Chargeback Management Quiz
Last Updated: 2025-02-17 Status: Complete
Test your understanding of chargeback management with these self-assessment questions.
Fundamentals
Question 1: Refund vs. Chargeback
What is the difference between a refund and a chargeback? Why does this distinction matter financially?
View Answer
Refund:
- Initiated by the merchant
- Merchant controls the process
- Only the transaction amount is returned
- No additional fees
Chargeback:
- Initiated by the cardholder through their issuing bank
- Merchant has no control over initiation
- Transaction amount is forcibly reversed
- Includes chargeback fee ($15-100)
- Counts against merchant's chargeback ratio
- May trigger monitoring programs
Financial Impact: A chargeback costs significantly more than a refund due to:
- Chargeback fee
- Operational cost of representment
- Potential monitoring program fines
- Long-term ratio impact
Best Practice: Process refunds proactively to avoid chargebacks when customer complaints are valid.
Question 2: Chargeback Ratio Calculation
A merchant has 10,000 transactions and 120 chargebacks in a month. What is the chargeback ratio? Is this acceptable?
View Answer
Calculation:
Chargeback Ratio = 120 / 10,000 × 100 = 1.2%
Assessment: This ratio is NOT acceptable. It exceeds the 1% threshold for both Visa and Mastercard monitoring programs.
Consequences:
- Entry into VDMP (Visa Dispute Monitoring Program) or ECP (Mastercard Excessive Chargeback Program)
- Monthly fines ($10,000+)
- Required remediation plan
- Risk of termination if not improved
Action Required:
- Immediate investigation of chargeback causes
- Implement fraud prevention measures
- Review merchant communications and policies
- Consider reserve increase
Question 3: Representment Decision
What is representment, and what determines whether it's worth pursuing?
View Answer
Representment Definition: Representment is the process of disputing a chargeback by submitting compelling evidence that proves the original transaction was valid.
Factors Determining Worth:
| Factor | Represent | Accept |
|---|---|---|
| Transaction Value | > $25 | < $25 |
| Evidence Available | Strong | Weak/None |
| Win Probability | > 40% | < 30% |
| Reason Code | Service/Auth | True Fraud |
| Operational Capacity | Available | Overwhelmed |
Cost-Benefit Analysis:
- Operational cost: $15-50 per representment
- Only pursue if expected recovery > cost
- Consider ratio impact (won chargebacks don't count)
Decision Framework:
- High value + strong evidence = Always represent
- Low value + weak evidence = Always accept
- Medium cases = Evaluate case-by-case
Evidence and Reason Codes
Question 4: Not Received Evidence
A cardholder claims they never received merchandise (Visa 13.1). What evidence could successfully dispute this chargeback?
View Answer
Compelling Evidence for Non-Receipt:
| Evidence Type | Strength |
|---|---|
| Delivery confirmation with signature | Very Strong |
| Photo proof at delivery location | Very Strong |
| GPS coordinates matching billing address | Strong |
| Tracking showing "Delivered" status | Strong |
| Delivery notification email | Medium |
Evidence Package Should Include:
- Carrier tracking number
- Full tracking history showing delivery
- Delivery confirmation/signature (if available)
- GPS coordinates of delivery
- Photo proof (if carrier provides)
- Delivery notification sent to customer
Win Rate: 40-60% with strong evidence
If No Delivery Proof:
- Accept the chargeback
- Require signature confirmation for future high-value orders
- Consider shipping insurance
Question 5: Fraud Chargeback with 3DS
A merchant uses 3D Secure for all transactions. A customer files a fraud chargeback (Visa 10.4). How should this be handled?
View Answer
3D Secure Liability Shift: When a transaction is authenticated via 3D Secure:
- Liability shifts from merchant to issuer
- Fraud chargebacks should be represented with 3DS proof
Evidence to Submit:
- 3DS authentication result (ECI indicator)
- 3DS transaction ID
- Authentication timestamp
- Device fingerprint (if captured)
- AVS/CVV responses
Expected Outcome:
- With valid 3DS authentication, chargeback should be reversed
- Win rate: 70-85% for properly authenticated transactions
Key ECI Values:
- ECI 05 (Visa) / ECI 02 (MC): Fully authenticated - Strong liability shift
- ECI 06 (Visa) / ECI 01 (MC): Attempted auth - Partial protection
- ECI 07 (Visa) / ECI 00 (MC): Not authenticated - No protection
Action: Always submit 3DS proof for fraud chargebacks on authenticated transactions.
Question 6: Reason Code Mapping
Map these Visa reason codes to their Mastercard equivalents:
- Visa 10.4
- Visa 13.1
- Visa 12.6
View Answer
| Visa Code | Description | Mastercard Equivalent |
|---|---|---|
| 10.4 | Other Fraud - Card-Not-Present | 4837 (No Cardholder Authorization) |
| 13.1 | Merchandise/Services Not Received | 4855 (Goods or Services Not Provided) |
| 12.6 | Duplicate Processing | 4834 (Duplicate Processing) |
Why This Matters:
- Multi-processor environments need consistent handling
- Evidence requirements are similar across networks
- Reporting should normalize codes for analysis
Scenario Questions
Question 7: High-Risk Merchant
Scenario: A merchant's chargeback ratio jumps from 0.5% to 1.5% in one month. Most are reason code 10.4 (fraud). What immediate actions should be taken? What's the risk if nothing is done?
