here are many types of disputes and chargebacks. To respond appropriately, it's important to understand their distinctions and review chargeback notifications carefully.

Each specific chargeback is designated by a chargeback code. These codes are either a one- or two-digit number. MasterCard Worldwide and Visa U.S.A. may use the same chargeback designation number, but the definitions of the common number may be different.

There are five broad categories under which all chargeback codes are classified. These are: authorization, cardholder dispute, documentation request, fraud and processing error. The first step in shaping a correct response to a dispute or chargeback is understanding the specific category under which the reason code falls.

Once the category of the chargeback or dispute is understood, the next step is to carefully examine the associated documentation.

As detailed in Part l of this series (The Green Sheet, Aug. 28, 2006, issue 06:08:02), the entire process is specifically timed; you must be aware of when a response is due. Further, since the meaning of dispute codes varies by payment brand you must examine the jurisdiction to which you are responding. Jurisdictions include MasterCard Worldwide and Visa U.S.A. as well as others.

Next, examine the adjustment amount. This may give you a clue as to the underlying mechanisms for a specific chargeback. Clearly, you must respond specifically to the reason and the dispute type. Failure to respond to the specific area will lead to failure in your efforts to resolve a chargeback or dispute in your merchant's favor.

Analyzing a notification of chargeback

Here are five key areas you should examine whenever you receive a chargeback notification:

1. Due date
2. Jurisdiction
3. Adjustment amount
4. Reason
5. Dispute type.

From the initiation perspective, two broad categories of chargeback or dispute exist: procedural and substantive. Procedural chargebacks are initiated by the card issuer for various processing errors or for violations of the MasterCard or Visa rules and regulations. Substantive chargebacks occur when cardholders initiate disputes.

Understanding the categories and the reasons why a chargeback or dispute falls into a particular category significantly increases your ability to respond in the appropriate manner.

Dispute/chargeback reason codes

There are over 100 valid reason codes. Many of the definitions have very subtle nuances and require specific conditions. To help the merchant successfully defend against these codes requires detailed understanding.

The vast majority of reason codes consist of two digits. If you receive a one-digit code, this indicates in the majority of cases that a warning bulletin violation has occurred. Reason Code 7 is an example. It is usually associated with the failure to receive a proper authorization.

For MasterCard, Visa and other noncard Association transactions, the same two-digit reason code can represent different conditions. Here are some examples:

Reason Code 47 under Diners Club International Ltd. is an unauthorized transaction that exceeds floor limit and for which no authorization was obtained. Visa Code 47 represents a fraudulent transaction and is associated with no authorization being obtained. Under MasterCard, Code 47 represents a transaction that exceeds floor limit, is not authorized and is fraudulent.

Code 54 under Diners is defined as a "claim or defense." It represents a situation in which a customer claims that a service or good is no longer viable, such as a timeshare or contract work. Under MasterCard, Code 54 represents a "cardholder dispute - not elsewhere classified (U.S. Region only)." Under Visa, Code 54 represents "cardholder dispute - not elsewhere classified (not region specific)."

On the other hand, Code 53 is defined the same way by Diners, Visa and MasterCard. The definition is "not as described." In this situation, the customer claims that the good or service is not as described. For example, a ring turns out to be 14-karat gold rather than 18-karat, etc.

Further complicating matters are reason codes that require a certain condition regardless of the card brand. Examples of this circumstance include Codes 24, 94 and 95. Code 24 is merchant service error, Code 94 is cancelled guaranteed reservation and Code 95 is advance deposit service.

Common chargeback scenarios

Here are three examples of chargebacks with common causes:

Reason Code 41: The cancelled transaction

Definition: The card issuer received a claim by the cardholder for one of the following reasons:

• The merchant was notified to cancel a recurring transaction but has since billed the customer.
• The transaction amount exceeds the preauthorized dollar amount range.
• The merchant was supposed to notify the cardholder prior to processing each recurring transaction but has not done so.

Most common causes for Reason Code 41:

• The cardholder withdrew permission to charge the account, cancelled payment of a membership fee or cancelled the card account.
• The card issuer charged back a previous recurring transaction, and the cardholder did not expressly renew or cancelled the card account.
• The merchant received notice before the transaction was processed that the cardholder account was closed or exceeded the pre-authorized dollar amount range and did not notify the cardholder in writing within 10 days before processing the transaction - or notified the cardholder in writing within 10 days of processing the recurring transaction, after which the cardholder notified the merchant not to charge.

Reason Code 81: Fraudulent transaction - card present environment

Definition: The card issuer received a sales receipt that is missing required information, indicating a potentially fraudulent transaction.

Specific situations in which this chargeback code may be used include those wherein the card issuer received a sales receipt that has no imprint of the card's embossed or magnetic-stripe information or the cardholder's signature and:

• the cardholder certifies he neither authorized nor participated in the transaction, or
• the card issuer certifies that no valid card with that account number existed on the transaction.

This chargeback is not valid for recurring payments and card-not-present transactions. However, it is valid for card-present sales on self-serve POS terminals, such as cardholder-activated gas pumps.

Most common causes for Reason Code 81:

The merchant or service establishment

• did not swipe the card through a magnetic-stripe reader
• did not make a manual imprint of the card account information on the sales receipt for a key-entered transaction
• completed a card-present transaction without obtaining the cardholder's signature on the sales receipt
• completed a card-not-present transaction but did not identify the transaction as a MO/TO or Internet purchase.

Reason Code 82: Duplicate processing

Definition: The card issuer received the same transaction more than once for posting to the cardholder's account.

Most common causes for Reason Code 82:

The merchant or service establishment

• entered the same transaction into the POS terminal more than once
• electronically submitted the same batch of transactions to its merchant bank more than once
• deposited with its merchant bank both the merchant copy and the bank copy of a sales receipt
• deposited sales receipts for the same transaction with more than one merchant bank
• created two sales receipts for the same purchase.

It is my hope this article will give you a better grasp of the multiple nuances involved in chargebacks. In part three we will discuss certain regulatory issues as well as specific methodologies to track and respond to chargebacks and disputes.

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