Evaluation Of Chargeback In Payment Transactions By Payment Service Providers

 Evaluation Of Chargeback In Payment Transactions By Payment Service Providers

Buying and selling have evolved with technological evolution and adaptation of commerce. Goods and services can be purchased willing consumers from the comfort of their home, all that is required is a valid debit/ credit card issued by an authorized issuing Bank.

However, it exposed both buyers and sellers to different challenges involving none delivery for the value of goods and services paid for, fraud, reception of substandard goods/ services, etc. Through a process of filling Chargeback, a cardholder can get a refund.


A chargeback payment process is defined as “a charge that is returned to a payment card after a customer successfully disputes an item on their account statement or transaction report. A chargeback may occur on debit cards (and the underlying bank account) or on credit cards”.

How does the chargeback process work?

Chargeback process occurs when a customer of a merchant demands a refund for payments made for the purchase of goods or refunds for payments made for the value of services not rendered. A chargeback can either be instituted by the Customer/ Cardholder or its bank (issuing Bank/ Issuer)

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Chargeback disputes are inevitable occurrences associated with the execution of payment transactions, including credit transfers and direct debits, issuing or acquiring payment instruments, money remittances, foreign exchange services, and similar services. The timeline provided for disputing a chargeback slightly varies as seen in both Mastercard and VISA Guidelines for Chargeback/ Dispute Management.


During a chargeback dispute, the following parties are involved:

• The Card Scheme I.e.Visa or MasterCard: Payment networks for credit and debit payment cards.

• An issuing bank (also called an issuer): This refers to the cardholder's bank which oversees the payment to the merchant's bank which is the Acquiring Bank or Acquirer for the goods and services the consumer purchases.

• Acquiring Bank: This refers to the bank that processes payment credit or debit cards on behalf of a merchant.

• Payment Facilitator (PF): Refers to a merchant service provider that simplifies the merchant account enrollment process

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How to win a chargeback as a consumer

Disputed Chargebacks are usually resolved through the process called “Arbitration”. Arbitration can be defined as a process whereby the Card Schemes are involved in the settlement of the Chargeback dispute between the Acquiring Banks (individually) or through a Payment Facilitator and the Issuing Bank. The measures for settlement of chargeback disputes are enshrined in the Mastercard and VISA Guidelines for Chargeback/ Dispute Management.


The arbitration process originates when a customer or an Issuing Bank raises a claim to the Acquiring Bank, the Acquirer either personally or through the Payment Facilitator informs the Merchant of the Chargeback claim.

The Merchant on the reception of the claim can either accept or contest the chargeback. The merchant sometimes accepts it when it is evident that the goods purchased by the cardholder did not get to the customer or in most cases lost in transit during delivery. The Chargeback on the other hand many be rejected/ contested when the merchant possesses an Evidence of Service Delivery (ESD) of the goods/ service to the cardholder usually an invoice, delivery receipt, or confirmation email.

To contest the chargeback, the merchant sends the ESD to the Acquiring bank or the Payment Facilitator for transmission to the Acquirer as evidence and refusal of the said chargeback. The Acquirer thereby sends the ESD to the Cardholder/ Customers Bank i.e. the issuing Bank for review. According to VISA guidelines, the issuing banks have 30 days to review the ESD to determine its validity. The Issuing Bank may rule in favor of the card owner, Merchant, or file a second Chargeback, please note that this is not applicable to VISA transactions.

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The Banks are often deterred from undertaking this process because of the huge fees involved, most especially when the settlement disputed is a negligible sum. In this stage, the Card Scheme stands as an impartial adjudicator whose decision the parties to the dispute must adhere to. After pre-arbitration, either the Acquiring Bank or the Issuing Bank can request from the Card Scheme for Arbitration. The Banks passes all the evidence collected to the relevant Card network for review and vetting.

The Card Scheme after about 10-50 days, reverts to the Banks a final decision on the chargeback dispute. The losing bank is liable to pay the charged fees however, in practice, the Acquirer covenants with the Merchant to bear the liability of the arbitration and for all fees incurred.

The effect of the decision of the Card Scheme may either be as follows:

• The Chargeback stands if the issuing Bank wins and the funds previously credited during pre-arbitration becomes permanent.

• Money is returned to the Acquirer if the Merchant wins and the Issuing Bank forwards the charge to the Cardholder.


Although it is admirable that the Card Schemes, through this Arbitration process seeks to resolve the Chargeback disputes occasioned by Cardholders or their issuing Banks, in anticipation of a fair and less turbulent outcome, it is notable that the resolution is usually fraught with many challenges as its simplicity negates the need for proper scrutiny and critical investigation of the facts of the dispute.

Furthermore, the outcome of this Arbitration process is final and there is no formal appeal process available. even if any party feels that the outcome was unjustified or biased, they cannot appeal it. The level of confidentiality involved in this arbitration cases appears to be detrimental to the parties because there is seemingly lack of transparency by virtue of the fact that the decision is solely hinged on the credibility and plausibility of mere transactional documents presented by the disputing banks without taking into cognizance that most documents (ESD) sometimes, fail to reflect adequately a comprehensive transactional record when it deals with some services rendered and on face-value, may not be convincing enough to convince the Card Scheme (Arbitrator).

Also, because of the wide timeframe open for filling Chargebacks by cardholders for different transactions (6 months for low-risk merchants and 540 days for High-risk merchants), vital documents to prove delivery may be lost or destroyed, hence the merchant becomes unable to prove delivery. Card Schemes should consider the inclusion of more stringent methods of scrutinizing.

In order to curtain chargeback fraud committed by some cardholders, strategic steps should be implemented by Card Schemes by the incorporation of more alerts and different fraud curtailing programs to prevent the merchant from being held accountable regardless of whatever measures they took to verify the transaction.
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