What To Do When Customers Force Refunds Through Their Banks

Customer disputes are a reality of accepting payments. But that doesn’t make them any less frustrating. Chargebacks are the result of a customer questioning or disputing a transaction with their issuing bank. The issuing bank collects evidence from the customer and categorizes the chargeback using the appropriate, card network-specific, reason code.

There are 151 chargeback reason codes across the four major card networks. The good news for those using Shopify Payments, the hundreds of reason codes and buckets them into eight distinct categories. For those not using Shopify Payments, you’ll see the same categories of reason codes instead represented in their original reason code format.

By understanding the reason code associated with the chargeback, you’re able to submit a response that includes the appropriate compelling evidence. In this post, we’ll review the categories of reason codes merchants will see most often, the specific reason codes associated with the category, and what compelling evidence to include to submit a response.

Fraudulent chargebacks

For most merchants, fraudulent chargebacks represent the bulk of customer disputes they see. Chargeback reason codes used to categorize fraudulent chargebacks include American Express reason code 193, Visa reason code 83, MasterCard reason code 4863, and Discover reason code 6040.

However, just because a chargeback is coded with a fraud or no authorization reason code does not mean true fraud has actually taken place. By verifying the customer IP address and investigating AVS or CVV failures, , you can effectively protect yourself from the bulk of this fraud.

Then why do fraudulent chargebacks still happen? Because the disputed transaction wasn’t actually fraudulent. In fact, true fraud accounts for just 29% of total fraud losses for ecommerce. The remaining 71% of losses come from chargeback fraud and friendly fraud. Fortunately, by submitting a response to chargebacks coded as fraud, you can win the chargeback and regain the transaction value.

What to include in the response

How you respond to fraudulent chargebacks hinges on the nature of your business and the circumstances of the transaction at-hand. If you obtained authorization from the cardholder and used AVS and CVV, then you should supply at least the following in your response:

• Copy of the transaction invoice or signed order form
• Proof of delivery
• If the cardholder collected merchandise from your physical storefront/location, include:
• Cardholder signature on the pick-up form
• Copy of identification presented by the cardholder
• Details of identification presented by the cardholder
• If the merchandise was delivered to the cardholder’s address, include:
• Evidence of delivery date at time
• Proof that the item was delivered to the same address for which an AVS match of “Y” (match address and 5 digit ZIP) or “M” (non-U.S. match)
• If the merchandise was delivered to the cardholder’s business address, include:
• Evidence that the merchandise was delivered
• Proof that the cardholder was working at the address at the time of delivery

Beyond the minimum required compelling evidence, you can (and should where applicable) also provide evidence in the form of photographs, emails, or otherwise that proves and/or displays:

• A connection/relationship between the order recipient and the cardholder; i.e. a member of the cardholder’s family authorized the transaction
• The cardholder disputing the transaction is in possession or using the merchandise
• The IP address, email address, physical address, and/or telephone number was used in a prior transaction that was not disputed

Merchants selling digital goods have a bit more compelling evidence to collect to respond to a chargeback categorized as fraudulent. The chargeback response needs to include a description of the merchandise downloaded, the date and time of download, and at least two of the following:

• IP address of purchaser at date and time of transaction
• Device geographical location at date and time of transaction
• Device ID number and device name
• Name and email address linked to the customer profile on-record
• Evidence that the customer profile was activated and verified by the cardholder before the date and time of transaction
• Evidence that the cardholder accessed/used the downloaded digital goods on or after the date and time of transaction
• Evidence that the same device and card were used in previous, undisputed transactions.

Unrecognized chargebacks

Unrecognized chargebacks are very similar to fraudulent chargebacks, in that the cardholder does not recognize a transaction on their statement. But in this case, the cardholder does not initially believe that their account information has been compromised. Chargebacks that occur due to unrecognized transactions are represented by numerous reason codes. Including, but not limited to: MasterCard reason code 4837, Discover reason code UA38, and Visa reason code 72. Chargebacks that occur due to a cardholder’s inability to recognize the merchant are nearly always the result of poor merchant descriptors.

If you use Shopify Payments, you’re in luck, setting a good merchant descriptor is simple. Payment service providers that aggregate and underwrite multiple services such as your gateway, processor and acquiring bank account, like Shopify Payments, Stripe or PayPal, will occupy some space in front of you on the descriptor so be as brief as possible without being confusing or cryptic. Shopify Payments cleverly only uses SP * reserving all but five characters for you.

For example, TruthPaste’s merchant descriptor is: SP * TRUTHPAST.COM 5303885883 CA 95959 US. Where truthpaste.com is the relevant URL and 530-388- 5883 is the contact phone number.

What to include in the response

With a clear merchant descriptor, you effectively prevent the majority of unrecognized-related chargebacks. But, for those that do still occur, you should treat unauthorized chargeback responses as you do chargebacks categorized as fraudulent. So, if you obtained authorization from the cardholder and used AVS and CVV, then you should supply the following:

• Copy of the transaction invoice or signed order form
• Proof of delivery (based on the method of delivery)
• If available, evidence of:
• A connection between the order recipient and the cardholder
• The cardholder disputing the transaction is using the merchandise
• The IP address, email address, physical address, and/or telephone number was used in a prior undisputed transaction

Subscription billing chargebacks

Subscription billing can prove to be wildly successful for merchants who execute recurring payments well. But even these merchants will see chargebacks related to subscription billing disputes. Here, the customer notified you of recurring payment cancellation, yet they continued to be charged in the following billing cycle.

