How Chargebacks Apply to Payment Facilitators

While becoming a payment facilitator can create new revenue streams for many businesses, it carries a risk of losses as well. One type of risk a PF must address is the potential for losses from chargebacks. 

So, what are chargebacks, and how can they be managed? 

A chargeback is a reversal of a completed transaction. It’s the process that occurs when a consumer disputes a charge on their account and subsequently receives their money back from their issuing bank. 

Chargebacks can be initiated for many reasons. A cardholder might deny that they authorized the transaction, for example. Or, they might dispute a charge when they feel that the product or service wasn’t delivered as advertised and the merchant has failed to address their complaint.

A chargeback differs from a refund because it goes through the payments system, whereas a cardholder requests a refund directly from the merchant. 

The consumer initiates the chargeback process by registering the dispute with their issuing bank. This bank passes the chargeback along via the associated card network to the acquiring bank (acquirer), which then may investigate the transaction and the validity of the complaint, asking for documentation from the merchant. 

Ultimately, the merchant should be responsible for the amount of the transaction. However, if for some reason the funds cannot be recovered from the merchant, the acquirer is then held liable for this amount.

What is a payment facilitator’s role?  

In chargeback situations where the merchant is accepting payments through a payment facilitator, that PF will sit between the acquirer and the merchant. The PF manages the chargeback process along with the acquirer, responding to any documentation requests. 

PFs’ contracts with acquirers also hold them responsible for chargebacks. So, if the PF is unable to recover the funds from the merchant, it is then on the hook for the transaction amount.

Having procedures in place to manage the chargeback documentation and information process is an important part of a payment facilitator’s business. Because the PF is exposed to losses from chargebacks, it will have to implement risk and fraud mitigation practices to guard against those losses as well. 

Screening for merchants who are either fraudulent or who may otherwise pose a risk of generating excessive chargebacks is part of the underwriting process. Payment facilitators also implement other controls to protect themselves against losses, including excessive chargebacks, once a submerchant is onboarded – such as initially low processing limits or robust transaction monitoring to watch for suspicious activity that might indicate a merchant is not what they said they were. 

The scale of the risk depends on the types of submerchants a payment facilitator takes on. And while it’s important to manage the risk, that must also be balanced with the user experience. Overzealous fraud policies can alienate legitimate merchants. 

While chargebacks are a fact of life for any payments provider, they can and should be minimized with appropriate processes for managing both card brand and internal risk and information requirements.  

Updated 1/16 with clarifications.