As an online merchant, it's very important to understand where the burden of financial responsibility lies with regards to accepting credit card payment online.  This article is not a rant nor is it a bitter documentary of lost chargeback disputes.  The purpose of this document is to clearly explain how you, the online merchant, will be left holding the financial "bag" with all chargebacks that are demanded against your merchant account.

Anatomy of a Chargeback

First, let's review all the parties involved with a chargeback.  Once we know everyone involved, we'll get into exactly how each of these parties is involved in the chargeback process.  Every chargeback involves the following entities:

  1. Cardholder:  Person to whom the credit card was issued.  For this article, we'll call him John Doe.
  2. Issuing Bank:  The financial institution that issued the card to the cardholder.  Examples include Chase Bank, Wachovia and even your local bank.
  3. Processor:  Also a financial institute but not necessarily a bank with retail outlets.  Some processors are "commercial banking" facilities that do not operate "public" banking facilities.  The processor can also be the same bank you already do business with.  Regardless, the processor is just a middle man pushing financial transactions back and forth between your bank and the issuing bank.  They follow a very specific set of rules and rarely deviate from these rules.
  4. Online Merchant:  You.  The guy who's going to get stiffed by all of the above parties when a chargeback hits your account.  You run an online store called selling nice electronic gizmos to Latte-drinking big city folks.
  5. Visa/Mastercard:  These are real companies, not just a brand label for a credit card.  These guys hold all the cards no pun intended.

What exactly is a "chargeback"?  Put quite simply, a chargeback is a refusal by the issuing bank to accept financial responsibility for a given purchase.  In most cases, the issuing banks refusal is based on the cardholders signed statement of refusal.  At any time while the cardholder account is active, the cardholder has the option to refuse specific charges against their credit card.  Once this refusal by the cardholder is submitted in writing, the chargeback is born.

Chargeback Flow

There are almost as many interpretations of the flow of the chargeback as there are financial institutes issuing them.  Here's how it really works:

John Doe gets his credit card statement in the mail (or a phone call if his bank really cares) and learns a bunch of stuff he didn't order has been charged to his account.  In fact, he doesn't even remember opening this account in the first place.  John responds that he didn't authorize these charges or make these purchases.  His bank fires off the usual paperwork and John fills out form after form detailing the charges he says are fraudulent.  The paperwork is signed by John and returned to his bank.
There are time limits involved here as well.  So John can very well expect the bank to advise him of how much time he has and how much time they have to submit his claims.  Miss those deadlines and the bank (and John) lose the window of opportunity to submit a chargeback.

John's bank, the Issuing Bank, now researches the electronic data associated with each fraudulent charge.  The bank determines the originating processor and merchant involved with each transaction.  Johns bank fires off a series of electronic demands-for-payment against each merchant involved to each merchants assigned processor.  This is where the fun begins.  According to the rules of the game, the issuing bank can and will demand funds be withdrawn from your account at any time.  They aren't required to give any warning or notice to you as the merchant.

So as you truck along your merry way running your business, you must always keep that point in mind.  At any given time, without any warning whatsoever, the issuing bank of a cardholder can demand your processor return the funds to them for the transactions involved.  Since the processor is just a middle-man shoveling transactions back-and-forth, they do precisely what the rules say and electronically remove the funds from your account.  Whether your processor notifies you is completely dependent on the policies of that processor.  This is something incredibly important to keep in mind as you shop for a processor – the bank you normally do business with may not necessarily be the best choice as your processor.

Now let's move to the online merchant side of the equation.  You log into your online banking account one day to find your business checking is OVERDRAWN!  But wait, you haven't written any checks so how could this be?  Was the account compromised and the money stolen?  Well, you're half-right.  The money was stolen, it just happened to be stolen by someone you gave permission to do so.  You agreed to allow any issuing bank to withdraw money from your account when you signed the long and hard-to-read contract with the processor to get your online merchant account.  Welcome to Stiffing-the-Merchant 101.

When you opened your merchant account with processor, you of course had to sign some forms.  Buried deep in those forms is the clause that authorizes the processor to withdraw funds from your account at any time.  It gets better: you don't have to be notified and there is no arbitration process with the processor.  They're just the middle-man and they're just doing what they're told.  Well who in the world would make such a rule that favors the banks and leaves the merchant high-and-dry?  The banks started Visa and Mastercard.  These companies were started by a conglomerate of over 21,000 financial institutions around the world as a way of implementing a common form of payment.  So you as the merchant are forced to play poker with the deck stacked against you.

Back to our saga:  Your bank account is overdrawn and you're in a panic.  Orders from distributors are going to bounce.  Overdraft fees (from the same bank that over-drafted you!) are racking up.  Fingers fly as you dial the merchant support services number on your phone……

Disputing the Chargeback

The Merchant Services (aka Merchant Support) department at your processor is your next step.  Your task now is to "dispute" the chargeback.  You've made every attempt possible to validate the identity of the online purchase.  You used the processors Address Verification Service (AVS).  You used their CVV2 service.  Everything came back a full match.  Heck, you even shipped the order signature required.