View Answer
Immediate Actions:
-
Investigate Root Cause
- Review recent fraud chargebacks for patterns
- Check for card testing activity
- Analyze geographic and device patterns
-
Implement Fraud Controls
- Enable 3D Secure for all transactions
- Tighten AVS/CVV requirements
- Implement velocity limits
- Add device fingerprinting
-
Reserve Adjustment
- Increase reserve percentage
- Consider rolling reserve to cover chargebacks
-
Communication
- Notify sponsor bank (may be required)
- Prepare remediation plan
Risk If Nothing Done:
| Timeline | Consequence |
|---|---|
| Month 1-2 | VDMP/ECP entry, $10K+ monthly fines |
| Month 3-4 | Escalating fines, remediation required |
| Month 5-6 | Higher fines ($50K+), termination warning |
| Month 7+ | MATCH listing, account termination |
Long-Term Impact:
- MATCH listing prevents processing for 5 years
- Reputation damage
- Sponsor bank relationship harm
Question 8: Empty Box Claim
Scenario: A merchant claims they shipped merchandise and provides a tracking number, but the customer disputes claiming it was an empty box. How should this chargeback be handled?
View Answer
Challenge: "Empty box" claims are difficult because:
- Delivery was confirmed (merchant has proof)
- Contents cannot be verified after the fact
- He-said-she-said situation
Evidence to Gather:
- Tracking confirmation showing delivery
- Package weight from carrier records
- Packing slip/invoice
- Warehouse CCTV (if available)
- Photos of packed item (if taken)
- Customer communication history
Representment Strategy:
- Submit delivery proof
- Show package weight matches expected weight
- Include order details and packing process
- Reference customer's order history
Realistic Outcome:
- Win rate: 20-35% (challenging to prove contents)
- Better with weight verification or packing photos
Prevention for Future:
- Video record packing of high-value items
- Use tamper-evident packaging
- Require signature delivery for expensive items
- Note package weight on shipping labels
Question 9: Monitoring Program Entry
What happens when a PayFac enters the Visa Dispute Monitoring Program (VDMP)? What are the consequences of not improving?
View Answer
VDMP Entry: Triggered when:
- Chargeback ratio ≥ 1.0% AND
- Chargeback count ≥ 100
Program Stages:
| Stage | Duration | Fines | Requirements |
|---|---|---|---|
| Early Warning | 1-4 months | None | Monitoring only |
| Standard | Months 5-9 | $50/chargeback | Remediation plan |
| Excessive | Months 10+ | $100/chargeback + $25K monthly | Aggressive remediation |
Consequences of Not Improving:
| Timeline | Action |
|---|---|
| Month 4-5 | Fines begin, sponsor bank notified |
| Month 9-10 | Escalated fines, termination warning |
| Month 12+ | Potential MATCH listing |
| Final | Account termination, 5-year industry blacklist |
Required Actions:
- Identify and terminate high-risk sub-merchants
- Implement enhanced fraud controls
- Improve customer service to reduce disputes
- Increase reserves on remaining portfolio
- Report progress to sponsor bank monthly
Advanced Questions
Question 10: Representment ROI
A PayFac receives 500 chargebacks monthly with an average transaction value of $200. Current win rate is 30%. The operations team costs $50/hour and can process 10 representments per hour. Calculate:
- a) Monthly chargebacks worth representing (transaction value > $50)
- b) Expected monthly recovery
- c) Monthly operational cost
- d) Net ROI of representment program
View Answer
Assumptions:
- Total chargebacks: 500/month
- Average value: $200
- Win rate: 30%
- Staff cost: $50/hour
- Throughput: 10/hour
a) Chargebacks Worth Representing: Assuming 80% have value > $50:
500 × 0.80 = 400 chargebacks/month
b) Expected Monthly Recovery:
400 representments × 30% win rate × $200 average = $24,000
c) Monthly Operational Cost:
400 representments ÷ 10/hour = 40 hours
40 hours × $50/hour = $2,000
d) Net ROI:
Recovery: $24,000
Cost: $2,000
Net Gain: $22,000
ROI = ($22,000 / $2,000) × 100 = 1,100%
Additional Benefits Not Quantified:
- Won chargebacks don't count against ratio
- Reduced monitoring program risk
- Lower future fines
Optimization Opportunities:
- Improve win rate through better evidence gathering
- Automate evidence collection to reduce cost
- Focus on high-value, high-probability cases
Summary
After completing this quiz, you should understand:
- The difference between refunds and chargebacks
- How to calculate and interpret chargeback ratios
- When to represent vs. accept chargebacks
- Evidence requirements for different reason codes
- Monitoring program triggers and consequences
- ROI calculation for representment programs
Related Topics
- Chargeback Lifecycle - Detailed process flow
- Reason Codes - Complete reference
- Representment - Building winning cases
- Network Programs - VDMP, ECP details