Chargeback Disputes: What's the Difference Between Disputes & Chargebacks? How Does the Process Work?

Anyone can get a little lost when trying to understand banking terminology. There are literally hundreds of terms passing from one party to another every single day.

Some of them sound so similar, they might as well mean the same thing. In other cases, though, you might have two words that appear to mean the same thing, but are actually different. The words “chargeback” and “dispute” are an example of this.

The phrase “chargeback dispute” is a common misnomer. While it doesn’t generally cause problems, and although they are part of the same process, these two words mean different things.

In this article, we’re gonna clarify the situation for consumers and merchants, and give you a better picture of the dispute process.

A Brief Rundown on “Chargeback Disputes”

Since both terms are easy to confuse, let’s start by breaking them down, one by one.

Payment Dispute

A payment card dispute happens when a cardholder challenges a transaction on their card statement. They may claim the transaction amount is incorrect, for example, or that an order was never delivered. In some cases, the customer doesn’t remember the purchase at all.

Whatever the reason, the cardholder contacts the bank to “dispute” the legitimacy of the charge. A dispute is an action taken by a cardholder to challenge a transaction appearing on the cardholder’s statement.

Chargeback

In contrast, a chargeback is a forced payment reversal. It results from a payment card dispute and is carried out at the banking level.

The issuer investigates a charge, determines it is illegitimate, withdraws the transaction amount from the merchant’s account, and returns it to the cardholder. This happens with no input on the merchant’s part.

IMPORTANT!

The terminology is set by the different card networks, which also determine how and when they are used. Some institutions (likely those that are part of the Visa network) may use “dispute” exclusively, while others prefer to use only the term “chargeback.” Still, others use the two terms interchangeably.

To put it in simple terms: most chargebacks start with a customer dispute, but not every customer dispute results in a chargeback. A dispute is an action, while a chargeback is a process. It could be fair to consider a dispute as the first stage in the chargeback process.

What is This “Dispute-to-Chargeback” Process?

Once a customer decides to challenge a charge on their credit card statement, the dispute process is initiated. At this stage, action has been taken by the cardholder to undo a charge. If the bank agrees with the cardholder regarding the disputed transaction, the dispute will be elevated to the chargeback stage.

Dispute Stage

Step #1 | Initial Dispute

The cardholder identifies an invalid charge. This could be a fraudulent charge, or one for which the promised goods or services were not provided. The cardholder challenges the transaction by contacting their issuing bank.

Step #2 | Provisional Refund

A conditional refund is issued by the bank to the cardholder.

Chargeback Stage

Step #3 | Chargeback Initiated

The bank files a chargeback in response to the customer dispute. The issuing bank sends a message to recoup their funds from the merchant’s acquirer. They also assign a numeric reason code for the chargeback, then electronically transmits all the chargeback information to the acquirer.

Step #4 | Merchant Chargeback Notification

The acquirer receives the chargeback notification and forwards it to the merchant. The acquirer will also debit the disputed amount, plus fees, from their merchant’s account. The merchant also receives a chargeback advice letter, instructing them on how to proceed, and may get a merchant advice code as well, in some cases. .

At this point, the merchant has the option to do one of two things. First, they can agree with the cardholder’s claim and accept the chargeback. But, if the merchant believes the chargeback was an error, or that the cardholder made an invalid claim, they can fight it through the representment process.

Learn more about chargeback representment

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Valid Reasons for a Chargeback Dispute

Okay, but what makes a chargeback dispute claim “valid” or “invalid?”

The simple answer to this question is intention. If a cardholder has a legitimate reason to file a dispute with their credit card company, and they have the evidence to prove it, then their dispute is valid.

There are two fundamental, valid reasons to dispute a charge:

Criminal Fraud

Any unauthorized use of a cardholder’s payment details by a third party is considered an act of fraud. Examples of criminal fraud tactics include account takeover, “clean” fraud, and new account fraud, just to name a few.

Cardholders are generally insulated against liability from most acts of criminal fraud. When an unauthorized purchase is discovered, they should first contact merchant to verify that it was not a valid charge. If the merchant won’t refund the purchase, the cardholder may call the bank to have the charge reversed. The cardholder should also report the incident to the FTC.

