Chargeback Reason Codes 101
Everything has its reason.
This statement holds more merit in the world of chargebacks than in our everyday life. Why so? Well, then welcome to the Chargeback Reason Codes-101 to discover why the right reason code is must when handling a chargeback.
Let’s hit the basics first!
What is a Reason Code?
A reason code is used to indicate the reason as to why the chargeback has been filed by the cardholder. This code differs from card network to card network and is assigned by the issuers when a dispute is raised.
Typically, reason codes cover the usual reasons of fraudulent transaction, merchandise not received, merchandise not as described, duplicate transaction, and many others. All these reasons are covered under these four broad categories such as:
Fraud:
Fraud in the payments sector refers to the unauthorized use of credit card information without the consent of the original cardholder. Typically, a stolen credit card or card number is the root cause of fraudulent transactions. The definitions of friendly fraud also come under this category.
Dispute:
In a dispute, the cardholder questions the validity of the original transaction and demands the issuer to process a fund reversal. For example, double debit for a single transaction, wrong amount charged and so on.
Processing Errors:
These reasons codes are attributed to the technical failure that occurs when processing transactions. Example: Invalid transaction data, late presentment and so on.
Consumer Dispute:
The most popular type of disputes of the chargeback category. These reason codes indicate disputes that occur as a result of inaction or wrong action on either party’s part (merchant or cardholder).
Examples, processing a transaction even after the subscription is cancelled, defective items delivered, non-delivery of sold goods and so on.
The bank or credit card provider will issue a reason code based on any of these four categories based on the cardholder’s claim when they challenge a transaction and initiate a dispute. The chargeback notification for the acquirer/merchant will contain the reason code and further information about the disputed transaction.
Furthermore, it is a standard blurb to say that a merchant is supposed to understand a reason code to put together a proper representment package. But we have a contrary view to that and here’s why!
Before that, let me put forth a question.
Who is the person responsible for assigning the reason code?
It is an analyst, of course from the issuer side. They are the ones who receive the initial complaint from the cardholder care team and file the dispute in the dispute filing system, for example Visa Resolve Online (VROL) or MasterCard Chargeback System. Assigning this reason code is a monumental task by itself as the analyst must take multiple factors into account such as;
- The reason stated by the cardholder while raising the dispute
- The action taken by the cardholder before deciding to file the dispute
- And if the cardholder has completed the waiting period of 7–14 days (like reaching out to the merchant and avoiding the long cycle of chargebacks) before raising the dispute.
After all is said and done, the analyst assigns the appropriate reason code to the cardholder’s dispute. Then the usual process of sending the dispute to the acquirer who in turn sends it to the merchant and the whole cycle of chargeback decisioning happens. And the result could be in the merchant’s favor or not.
Nevertheless, there is a question here again, what if the analyst assigns the wrong reason code? Then here’s what happens; it is a tumbling wall of dominoes where everyone participant; acquirer, card network and merchants get impacted.
Here’s a story illustrating the same:
Scene 1:
Mr.X raises a dispute with the issuer’s cardholder care center, stating that he has been defrauded by the merchant as he had delivered defective goods. The customer care executive will only pay attention to the word “Fraud” instead of the whole context. The same context will be conveyed to the analyst, who will assign the wrong reason code of Fraud instead of Consumer Dispute.
Scene 2:
The dispute will be sent to the network and in case it bypasses their gauntlet, that’s where the dominoes start to tumble. As a consumer dispute is filed as fraud, the acquirer and merchant are the ones first to get impacted.
Scene3:
The merchant rises up to the challenge and submits relevant proof to the acquirer proving that the disputed transaction is not fraud but rather a consumer dispute. When proven, this action completely backfires on the issuer, as they are the ones who have to bear the entire cost of the chargeback.
Let’s take a pause here, this entire dominoes falls because of a manual clerical error and lack of understanding about reason codes and its significance. Infact, the operational cost involved in training each and every individual analyst is quite expensive.
And this challenge exists on the acquirer side as well. Because, once the acquirer receives sufficient evidence that proves the dispute to be wrong, they primarily use the code Invalid Dispute (ID) to refute the chargeback. Moreover, the acquirer terms them as response code instead of reason code.
But here’s a twist to that response (reason) code, the code will simply declare the chargeback raised to be not classifiable as a fraudulent transaction. That’s all, it will not specify whether it is a consumer dispute or any other category.
So, based on the latest Visa guideline of Compelling Evidence 3.0, the acquirer will refute the chargeback by providing evidence of the cardholder’s transaction pattern on the merchant’s site and proof of delivery.
Now, this all routes back to the issuer who informs Mr.X, that his dispute does not hold merit as the evidence says otherwise.
Even if Mr.X, tries to raise the dispute again, it will be stopped by the issuer. However, Mr.X is still an aggrieved party as he has been defrauded by the merchant with defective goods. The customer care executive misconstrued the whole scenario and the rest followed.
Moral of the story: The lack of coherent understanding and effective communication inherently leads to confusion and too many aggrieved parties.
How can this be rectified?
In simple words,
Unified Dispute Management (UDM)
No matter the card network and reason code, UDM automates the entire process of chargeback filing with the correct reason code. With simple questions to classify cardholder’s dispute claims that map with the right reason code, UDM enables analysts on the either side to file or respond to the chargeback in an efficient manner.
Right from auto resolution to AI based case assignment, UDM improves productivity while reducing operational costs of maintaining a chargeback team.
Get in touch with us today to know more about UDM and how it can help regulate, tailor and modernize chargeback process and responses.
