Acquirer and Issuer: The Roles Each Bank Plays

Who Plays A Role In The Chargeback Process?

For some people involved in the chargeback process, the only clear aspect is the end result: where the money ends up. For cardholders, this would be a simple refund from their bank. For merchants, the loss of profits and product. For banks, a risky merchant may be at it again. However, there are many different organisations who play different roles in the chargeback process, and each one can affect that end result.

The Cardholder

Chargeback cases begin with the cardholder. A person makes a purchase using a credit or debit card, setting the transaction in motion. Ideally, once a transaction is complete, the cardholder receives the product or service and the merchant receives payment.

Chargebacks are essentially a forced reversal of this initial transaction. They were created in order to protect cardholders from fraud when shopping with credit cards.

Chargebacks occur when cardholders (or on some occasions, an issuing bank on the cardholder’s behalf) request a refund from their issuing bank due to an error of some kind. There a variety of reasons for cardholders to file chargebacks: the product was not delivered, the purchase was not authorised, or the merchant had deceived them in some way, for example. Cardholders also file chargebacks when they are victims of credit card fraud.

Additionally, deceptive cardholders who file unwarranted chargebacks are committing what is known as friendly fraud. Friendly fraud occurs when a cardholder makes an authorised purchase and disputes the transaction to receive a refund and keep the product. Friendly fraud is illegal and costs merchants billions of euros in sales each year.

The Merchant

The merchant is on the opposite end of a chargeback from the cardholder.

When the transaction first takes place, the cardholder’s money is deposited into the merchant’s account. When a chargeback is then filed on the transaction, the money is placed on hold and the cardholder is given a temporary refund. If the merchant disputes the chargeback through chargeback representment, it is then given the opportunity to retrieve the money.

At the end of the chargeback cycle, if the merchant has won the case, the money remains in their account. If the merchant has lost the case, the money is permanently removed from the merchant account and the cardholder’s temporary refund becomes permanent. Although fees are involved in fighting back, merchants are able to reduce chargeback losses through winning representments.

There are two types of merchants: Card-Present and Card-Not-Present merchants. Although it is seemingly easier to prevent card-present chargebacks, all merchants who accept credit card payments are at risk of receiving chargebacks and being victims of friendly fraud.

Issuing Bank

The issuing bank is the bank through which the cardholder communicates during the chargeback process. Cardholders receive their credit or debit cards from their issuer. Therefore, when they decide to file a transaction dispute, cardholders will contact their issuing bank and request a refund.

The issuer then delivers the temporary refund to the cardholder’s account and passes the chargeback case to the acquiring bank.

Issuers will sometimes file chargebacks automatically if a processing error has occurred. In these cases, the cardholder is automatically refunded and the acquiring bank is notified immediately.

Acquiring Bank

The acquiring bank is the merchant’s link to the issuer and card networks. If the issuer represents the cardholder, the acquirer represents the merchant. The acquiring bank is notified of the chargeback from the issuing bank and either has the choice to dispute the chargeback themselves or pass the case to the merchant who then has the opportunity to prove its case.

The acquirer provides the merchant with its merchant account, which is required to accept credit and debit card transactions. The acquirer has a relationship with the card networks, such as MasterCard and Visa, and therefore holds the merchant to strict guidelines and regulations. If these regulations are breached by excessive chargebacks or instances of fraud, the merchant can lose its merchant account and be placed on the MATCH list. For a merchant who loses its merchant account, payment cards can no longer be accepted, which is certain death in eCommerce.

Take Action

Understanding the chargeback process and the major players involved is the first step to winning back lost revenue. However, prevention is key. By honing in on indicators of friendly fraud, criminal fraud, and merchant error, merchants are able to cut back on their chargebacks before they even arrive.