his is the first article in a three-part series designed to provide you, ISOs and merchant level salespeople (MLSs), with the necessary knowledge to help your merchant clients deal with chargebacks and disputes. Since this is a very complicated area, the goal is to provide basic information and not to be an exhaustive review.

Basic concepts

ISOs and MLSs are asked regularly about disputes, chargebacks and other notifications. These are issues that concern every merchant. If ISOs and MLSs don't fully understand the basics of these important events, they will be unable to help their clients effectively. This leaves them vulnerable to client loss because merchants may seek information from other sources.

There is much confusion about disputes and chargebacks and the process or processes that are behind these events. Essentially, a dispute is caused when a consumer denies the validity of a transaction for one of many reasons. This is sometimes called a retrieval.

A chargeback occurs when the merchant fails to respond appropriately, as determined by the issuance bank; fails to respond in a timely manner; or fails to respond at all to a notice of a dispute or notice of a chargeback.

What is the dispute/chargeback cycle?

It is very important that merchants have a basic understanding of the chargeback/dispute cycle. Certain keywords and concepts need to be fully explained to them. These include first presentment, retrieval, first chargeback, re-presentment, second chargeback and arbitration. They are explained in the following chargeback/dispute cycle steps:

Step 1: An authorized cardholder uses a bankcard for a purchase from a merchant who accepts the card brand.

Step 2: The merchant sends the transaction electronically to the appropriate merchant-acquiring institution. The transaction information is then sent to the issuance bank through the processor, using the MasterCard Worldwide/Visa U.S.A. system. This is called first presentment because the charge is being presented for the first time as a valid charge.

Step 3: The issuance bank sends a statement including the charge to the cardholder for payment.

Step 4: The cardholder disagrees with the charge and contacts his or her issuance institution to make the disagreement known.

Step 5: The customer service/dispute representative from the issuance institution takes the call from the authorized cardholder. The customer service representative sends to the authorized cardholder a dispute form to be filled out and returned.

Once the dispute form is returned, a retrieval request containing all pertinent information related to the disputed transaction is sent through the dispute channels to the processor/acquirer of the merchant in question. The attempt at this point is to receive back from the merchant a valid copy of the sales draft (card present environment) or retrieve direct relief of the charge.

Step 6: Pending the results of step 5, the item is placed into a disputes process, which is called a first chargeback. The issuance bank is requesting that the merchant take back the charge.

Step 7: The merchant responds to the disputed item.

Step 8: The acquirer/processor receives the merchant's response. If the acquirer is satisfied with the response, it sends back the charge to the issuance bank as a re-presentment. The acquiring bank is re-presenting the original charge.

Step 9: Upon receipt of the response, the issuance bank determines if the charge is valid. If the charge is not valid, the issuance institution returns the chargeback to the acquiring bank as a second chargeback.

Step 10: If the acquiring bank is still in disagreement, it can request that the matter be sent to arbitration. During arbitration, a neutral third party from either card Association hears the facts and makes a ruling. The ruling is final.

Three critical factors

All merchants must understand three critical factors: merchant responsibility, time frames and record keeping.

All merchants are ultimately responsible and liable for chargebacks and disputes issued secondary to consumer complaints under their distinct merchant identification numbers. Many merchants, especially merchants with smaller transaction volumes, do not seem to understand this concept. It is your job to make clear to merchants in your portfolio that they must respond to these events.

All of these activities occur under specific time frames set by MasterCard and Visa. The actual time frames under which a specific merchant may be required to respond are driven by institutional decisions but may not exceed the Associations' regulatory limits.

The following parameters pertain to the amount of time merchants have to respond to 1) retrievals and 2) chargebacks. The amount of time allotted to merchants in each of these situations can vary depending on type of card used and whether the transaction in question was domestic or foreign.

Retrievals/disputes

• Domestic (Visa and MasterCard): Merchant has 30 days to fulfill sales draft request.
• Foreign (Visa): Merchant has 45 days to fulfill sales draft request.
• Foreign (MasterCard): Merchant has 30 days to fulfill sales draft request.

Chargebacks

• Domestic (Visa and MasterCard): Issuer has 118 days to key in chargeback; merchant has 45 days to contest chargeback; issuer has 45 days to key in second chargeback; merchant has 45 days to file for arbitration.
• Foreign (Visa): Issuer has 118 days to key in chargeback; merchant has 60 days to contest chargeback; issuer has 60 days to key in second chargeback; merchant has 75 days to file for arbitration.
• Foreign (MasterCard): Issuer has 118 days to key in chargeback; merchant has 45 days to contest chargeback; issuer has 45 days to key in second chargeback; merchant has 60 days to file for arbitration.

Record keeping is a must. Many merchants still do not save sales receipts or keep accurate transaction records. Therefore, if a dispute/chargeback occurs, they are at a significant disadvantage. The basic requirement is to prove that the authorized cardholder entered into the transaction and acted with knowledge.

Part II of this series will discuss individual dispute codes and response patterns.

Ross Federgreen is founder of CSRSI, The Payment Advisors, a leading electronic payment consultancy specifically focused on the merchant. He can be reached at 866-462-7774, ext. 23 or rfedergreen@csrsi.com