Chargebacks in the ACH world are when a customer notifies their bank that a debit  initiated by a merchant was not authorized. Chargebacks can be very time consuming, costly, and can result in a loss of reputation or even in loss of processing capability for a merchant.

Chargebacks are an area of concern for the merchants and processors because of their implications. Typically a chargeback implies that some type of fraud is going on with a merchant and/or that fraud is being committed against a merchant or a customer.

Even through the reasoning for a customer to initiate a chargback against an item on their statement might be bogus, the burden of proof to resolve chargeback issues lies with the merchant. A merchant needs to provide the ACH authorizations for any debit that was initiated against a customer within a specified period of time in order to win the dispute.

Chargebacks can be the result of the following:

  • Point-of-sale processing errors
  • Customer dispute
  • Post-transaction
  • Potential fraud
  • Authorization-related

The chargeback process can be a difficult and frustrating. First, the customer contacts their bank to initiate a refund for a purchase made on their account. The bank then researches the validity of the dispute while providing a provisional credit to the customer. Next, the bank initiates the process by obtaining credit from the merchant’s account through the merchant’s processing bank. The merchant’s processing bank then performs their own research and validation.

The merchant’s bank either declines the chargeback or removes the chargeback amount from the merchant’s account and provides written notification to the merchant. The determination as to what decision is made is based on the documentation provided to the bank by the merchant. If the documentation is satisfactory, the chargeback is declined and the customer is charged again for the sale. If the documentation is unsatisfactory, the chargeback is successful, ending the process.

If a processing error occurred, the sale is re-presented to the bank for corrections.

Maintaining a respectable chargeback rate is a necessary aspect of ACH fraud protection practices. Processors are required by NACHA to keep an overall chargeback rate of  under 2 percent. Processors hold merchants to this threshold as well. If chargebacks ever become too abundant for either processors or merchants, banking relationships can be severely impacted or even terminated.

In order to keep chargebacks and other issues to a minimum, it is important to obtain the appropriate authorizations from customers, gain an exact understanding of what proper authorizations entail, and to keep them on file for at least 2 years.

Different transaction types usually have different authorization requirements. For instance, an authorization to initiate a debit to a customer’s account via the telephone (a TEL transaction) has different authorization guidelines and requirements than a transaction that was initiated by a customer in person.