Evolving Chargeback Reason Codes: What Recent Changes Mean for Merchants in 2024

Chargeback reason codes point you in the right direction by showing the likely causes of chargebacks and how you can dispute them. Recurring chargebacks in the fraud category can place your business on fraud-related programs, affecting your reputation and reducing patronage that would’ve given you more revenue.

Visa and other networks have evolved their chargeback rules to give merchants more power to prevent unwarranted chargebacks. However, keeping up with these updates is crucial for ensuring your business is equipped to handle them effectively.

We’ve now seen major changes to the Visa 12.1 and 11.3 chargeback codes. The network has also updated its compelling evidence rules and the authorization-to-clearing timeframes. These changes will require an upgrade in how you respond to chargebacks and how quickly you need to act. This guide will cover all of these updates in detail.

Visa’s Shift from Reason Code 12.1 to 11.3: What It Means for Merchants

As of April 2024, chargebacks that fell under reason 12.1 will now be reported with reason code 11.3. The now-defunct reason code 12.1 dealt with transactions merchants did not present on time.

Visa’s decision to move from 12.1 to 11.3 aims to streamline the chargeback process. That should give merchants the following:

• A less complex chargeback process: Late presentment, although formerly under processing errors, still shows that the authorization expired. Hence, merging it into 11.3 reduces complexity, putting everything under the authorization category.
• Quicker resolutions: It’s now easier for you and other merchants to handle chargebacks that fall into that category.

With that in mind, the reason code 11.3 now covers the following scenarios:

• Cases where the transaction required authorization from the cardholder, but you did not request it.
• Cases where you did not obtain the transaction.
• Cases where a merchant requests authorization for a particular amount but processes a higher amount for the same transaction.

Implications for Merchants

By merging late presentment under 11.3, Visa reiterates the importance of proper authorization for transactions. It highlights the need for merchants to ensure timely authorization and submit transactions within the required timeframe, reducing the risk of chargebacks.

With Chargeflow’s automated dispute resolution, merchants can streamline their response to chargeback claims under Visa’s new guidelines. The platform handles everything from tracking transactions to submitting evidence, allowing you to focus on running your business. Chargeflow’s automation reduces the time required from obtaining authorization to final settlement, ensuring compliance and reducing the risk of chargebacks.

Visa’s Compelling Evidence 3.0 Rule: New Requirements for Dispute Resolution

Introduction to Compelling Evidence 3.0

Visa’s Compelling Evidence 3.0 Rule outlines the pieces of evidence and guidelines required for chargeback disputes. In other words, that means documents that show the cardholder participated in the transaction or received the goods or services.

We do not intend to rule out cases where cardholders rightly contend a charge or transaction. However, some of these chargeback claims may be in error or a deliberate move to defraud your business. With the right documents as allowed in the Compelling Evidence 3.0 rule, you’ll have the upper hand in these disputes.

That said, here are the pieces of evidence needed:

• Records of at least two previous legitimate transactions with the cardholder (these should be between 120 days and 365 days older than the current disputed transaction).
• At least two of the following data points from the previous transactions should match the disputed one: User ID, IP address, shipping address, telephone number, fingerprint, device ID, etc.

You can submit these documents pre-dispute or during the dispute response. The new rule offers more leverage than the previous one.

Practical Steps for Compliance

Here are the steps you should take to comply with the new rule:

• Chargeflow’s automated evidence collection ensures that all necessary transaction data—such as previous legitimate purchases and matching data points—are captured and stored, ready for submission if a dispute arises. No need for manual tracking.
• Ensure you have records of all deliveries (goods and services) and records to show the cardholders took delivery of them without complaints.
• Leverage new technology for sharing evidence.

If you choose to submit evidence during the dispute, ensure you do so within 20 days. Visa allows pre-dispute submission. That can help you avoid cases where you skip the timeframe.

Impact on Merchant Operations

Chargeflow’s chargeback prevention alerts allow you to stop disputes before they become costly chargebacks. Chargeflow’s real-time alerts enable merchants to take action immediately, which helps protect their revenue and preserve customer relationships.

However, this new rule presents a few challenges. These include:

• Data collection and management for submission when the need arises.
• System integrations to capture the required data.

You will need modern tools, like Chargeflow to automate evidence collection and manage disputes effectively without burdening your teams.

