Introduction

Card processing presents both return and chargeback risk, which are different types of returns. Interchange return refers to a transaction being rejected by the network when it is unable to be processed for a variety of reasons. Meanwhile, chargebacks take place when a transaction occurs and settles, but a user disputes the transaction with the card issuer.

Card returns don’t create direct financial risk to platforms because transactions are immediately rejected and funds are sent back to the user in real time. Nonetheless, it's good practice for platforms to build logic to keep track of card returns, we have found that successive returns can be a red flag for future chargebacks. TRAN|PATCH webhooks will notify when returns occur.

The rest of this section will focus on chargebacks since they pose the greatest financial risk when using card processing.

High chargeback rates can potentially lead to substantial fines by card networks, inclusion on the Terminated Merchant File for up to 5 years (a list of merchants deemed high-risk by card networks), and/or suspension from the card networks.

Chargebacks also present financial loss risk as any negative balance, resulting from chargebacks will be reconciled from the platform’s reserve account.

How Disputes are Handled

A consumer that would like to dispute a transaction will notify its card issuing bank, which in turn will communicate this information to Synapse via Synapse Support. An investigation will be launched on whether the transaction was fraudulent or not.

Regulation E (Reg E), which governs electronic fund transfers, also sets forth requirements for errors and disputed transactions. Reg E does not apply to businesses, therefore, the dispute process will vary for business BINs.

Regulation E sets forth time limitations for disputed transaction investigations. Financial institutions may take up to 90 days to investigate the reported dispute/error. During the beginning of this period the platform has the option to submit evidence against the dispute via the Dispute Chargeback API call. Common examples of evidence are email communication & interactions, shipping verification, phone call transcripts, live chat transcripts, social media interactions, and similar. We will complement the provided evidence with information we have on the transaction (e.g. date/time stamp, past transaction history, device fingerprint), and submit all evidence to one of Synapse's bank partners.

Due to the zero-liability policies of card networks (e.g. Visa, Mastercard), if the transaction is proven to be unauthorized the platform (merchant) will have to pay the amount of the chargeback (i.e. the funds the platform received plus the interchange fee of the original transaction), regardless of whether they believe the transaction is fraudulent or not. The end user will receive exactly what he/she was initially charged.

An exception to the zero-liability policies would occur if there is evidence that the user was grossly negligent or if there was a substantial delay by the user in reporting the unauthorized transaction to its card issuance institution. Evaluating when this exception applies will be at the discretion of the card networks, platforms can submit evidence prior to evaluation of their case.

For example, a user purchases a $5.00 good, the network charges $0.20 for the transaction, and the merchant receives $4.80. The user then notifies its card issuing bank that the transaction is fraudulent, and investigation takes place and is deemed that the transaction is fraudulent. $5.00 is pulled from the merchant (although he/she only received $4.80) and the user receives the full $5.00. We offer two alternative funding methods to pay for network fees.

Funding Interchange Network Fees

Platforms can either use a fee node or facilitator fee to fund Interchange network fees. We recommend the former.

INTERCHANGE Fee Node Model (Recommended)

In this model, the platforms creates and periodically replenishes a deposit account (node) from which interchange fees are deducted. In the event of a chargeback, the user account would be debited by the exact amount that was deposited.

Interchange Facilitator Fee Model

Alternatively, in this fee node model platforms can directly collect the cost of the Interchange fee from the end-user in the transaction. In the event of a chargeback, the receiving account would be debited by the exact amount that was sent via the Interchange network. In the example below, this would be $100 (i.e. what the user deposit account receives plus the interchange fee).

This scenario would create a negative balance of $2.40. Please keep in mind that users can send funds out of that deposit account prior to chargeback occurring (if the functionality is enabled). In the example above, the account can go as low as negative $100.00 if any or all of the $97.60 is not in the account when the chargeback occurs. Synapse regularly reconciles negative balances from your Platform Reserve Account (for more details refer to Negative Balance Reconciliation.

Synapse recommends the Interchange Fee Node Model because the Facilitator Fee model can potentially lead to a negative balance in the user’s account (since the chargeback will be what was deposited plus the Interchange fee). If the account is external to Synapse, incurring a negative balance can lead to overdraft fees which can generate bad user experience--we don't charge overdraft fees.

Platforms can later reconcile the Interchange fee cost by passing the fee to the end user. Furthermore, in both models platforms can charge additional fees as long as it is clearly disclosed to the end user. Please see the marketing guidelines included in your MSA (Master Service Agreement).

Chargeback Rates

How is the Chargeback Rate Calculated?
Chargebacks are all categorized under the same transaction code (IR999), the platform’s chargeback rate will be calculated as the number of pull-type transactions with a IR999 transaction code divided by the total number of pull-type card transactions.

Chargeback rate =# IR999 pull type transactions / # total pull type transactions

Below a table of the different types of IR999s (chargebacks).

Chargeback Rate Thresholds

Preventing Chargebacks

Please make sure to check our general risk mitigation section as the steps outlined there are valid for card processing risk mitigation.