If you’re a subscription billing merchant, there could be subscription billing related chargebacks that aren’t categorized under Shopify’s ‘Subscription Canceled’ umbrella. For example, customers might not recognize your merchant descriptor on their monthly statement. These chargebacks would come through as ‘Unrecognized’. Or, the customer’s credit card on record was expired or not yet valid when the recurring billing transaction occurred. Chargebacks representing this situation would likely appear as ‘General’.

What to include in the response

The contents of a subscription billing chargeback response depends on the unique circumstances of the transaction at hand. In some cases, a customer may have contacted you to cancel the subscription, but due to the terms in your subscription cancellation policy the cancellation would not go into effect until after the following billing cycle. This situation is represented by Visa reason code 41, MasterCard reason code 4841, American Express reason code 4544, or Discover reason code 4541. If the customer disputes this transaction, you need to provide:

• The subscription cancellation policy to which the customer agreed
• A description, usually a screenshot, of how the customer was shown your cancellation policy at the time of the transaction

In contrast, the situation could instead be one where the customer did not contact you to cancel their subscription. In this case, you need to supply documentation to prove that the subscription was not canceled and that you or your acquiring bank were not notified that the subscription billing was canceled. This documentation usually includes one of the following as compelling evidence to disprove the chargeback:

• A notification sent to the customer renewal or continuation of subscription
• Proof that the customer continued to use the product after claimed date of cancellation
• If digital goods were provided:
• Proof that the customer accessed the purchased digital goods after the date of claimed cancellation including:
• IP address
• Timestamps
• Server or activity logs

Product not received chargebacks

With product not received chargebacks, the customer did not receive the merchandise they purchased. Shipping is arguably the biggest challenge in ecommerce. Merchants that don’t have a solid shipping and fulfilment policy can expect to see this chargeback category very often.

Each card network has specific reason codes to represent customer disputes where the cardholder claims they never received the products or services: American Express reason code 155, Visa reason code 30, MasterCard reason code 4855, and Discover reason code 4755.

What to include in the response

Winning these chargeback requires evidence that proves the customer received the product, service, or digital goods before the date they disputed the transaction. But the evidence you provide all depends on what type of merchandise you provided to the customer.

• If physical merchandise was shipped, include:
• Tracking number
• Complete shipping address information
• Date of shipment prior to the dispute date
• Shipping carrier
• Proof the address delivered to matched the address provided by the customer
• If digital merchandise was provided, include:
• Proof that the customer accessed the purchased digital goods, including:
• IP address
• Timestamps
• Server or activity logs
• If transaction occurred digitally where an offline service was provided, include:
• Date of services
• Documentation showing the services were provided to the customer on the specified dates

Product unacceptable chargebacks

‘Product Unacceptable’ chargebacks means that the customer feels the merchandise they received either arrived damaged, was defective, or was not as described by the merchant at the time of the transaction. A customer can also deem merchandise unacceptable if they believe it to be of low quality, counterfeit, or if the terms of sale were misrepresented. These variety of disputes can be represented by American Express reason code C31, Visa reason code 53, MasterCard reason code 4853, or Discover reason code 4553, among others.

For honest merchants, this category of chargebacks is usually the result of poor product descriptions or strict return policies. Your product descriptions should be robust and include all relevant specifications. And, most importantly, the product descriptions should accurately describe the product sold.

These chargebacks can also occur from customers who attempted to make a legitimate return with you, which was denied because of your return policy. They subsequently dispute the purchase claiming the product to be unacceptable. Strict return policies typically do more harm than good, particularly when it comes to chargebacks. While a customer-centric return policy can preserve long-lasting customer relationships.

What to include in the response

In most cases of product issue-related chargebacks where the customer claims the merchandise was not as described, the following compelling evidence will make the best case to prove the dispute to be invalid:

• A rebuttal addressing the cardholder’s claims
• Documentation (product description screenshots, copy, etc.) proving the merchandise delivered matched what was described
• Documentation to prove the cardholder did not attempt to return the merchandise (if applicable)

In addition to the compelling evidence above, additional documentation needs to be provided based on the method of delivery:

• If physical merchandise was shipped, include:
• Tracking number
• Complete shipping address information
• Date of shipment prior to the dispute date
• Shipping carrier
• Proof the address delivered to matched the address provided by the customer
• If digital merchandise was provided, include:
• Proof that the customer accessed the purchased digital goods, including:
• IP address
• Timestamps
• Server or activity logs
• If transaction occurred digitally where an offline service was provided, include:
• Date of services
• Documentation showing the services were provided to the customer on the specified dates

Have you had to deal with credit card chargebacks in the past? Let us know in the comments!

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About The Author

Scott Stone is the CMO at Chargeback, the industry-leading chargeback prevention and management software solution. With over a decade in sales and marketing, Scott's focus is helping merchants of all sizes realize profitability and success.