What is a Bank Chargeback?
The card-issuing bank initiates a bank chargeback. It is similar to a traditional chargeback but is initiated by the issuing bank and not by the customer. This typically happens when the issuer finds an anomaly with a specific transaction. It can be due to an inconsistency or an incorrect piece of data that concerns the bank.
Chargebacks can be costly for merchants, as they may lose revenue from the reversed transaction and may also be charged a fee by their bank or credit card company for the chargeback. Additionally, too many chargebacks may lead to a merchant’s account being suspended or terminated by their bank or credit card company. Learning the different types of chargebacks and how to mitigate them is a valuable lesson for all business owners.
Bank Chargebacks vs. Regular Chargebacks
As mentioned, a bank chargeback is initiated by the bank, rather than the cardholder. When the bank creates a chargeback, it can often go unnoticed by both the buyer and the seller. In many cases, it can be resolved between the issuing and acquiring banks. While this seems convenient, it’s a disadvantage to merchants. When it happens this way, you generally don’t have the opportunity to fight back, provide documentation, or save the sale.
Conversely, a regular chargeback is initiated by the cardholder. Customer often initiates chargebacks when they believe that a charge was made in error, was fraudulent, or if they didn’t receive the goods or services that they paid for. When a chargeback is initiated, the bank or credit card company will investigate the dispute and may refund the customer’s money if they find the charge fraudulent or an error was made. The bank or credit card company will then attempt to recover the funds from your merchant account. In this case, you generally have time to respond and provide proof that the transaction was valid.
What Causes Bank Chargebacks?
The bank initiates a bank chargeback which can happen for various reasons. Here are a few examples:
Fraudulent transaction: If the bank or payment processor detects a transaction is fraudulent, they may initiate a chargeback on behalf of the cardholder. For example, if the cardholder’s card was used for a transaction in a foreign country while they were still in their home country, this could trigger a fraud alert and result in a chargeback.
Technical issue: Sometimes, a technical problem can cause a payment to be processed multiple times, resulting in duplicate charges. In such cases, the bank or payment processor may initiate a chargeback to reverse the duplicate charges. The issuing bank can do this without the knowledge of the cardholder. Sometimes, the situation is handled before the buyer or seller even knows it happened.
Expired card or account: The transaction will not be processed if a customer’s bank account or card is expired. The issuing bank will stop the transaction in progress.
Incorrect or mismatched account numbers: When the account number on the authorization doesn’t match the card number on file with the issuer, the transaction will be declined or reversed.
Incorrect or mismatched amounts: Just like an account number, the issuer may initiate a chargeback if the part of the transaction you processed does not match the amount on the receipt. An excellent example is at a restaurant where the customer leaves a tip on the bill, and the server or manager enters the wrong amount when they close the check-in system. This is likely to be reversed by the bank.
Declined authorization or no authorization: when you process card payments, you receive an authorization or decline. If you receive a declined authorization and choose to process the transaction anyway using a hold, the bank will likely cancel it. The bank will cancel the transaction if you do not get the appropriate authorization before running the card.
Multiple authorization requests: If you try to authorize a card multiple times and receive declinations, you may try to process the transaction differently. However, this will often result in a bank chargeback, as well.
Delayed presentment: every transaction has a specific date on which it must be presented and settled. If you miss that date, the issuing bank will likely cancel or reverse the transaction. For a Visa card, it is reason code 12.1. For MasterCard, it’s reason code 4834. Each issuer will have its deadline and reason code.
Merchant’s account is terminated: If the payment processor or bank terminates a merchant’s account, any transactions that are still pending may be canceled, and the funds may be returned to the cardholders through a chargeback. The merchant is generally aware of the situation, but the cardholder may not be privy to that information.
In summary, a chargeback initiated by the bank or payment processor is usually done in cases where the bank or payment processor identifies an issue with the transaction that may have gone unnoticed by the cardholder. It can be frustrating for merchants, but there are steps you can take to decrease bank chargebacks in your business.
How to Dispute Bank Chargebacks
Bank chargebacks are more difficult to dispute and fight than disputes stemming from customer problems. Customer dispute can be contested if there are grounds to show it is invalid, allowing for challenges to be performed through a representment. A reversal of a representment, winning the dispute, can allow merchants to recover some of the funds in question, but all fees surrounding the chargeback process would remain.
Reversals of bank chargebacks are different. Besides a technical fault, it is rare that a bank chargeback is reversed. Overturning a chargeback would require the issuing bank to recognize the mistake and reverse its original decision. It is not uncommon for the option to challenge a chargeback to be unavailable.
It is best for merchants to go great distances to avoid bank chargebacks. Since most bank chargebacks are a result of a merchant mistake, nearly every potential bank chargeback instance is avoidable.
How to Prevent Bank Chargebacks
Being detail-oriented is one of the best ways to avoid bank chargebacks in your business. While the minute details aren’t exciting and sometimes go unnoticed, they can hurt your bottom line. Here are some things you can do to decrease your risk.
- Request authorization for every purchase, no matter what
- Do not attempt to bypass a card that has been declined
- Adhere to the policies and procedures set forth by the card network and your payment processor
- Be a good merchant by building a relationship with your customers and processing refunds and credits promptly
- Ship goods promptly after the order is placed, and communicate with your customers about shipping timelines, delays, and tracking
- Ship the order to the customer before presenting the sale for settlement
- Present receipts and sales for payment within five days of the transaction date
Take the time to examine your current processes to find areas to improve. The more diligent you are in these areas, the better your results will be. Since the details are an essential part of the process, train your team on what must be done daily to protect your business from bank chargebacks.
