Chargeback Process and Payment Facilitators

How the Chargeback Process Impacts Payment Facilitators

Behind most payment transactions is a simple interaction: a cardholder will find a good or a service they like from a merchant and decide to purchase it. They get what they’re looking for, the merchant gets paid for it, and everyone is happy.

But there are times when the completed sale is not the end of the story. A cardholder might ask the merchant for a refund. Or they might initiate a chargeback, disputing the charge with their issuing bank.

There are a number of reasons a cardholder might dispute a charge. They may allege fraud, saying that they did not authorize the transaction in the first place. Or they might decide the product or service wasn’t what they were expecting or that the merchant has not satisfactorily responded to a complaint.

Whatever the reason for the dispute, when a customer initiates a chargeback, they get their money back from their issuing bank. The transaction is reversed, with the issuer sending the chargeback through the card network back to the acquirer. The acquirer may then investigate, asking the merchant for details and documentation about the transaction to help determine the validity of the complaint.

The merchant is expected to cover the funds that are refunded to the cardholder. If for some reason the merchant does not or is not able to do so, the acquirer will then be liable.

Acquirers pass this responsibility on to PFs in their contracts. So, in cases where a payment facilitator is the one enabling the merchant to accept payments and the money is not recovered from the merchant, PFs will be liable.

Chargebacks affect payment facilitator processes in several ways.

Documentation. The PF will manage the chargeback process along with the acquirer, so they will need to be able to respond to any requests for documentation about the transaction. This requires the PF to have procedures in place to manage the type of information they would need to produce in case of a chargeback.

Underwriting. Because the PF is contractually liable for chargebacks, it’s in their best interests to guard against them. This requires robust risk and fraud mitigation processes and policies. During the underwriting process, PFs will want to screen applicants to weed out fraudulent merchants and those who otherwise have a risk of generating excessive chargebacks.

Ongoing risk mitigation. If a merchant passes through underwriting and is ultimately onboarded, PFs will still need to continue to take steps to protect themselves. This means having strong transaction monitoring processes to watch for suspicious activity. It can also mean starting merchants out with low processing limits.

PFs need to prepare for the likelihood of chargebacks by having the appropriate processes in place. While no PF will never fully eliminate chargebacks, the risk can be minimized with appropriate policies that balance robust fraud protection with the user experience.