Authorization-to-Clearing Timeframes: Standardization and Its Effects

Transactions begin when you request authorization from the issuer. Depending on the transaction type, you may defer clearing to a later date. The new standard allocates the following time frames for transactions:

• Cardholder-initiated (CNP) transactions have a maximum of 10 days between authorization and clearing.
• Rentals and lodging transactions have a maximum of 30 days between authorization and clearing.
• Card-present (CP) transactions have a maximum of 5 days between authorization and clearing.

Implications for Different Merchant Categories

If you are running a pick-up store that accepts card-present transactions, the new timeframes may not strain your operations. That means you can quickly clear transactions since the goods are provided on the spot. On the other hand, you may experience some challenges if you run long-duration transactions like hotel bookings, vehicle rentals, or recurring payments.

You may need more time for clearing. For that, Visa has the Extended Authorization Service, allowing up to 30 days for clearing.

Recommended Actions for Compliance

Here are a few things we recommend to ensure compliance:

• Update your payment systems to submit transactions for clearing within the allocated timeframe.
• Automate the process from transaction authorization to clearing. Chargeflow’s tools can help manage this automation.
• Monitor your transactions to ensure they are submitted within the allocated timeframes.

New Requirements for Partial Authorizations: What Merchants Need to Know

The new requirements mandate businesses with specific Merchant Category Codes (MCCs) to support partial authorizations for debit and prepaid transactions. MCCs refer to merchant category codes.

This mandatory support does not mean you have to use partial authorization as a merchant. You’ll need advance notice, like selecting the partial auth indicator on your request.

With this indicator in your authorization requests, the transaction approval rates are expected to improve. That is because an issuer can act better if the balance is less than the purchase amount in a transaction. In that case, it will respond to the authorization request with a unique code and make the balance the partially approved amount.

This will reduce friction when customers have insufficient funds to complete a transaction.

Consequences of Non-Compliance

Non-compliance may result in:

• Increased transaction declines.
• Additional fees if a transaction fails due to insufficient funds and the partial auth indicator was not used.

We recommend a full audit of your payment systems to ensure the partial auth indicator is included in your authorization requests.

Steps to Implement Partial Authorization

• Communicate with your payment processors to add the necessary settings.
• Update your payment processing systems and point-of-sale terminals to include partial authorizations. That may involve installing new software.
• Train your staff on how to handle partial authorizations.
• Test the systems and monitor transactions using reporting tools.

Preparing for the New Chargeback Landscape

It’s time to review all your chargeback management strategies including the systems, hardware, and software you use.

Update how you gather evidence and report it. While doing so, you can review recent chargebacks, especially those in the late presentment category. Be on the lookout for vulnerabilities such as data security issues, incompatible system integrations, and human operational errors.

Leveraging Technology and Tools

The evolving chargeback landscape calls for efficient systems to handle transaction recording, monitoring, and evidence gathering. Chargeflow’s AI Insights gives merchants the ability to analyze chargeback trends, detect fraud patterns, and proactively address potential disputes to reduce future disputes, resulting in better chargeback management and revenue protection.

Here is an example of how Chargeflow can help with the new chargeback landscape:

• Scenario: Let’s say you are a medium-sized retailer experiencing an increased number of chargebacks, particularly under 11.3 (“No Authorization”). Managing these disputes with outdated, manual processes can be time-consuming and prone to errors.
• Solution: Chargeflow’s automated chargeback management system allows you to automatically track authorization details, collect compelling evidence, and submit disputes well within timeframes.
• Result: By automating the process, you’ll see a significant reduction in chargebacks, minimizing revenue loss and maintaining compliance with Visa’s new rules. Chargeflow’s real-time alerts keep you ahead of disputes, and customizable workflows ensure you adapt quickly to changing chargeback scenarios. This proactive approach allows you to resolve disputes pre-dispute, preventing them from escalating and protecting your bottom line. 

Strategic Next Steps with Chargeflow

The removal of the reason code 12.1 and merging it into 11.3 means you need a new system to respond to chargebacks under reason code 11.3. Visa updates are designed to streamline the chargeback process and give merchants more power during disputes. However, you must upgrade your systems to keep up with the changes.

Staying updated on new regulations and requirements is crucial. Fortunately, Chargeflow can help by keeping you informed.

Chargeflow’s comprehensive suite of tools automates evidence collection and offers real-time monitoring, taking the burden off your shoulders and allowing you to focus on running your business.

Chargeflow’s solutions streamline chargeback management, automating transaction monitoring, evidence collection, and submission, allowing you to focus on growing your business while we handle the complexities of chargebacks.