Chargebacks are a form of consumer protection for credit card holders, introduced as part of The Fair Credit Billing Act of 1974.
Essentially, a chargeback voids a card transaction, withdrawing funds that were previously deposited into the merchant’s bank account and applying a credit to the cardholder. Chargebacks are normally used to dispute a card transaction and secure a refund for the cardholder.
The cardholder, rather than contacting the business for a refund, may go above the merchant’s head and asks the bank to forcibly remove funds from the business’s bank account. If the bank feels the cardholder’s request is valid, the funds will be removed from the merchant’s account and returned to the cardholder.
Chargeback reason codes were created to standardise the list of acceptable reasons why a bank may file a payment card chargeback on their cardholders/customers behalf.
A reason code is usually a 2-to-4-digit alphanumeric code provided by the issuing bank involved and is used to identify the reason for the dispute. Each of the major card brands, including Visa, Mastercard, have their own system of reason codes. Reason codes can be important and support the merchant, to understand why and then look to address the reasons as to why the chargeback is being filed. This could highlight poor customer service, inferior products or a problem with the distribution/supply chain. It could also highlighted potential areas, where security/process may need to be improved.
On receipt, of the reason code, the merchant can decide to accept or challenge the chargeback. If the merchant chooses to dispute, it must use the reason code to evidence why it felt the original transaction was valid and true.
Card Schemes - Visa and Mastercard Reason Codes:
VISA:
Visa Claims Resolution (VCR) was introduced in 2018 and was a significant overhaul of their reason code process, designed to prevent fraudulent claims from becoming chargeback disputes.
Essentially, they have split the reason codes into four categories. Each category has a list of reason codes, to which the cardholder can file a dispute against.
MASTERCARD:
Similar to Visa, Mastercard reduced their list of reason codes down into 4 categories in 2016.
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