Chargebacks
A chargeback is a transaction disputed within the payment system. A dispute can be initiated by the cardholder when he receives his statement and rejects one or more items on it or when an issuing financial institution disputes a transaction for a technical reason (usually at the behest of the cardholder or if his account is overdrawn). A technical reason could be the wrong or no signature, wrong or no date, important details missing in the sales vouchers and so on. Despite the warnings carried on many a sales voucher (”No Refund – No Cancellation”) both refunds and cancellations are daily occurrences.
To be considered a chargeback, the card issuer must initiate a well-defined dispute procedure. This it can do only after it has determined the reasons invalidating the transaction. A chrageback can only be initiated by the issuing financial institution. The cardholder himself has no standing in this matter and the chargeback rules and regulations are not accessible to him. He’s confined to lodging a complaint with the issuer. This is an abnormal situation whereby rules affecting the balances and mandating operations resulting in debits and credits in the bank account are not available to the account name (owner). The issuer, at its discretion, might decide that issuing a chargeback is the best way to rectify the complaint.
The following sequence of events is, thus, fairly common:
The cardholder presents his card to a merchant (aka: an acceptor of payment system cards).
The merchant might request an authorization for the transaction, either by electronic means (a Point of Sale / Electronic Fund Transfer apparatus) or by phone (voice authorization). A merchant is obliged to do so if the value of the transaction exceeds predefined thresholds. But there are other cases in which this might be either a required or a recommended policy.
If the transaction is authorized, the merchant notes down the authorization reference number and gives the goods and services to the cardholder. In a face-to-face transaction (as opposed to a phone or internet/electronic transaction), the merchant must request the cardholder to sign the sale slip. He must then compare the signature provided by the cardholder to the signature specimen at the back of the card. A mismatch of the signatures (or their absence either on the card or on the slip) invalidate the transaction. The merchant will then provide the cardholder with a receipt, normally with a copy of the signed voucher.
Periodically, the merchant collects all the transaction vouchers and sends them to his bank (the “acquiring” bank).
The acquiring bank pays the merchant on foot of the transaction vouchers minus the commission payable to the credit card company. Some banks pre-finance or re-finance credit card sales vouchers in the form of credit lines (cash flow or receivables financing).
The acquiring bank sends the transaction to the payments system (VISA International or Europay International) through its connection to the relevant network (VisaNet, in the case of Visa, for instance).
The credit card company (Visa, Mastercard, Diners Club) credits the acquirer bank.
The credit card company sends the transaction to the issuing bank and automatically debits the issuer.
The issuing bank debits the cardholder’s account. It issues monthly or transaction related statements to the cardholder.
The cardholder pays the issuing bank on foot of the statement (this is automatic, involuntary debiting of the cardholders account with the bank).
Some credit card companies in some territories prefer to work directly with the cardholders. In such a case, they issue a monthly statement, which the cardholder has to pay directly to them by money order or by bank transfer. The cardholder will be needed to provide a security to the credit card company and his spending limits will be tightly related to the level and quality of the security provided by him. The very issuance of the card is almost always subject to credit history and to an approval process.