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Deeper understanding of chargeback & dispute
Customers may want their fund to be returned when they are not satisfied with the good or service they have paid for, then "dispute" and "chargeback" occurs. However, the terms “dispute” and “chargeback” are sometimes used interchangeably. Although they are part of the same process, these two words mean different things.
 
In this post, we’ll look at the subtle distinctions between chargebacks and customer disputes.
 

Term explaining of "dispute" and "chargeback"

Since both terms are easy to confuse, let’s start by breaking them down.
Payment Dispute
A payment card dispute happens when a cardholder challenges a transaction on their card statement. For example, they may claim the transaction amount is incorrect, or the product they received was damaged, or that an order was never delivered.
 
Whatever the reason, the cardholder can contact the bank to “dispute” the legitimacy of the charge and request for a refund. A dispute is an action taken by a cardholder to challenge a transaction appearing on the cardholder’s statement.
Chargeback
In contrast, a chargeback is a forced payment reversal. It results from a payment card dispute and is carried out at the banking level.
 
The issuer will review and investigate a charge and decides to decline or approve. Once the issuer considers the charge to be illegitimate, the transaction amount will be withdrawn from the merchant's accounts and returned to the cardholder
 
To simply clarify: most chargebacks start with a customer dispute, but not every customer dispute results in a chargeback. A dispute is an action, while a chargeback is a process. It could be fair to consider a dispute as the first stage in the chargeback process.
 

What is This “Dispute-to-Chargeback” Process?

Once a customer has challenged the charge on their credit card statement, they initiate the dispute process. If the bank agrees with the cardholder regarding the disputed transaction, the dispute will be elevated to the chargeback stage.
 
Dispute Stage
  Step #1 | Initial Dispute
The cardholder identifies an invalid charge. This could be a fraudulent charge, or one for which the promised goods or services were not provided. The cardholder challenges the transaction by contacting their issuing bank.
  Step #2 | Provisional Refund
 A conditional refund is issued by the bank to the cardholder.
Chargeback Stage
  Step #3 | Chargeback Initiated
The bank files a chargeback in response to the customer dispute. The issuing bank sends a message to recoup their funds from the merchant’s acquirer. They also assign a numeric reason code for the chargeback, then electronically transmits all the chargeback information to the acquirer.
  Step #4 | Merchant Chargeback Notification
The acquirer receives the chargeback notification and forwards it to the merchant. The acquirer will also debit the disputed amount, plus fees, from their merchant’s account. The merchant also receives a chargeback advice letter, instructing them on how to proceed.
 
At this point, the merchant has two options. First, they can agree with the cardholder’s claim and accept the chargeback. But, if the merchant believes the chargeback was an error, or that the cardholder made an invalid claim, they can choose to challenge it by providing defense documents. The issuer will review the documents to decide whether to accept or decline. Merchants may challenge twice or three times if their defense is declined. And the third round is called arbitration. Arbitration is often not advised as the fees are particularly high (up to $500 on top of the disputed amount).
 
The failure and success of this chargeback dispute depend on various reasons and are not decided by only one side. For merchants, they should improve customer experience to avoid unnecessary disputes. And for customers, they also should think it over before going on a chargeback, which may take a long time and extra charge.
 
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