Merchant Errors or Abuse

Merchant errors include any problems with authorization, processing, or fulfillment that result from merchant activity. Essentially, if a merchant makes a mistake during the order, fulfillment or shipping processes, the cardholder can file a dispute. Valid reasons can include incorrect or inaccurate billing details, amounts, product descriptions, or items.

Merchant abuse is a bit harder to prove. However, to prove a merchant failed to uphold their end of the bargain, a cardholder will likely be expected to provide evidence. Examples of valid claims include:

Items which do not match their description
Charges for items which the cardholder didn’t order
Items which never arrived
The merchant didn’t provide a refund in a timely fashion

Invalid Reasons for a Chargeback Dispute

Conversely, there are many reasons a cardholder should not dispute a transaction. These include:

Convenience
Refund took too long
Forgetting about the purchase
Forgetting about a recurring payment
Not recognizing the merchant’s billing descriptor

Buyer’s remorse
Waiting too long to file a refund
Confusing chargebacks with refunds
A household member made a purchase without permission

Cardholders should never bypass a merchant for a forced bank refund. The law allows consumers to dispute charges when the merchant has made a legitimate error or has failed to uphold their end of a transaction. This does not include items which consumers simply don’t like, or which they decide are unneeded, though.

Merchants: take the first step today to prevent chargebacks and recover revenue.

How to Win a Chargeback Dispute: Cardholders

As a cardholder, the best approach to take here will depend on the claim being made.

Keep in mind, the merchant has the option to provide evidence that may invalidate the cardholder’s claim. In these cases, the issuing bank may reverse the provisional credit and return the funds to the merchant, thereby negating the attempted refund. If the cardholder’s claim is valid, however, and a merchant doesn’t attempt to reverse it, the issuing bank will file the dispute as normal.

Cardholders should ensure that they have their facts in order before calling the bank, and that they have documentation handy to support their claim. They should also pay attention to chargeback time limits; cardholders often have 120 days to dispute a charge, but this can vary substantially depending on the claim.

Learn how to dispute a charge

How to Win a Chargeback Dispute: Merchants

For merchants, the dispute and chargeback processes are slightly more complex. They are only allowed to challenge illegitimate chargebacks (cases of so-called “friendly fraud”). Often, friendly fraud can be the result of a misunderstanding of the merchant’s policies on behalf of the cardholder, or can be purely intentional.

Also, the merchant must be able to provide evidence that the cardholder’s claims are invalid.

This evidence must be submitted in a formalized manner, along with a rebuttal letter. Some of this information will be outlined in the acquirer’s chargeback advice letter, instructing sellers how to respond. Merchants are on a very tight timeframe for submitting a response, though; often less than a week.

Learn how to fight chargebacks

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5 Tips to Help Prevent Chargeback Dispute Claims

It costs merchants time and money to fight chargebacks, and there are no guarantees that the merchant will win. So, here are a few tactics merchants can employ now to prevent disputes and chargebacks later:

Clear Up Billing Errors

Prominently displaying information like email address, website, and phone number encourages customers to reach out to merchants (not their banks).

Simplify Returns

Including no-hassle returns, extended refund deadlines, postage-paid returns, and so on, can drastically improve customer relations and satisfaction.

Provide 24/7 Customer Support

Banks have made dispute forms available to customers online, 24 hours a day. Merchants should do the same to avoid missing the chance to resolve a dispute in advance of a chargeback.

Keep Customers Informed

Always alert customers when goods have been shipped. Also, provide notifications, as well as a cancellation option, if they have been back-ordered or delayed.

Send Billing Alerts

Customers should be notified before a recurring transaction is processed, especially with a subscription or a negative-option arrangement.

Disputes and chargebacks are complex issues. Neither has a “one-size-fits-all” solution.

Frankly, what works for some merchants may not work for others. This is why it’s imperative to not only have a fraud and chargeback prevention plan in place, but also to diversify those options as much as possible.

With the industry’s first and only full-service chargeback management solution, Chargebacks911® is uniquely qualified to can help merchants prevent chargebacks, recover revenue, and grow their businesses. Contact us today to learn about our no-obligation ROI analysis.

Chargeback DisputesWhat’s the Difference Between a Chargeback & a Dispute? What’s the Process for Each?

In a Nutshell

Chargeback Disputes: What's the Difference Between Disputes & Chargebacks? How Does the Process Work?

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