ratio | Status |
|---|---|---|---|---|
| January | 10,000 | 80 | 0.8% | Safe |
| February | 10,000 | 110 | 1.1% | At Risk |
| March | 10,000 | 150 | 1.5% | Program Entry |
PayFac Chargeback Flow
As a PayFac, you're in the middle of the dispute process:
PayFac Responsibilities
- Receive & Route - Get chargebacks from acquirer, route to sub-merchant
- Time Management - Ensure responses within deadlines
- Evidence Review - Validate evidence before submission
- Financial Settlement - Debit sub-merchant, manage reserves
- Ratio Monitoring - Track aggregated and per-merchant ratios
- Remediation - Work with high-risk merchants or terminate
Section Contents
- Lifecycle - Detailed dispute flow with timeframes
- Reason Codes - Complete Visa/Mastercard reference
- Representment - Evidence requirements and strategy
- Quiz - Test your chargeback knowledge
Related Topics
- Network Monitoring Programs - What happens when ratios exceed thresholds
- Reserve Management - Using reserves to cover chargebacks
- Fraud Prevention - Preventing chargebacks at the source
Ecosystem Context:
- Four-Party Model - Why acquirers bear chargeback risk
- PayFac Position - PayFac first-line liability explained
Onboarding Context:
- Risk Factors - Chargeback prevention starts with proper underwriting
- Ongoing Monitoring - Continuous chargeback ratio monitoring