Different Types of Chargebacks

Online merchants know that chargebacks can be a major challenge, both to their bottom line and even to their ability to continue accepting credit card payments for purchases. What they don’t always have a full understanding of, though, is that there are many different types of chargebacks. In fact, the four main credit card networks (Visa, Mastercard, American Express, and Discover) have over 100 different reason codes they choose from in assessing the reason for a chargeback. 

While it’s the card networks that determine the reason for the chargeback, it’s ultimately up to the payment processor to decide how to deal with the merchant account in question. The general rule is that merchants can have 1% of their transactions be chargebacks before an account is flagged; depending on the type of business, their average number of transactions, refund rate, and many other factors, that threshold can truly be daunting. Once the 1% limit is reached, many processors will close the merchant account – sometimes without notice. 

It’s because of this threshold, and the fact that your future online selling presence hangs in the balance, that the choice of a payment processor necessarily means an evaluation of the way they handle chargebacks. To this end, make sure you look for a processor who considers the type of chargeback rather than the simplistic approach taken by processors who don’t see anything beyond the 1% limit. 

What are the different categories of chargebacks?

To get a better sense of how a processor might handle the different types of chargeback, it’s helpful to look at those types and how credit card networks separate them. The numerous reason codes can vary slightly depending on the card network, but they are typically grouped into a series of categories that are generally similar across all cards:  

  • Authorization errors: this is any kind of transaction where there was an issue related to authorization. Some examples include not having the required authorization or being charged for an amount greater than what was authorized.   
  • Consumer disputes: this is when the consumer had some problem with the products or services they purchased or even the merchant in question.   
  • Processing errors: these errors are related to any mistake in the processing of a transaction, such as an overcharge or an incorrect account number, for example. 
  • Fraud: this category encompasses anything that can be classified as fraud, including situations when the consumer believes their card or identity were stolen.  

Fraud is, unfortunately, one of the most common reasons why a chargeback is initiated, and there are a variety of ways that it can happen. From the merchant’s perspective, though, one of the most insidious forms of fraud is called “friendly fraud,” a dubious term that refers to scenarios where consumers dispute a perfectly legitimate transaction because they may have forgotten or in order to get a refund. Some have estimated that 28% of online revenue is lost because of friendly fraud, and it has become a huge burden for online merchants. This is particularly true for those who have a business model with hard-to-prove completed transactions, like with digital products or services. 

These are the kinds of nuances that affect e-commerce businesses on a regular basis, and your payment processor should be taking them into account when evaluating a merchant account in light of a high chargeback rate. Unfortunately, many payment processors have a very binary approach to chargebacks: under 1% and you’re safe, over 1% and you’re out. The primary reason they operate in this way is that it’s cheaper for them to cut a merchant loose than to do a more detailed investigation. This also speaks to them having a hands-off business philosophy that treats every merchant the same way.  

PayCafe’s approach to chargebacks 

PayCafe, by contrast, understands that businesses all function differently and have different needs. Moreover, the circumstances surrounding chargebacks can also be different depending on the type of business and a particular customer. PayCafe is vigilant about providing robust chargeback defense so that instances of chargebacks become increasingly rare. But when they are initiated, PayCafe will investigate the specifics of the transaction to determine what kind of chargeback it is and how best to proceed. 

For PayCafe, it starts with a relationship; they will take the time to get to know your business and develop a tailored strategy based on what kind of business you are, even if you are considered high risk in the payment processing industry. From there, the payment processing strategy is about reducing risk and the related risk of getting chargebacks. With tools like integrated chargeback alerts, you’ll be able to head off chargebacks before they even happen by getting notified as soon as a customer attempts to dispute a charge. 

When chargebacks do get initiated, PayCafe will investigate the circumstances. Are there many from the same customer? What was the reason for the chargeback? Was it a stolen card? Were there any other factors in the mix? For PayCafe, it isn’t just a question of the 1% chargeback limit, it’s about working with you to find a solution so that you can keep your merchant account if at all possible.