Well, start printing.  Print everything about the order you can because you're going to have to submit all of this information as part of your chargeback dispute.  Order details, payment transaction logs, shipment tracking logs etc.  Put it all together, and then print some more because the processor will have some forms you have to fill out too.  Get everything together, fax it to the processor and they will submit the dispute on your behalf.  And you better hurry – there's a time limit on how long you can wait before the opportunity to dispute a chargeback disappears.

Don't forget:  the funds have already been taken from your account.

Wait a minute.  On your behalf??  That's right.  You don't get to directly dispute the chargeback.  You have to go through that middle-man the processor.  Another fine rule made by the banks – they didn't want you ignorant (and probably angry) merchants calling them directly.  They hide behind the processor by requiring disputes be filed via proxy.  You submit the details to your processor, and your processor handles submitting the dispute to the issuing bank.

Finally some decent news.  Most processors, if not all, will return the disputed funds while the dispute is in progress.  Nice if you needed the money, but darn confusing from a bookkeeping standpoint.  Plus, you have no guarantee the funds will remain there (pending the outcome of the dispute) so you could easily wake up 3 days from now to see your account overdrawn again!  Having fun yet?

Once the dispute is filed, you wait.  And wait.  And wait so more.  Because there's still no requirement to notify you as to the result of the dispute.  Good or bad news, nobody has to call you to advise the status or result of the dispute.  Eventually you'll learn the results of the dispute – probably only by calling Merchant Services (again) and asking someone.

Re-presents and Your Processor

So you lost the chargeback dispute.  Swell.  You just had real cash money stolen from you and you've joined the ranks of hundreds of thousands of other lucky online merchants.  Is there anything more you can do?  Well, that all depends on how aggressive you want to be.  In some cases, the processor can be "encouraged" to re-present the dispute to the issuing bank.  Hopefully this will be done with some new information like a letter from you bank stating all efforts were made to authenticate the charge.  However your chances of success here are completely up-in-the-air.  There's no way to tell as every bank and situation is different.  A good processor will work hard for you to get that money back.  A bad one will throw your contract up in your face by suggesting you read the terms of said contract.

At this point, the chargeback process is pretty much done.  Have you noticed the issuing bank did not have to pay for the charge?  They seem to be no-worse-for-wear in this situation.  What about the fees charged by Visa/Mastercard?  Nope, they still have your money too.  How about those processor transaction fees?  Gone.  In case this isn't clear enough, here's who still got paid:

  • Your distributor:  for the product purchased in the disputed transaction.  Kiss that money goodbye.
  • The Issuing Bank:  They didn't really get paid but they sure as heck aren't out any cash.  That's what they have you for.
  • Visa/Mastercard:  that lovely 2.6% is theirs to keep.
  • The processor:  Every transaction has a fee, doesn't matter if it's good or bad.
  • The payment gateway:  a silent player in the game – they handled getting everything from your storefront to the processor and they aren't planning on giving it back any time soon.

Notice how "The Merchant" seems to be missing from that list?  Do everything right and you'll still wind up stiffed.  Read on to see how….

How to Protect Yourself from Chargebacks

You can't.  Period.  Plain and simple.  The sooner you accept that answer, the sooner you can decide if online merchant is what you want to be.  You can reduce the likelihood of a chargeback, but you as the merchant have no protection.

The official Visa/Mastercard stand is:  "By choosing to offer the service of credit card payment in a card-not-present environment such as online transactions, the merchant assumes the financial risk inherit to such activity."

The only safety net you can build is a physical imprint of the card itself.  Yeah, sure – you'll get right on that with your internet-based online storefront!  The banks don't have to be realistic – they're making the rules.

Improving Chargeback Dispute Success

Here are some tips to help improve your dispute success.  Nothing is going to guarantee it, but at least you can cry about it knowing you did everything you could:

  • Never ship to any address other than the bill-to address
  • Ship everything signature-required and use shippers with good tracking abilities like UPS, FedEx etc.  Don't even bother with USPS if you ever want to use tracking info in a dispute.
  • Use a storefront that documents the payment processing transactions in detail.
  • Contact the issuing bank and request they contact the card holder for charge verification.  Specifically document who you spoke with at the issuing bank, when you called and what their response was.  If the issuing bank is too lazy to perform such a simple step, you've got the evidence that you cared and they didn't.
  • Ask to speak with the manager of your processors merchant services department.  Often they will have unique insight and experience that can help you.


As you've seen, the entire credit card system is designed to place the financial burden of responsibility on the merchant.  As an online merchant, you must prepare yourself and your business for the financial losses that will occur.  You cannot assume you'll win any chargeback disputes.  You can do AVS and still lose.  You can do CVV2 and still lose.  You can ship every order to the bill-to address and still lose.   A payment system designed by the banks, for the banks.  That's what you're up against.  The sooner you plan for that mentality, the better.