What is a Compliance Chargeback and How Can Merchants Handle These?

Chargebacks can be a huge source of stress for merchants. They have a direct financial impact but can also steal your attention away from more pressing matters, all while putting your reputation on the line.

To make matters worse, there are so many different types of chargebacks you need to be prepared for - including the pre-compliance chargeback. So, what is a compliance chargeback - more importantly, how do you handle these in the rare event they pop up?

We’re here to simplify things and leave you with a clear understanding of this nuanced topic. This type of dispute occurs when a transaction doesn’t meet certain regulatory or card network criteria, often due to procedural errors during the transaction process. 

These can stem from a failure to adhere to payment security standards, incorrect transaction authorizations, or mishandling of the customer verification process. 

Avoiding these issues is as simple as staying up to date on all processing guidelines and investing in a chargeback prevention solution, like ours here at Disputifer.

We help you put the concern of disputes in the past for good by blocking up to 95% automatically. Our software also automates the process of fighting disputes on your behalf, boosting win rates to as high as 60-70%. Learn more about what it can do for you below!

What is a Compliance Chargeback?

Let’s start with the basics - what is a compliance chargeback? You’ll often see the term “pre-compliance chargeback” used in this context as well. We’ll define all this and more below before getting into the most common causes for these disputes.

Compliance Chargeback Definition

As we briefly touched on already, this type of chargeback occurs when a transaction or its handling fails to meet the established rules and standards set by card networks, such as Visa, MasterCard, or American Express. 

Unlike the chargebacks customers initiate themselves as a result of fraud or frustration with a product or service, these are typically triggered by procedural violations during the transaction process. In other words, the bank issues them themselves.

This can include errors in transaction entry, failure to adhere to network security requirements, or not obtaining the proper authorization. All of these share a common theme of resulting in financial losses for one party, which is where the dispute occurs.

You’ll learn all the different causes in just a moment - first, it’s important that you understand the differences between compliance vs pre-compliance chargebacks.

Pre-Compliance vs Compliance in the Context of Chargebacks

Pre-compliance is the process banks employ in an effort to settle disputes among themselves before escalating the matter to Visa. The goal is to negotiate and communicate to rectify any rule breaches prior to compliance.

If unsuccessful, a compliance chargeback is initiated and Visa is required to step in as the mediator. The card processor reviews all pertinent details to determine if the Visa Core Rules and Visa Product and Services Rules were in fact violated. More importantly, if that violation led to a direct financial loss.

Although there is an appeal process, it is rarely pursued due to its cost and complexity. Visa's decision at this stage is final in most cases. 

The merchant (you) is not always involved in these disputes, but your operations can be impacted regardless, especially if repeated rule violations occur.

Common Compliance Violations That Lead to Chargebacks

The first step in avoiding compliance violations is knowing what they are in the first place. There are quite a few that you need to understand, including:

  • Improper Transaction Authorization: This includes processing transactions without a valid authorization code or with an expired authorization. All transactions need to be properly authorized according to the card network's guidelines.
  • Inaccurate Transaction Coding: Transactions must be correctly coded to reflect the nature of the purchase. Errors in transaction coding can mislead or confuse the cardholder or issuer, often leading to disputes and chargebacks.
  • Non-Adherence to Merchant Service Agreements: From compliance with operational procedures to refund policies, chargeback management, and more, violations here lead to compliance chargebacks if they cause financial losses for the banks or card issuers.
  • Security Standard Violations: Compliance with PCI DSS (Payment Card Industry Data Security Standard) and other security standards is mandatory. An insecure transaction environment, be it inadequate data encryption or failure to secure cardholder data, can result in chargebacks to remedy security-related compliance breaches.
  • Misrepresentation of Product or Service: Misrepresenting a product or service leads to a discrepancy between what is sold and what the customer receives, triggering disputes. 
  • Failure to Process Refunds Appropriately: Processing refunds correctly and on time is paramount to avoiding a compliance chargeback.
  • Ignoring Retrieval Requests: Ignoring a retrieval request for information about a transaction or failing to respond fast enough can lead to a compliance chargeback. 

Each of these violations not only risks financial penalties but also can damage relationships with payment processors and card networks. Let’s take a deeper look at the implications of these chargebacks for merchants below.

What Do These Types of Chargebacks Mean for Merchants?

It’s important to note that these types of chargebacks are unique in that they won’t have an impact on your chargeback ratio. That being said, they are still something you need to take measures to avoid - here’s why:

  • Direct Costs: Financial penalties or reversed transactions not only affect the immediate cash flow but also lead to bank fees associated with each chargeback processed.
  • Increased Processing Fees: Frequent compliance issues may leave you labeled as high-risk by payment processors and banks. This can lead to increased transaction fees and more stringent contract terms, driving operating costs even higher.
  • Resource Allocation: While merchants do not directly engage in resolving compliance chargebacks between banks, maintaining compliance to avoid such disputes can require training, system upgrades, and administrative work to avoid breaking applicable rules and standards.
  • Relationships with Financial Institutions: Compliance problems can strain relationships with banks and payment processors. These institutions may become less willing to provide favorable terms or services to a merchant perceived as high-risk, which can limit the merchant’s financial flexibility and growth opportunities.

There is some more good news, though. This type of chargeback is becoming less and less common thanks to the emergence of VROL. Reason code 98 will soon be a problem of the past, which means you won’t have to stress about it nearly as much going forward.

You can learn more about what happens if merchant does not respond to dispute or what happens if you lose a chargeback in our blog. But let’s talk about what you can do to avoid any type of dispute going forward. 

Put the Stress of All Types of Chargebacks in the Past With Disputifier!

Wouldn’t it be nice if you could put the problem of chargebacks out of sight and out of mind? With Disputifier, you can! 

Our chargeback company offers a two-pronged approach to preventing up to 95% of disputes from happening in the first place without you having to lift a finger. In the rare instance that one slips through the cracks, you can count on us to fight it on your behalf, so you can focus on more pressing matters for your business. 

It’s all powered by our fraud prevention technology that uses cutting edge chargeback alerts powered by ETHOCA and Verifi. These identify and flag suspicious activities, so you can take proactive steps to address issues before they escalate into chargebacks. 

This can be automated to the point where the system automatically cancels and refunds suspect orders, or you can choose to make the final call yourself. From billing address concerns to orders not received, you can prevent chargebacks without actually doing anything.

You won’t have to stress about how to win a chargeback as a merchant, either. When a dispute occurs our technology automatically answers them with a highly customized response tailored to increase your dispute win rate. 

Just how often do merchants win chargeback disputes? Up to 70%, compared to the industry average of between 20-30%! You only pay after successful dispute resolution, too.

The best part is you can get started with a free trial to see firsthand how Disputifier streamlines your business and offers peace of mind. So, try it out today and see why we’re among the best chargeback companies!

Bringing Our Pre-Compliance Chargeback Guide to a Close

So, what is a compliance chargeback? In conclusion, these are initiated by a bank against another bank when Visa’s operational rules are broken. This could be the result of anything from billing a customer’s card without authorization to not refunding a customer per best practices.

Fortunately, merchants themselves don’t have to worry about these too much, as they’re typically not involved in the process. Nevertheless, they do present a hassle and it’s important that you put measures in place to avoid them.  

Our blog has additional resources on topics like the chargeback deadline, chargeback insurance, sending a chargeback email to customer, and more. 

At this point, though, it’s time you put all the stress and headaches associated with chargebacks in the past for good with Disputifier. Start your journey towards better chargeback management with Disputifier - peace of mind is just a few clicks away!

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