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Chargebacks – What Agencies Need to Know Part 1

Card payment processing for government agencies has a lot of nuances. One of those nuances is that most government agencies do not pay for their card payment processing, their constituents do through the payment of fees. These fees are collected and by a payment solutions processor who assesses their constituent a service or convenience fee.  The payment processor uses the fees to pay for the processing costs. A payment solution processor will open a merchant account, process the constituent’s payment and deposits money into the agency’s bank account.

Role of the Payment Solution Provider

The payment solution processor will also open a merchant account for service or convenience fees.   The service fee government agency account deposits the service or convenience fee into the payment solutions processor’s bank account. The payment solution processor uses the service or convenience fee to pay the payment processing fees for both the payment and fee merchant accounts. Because there are two card payment processing accounts, a constituent will see two separate card payments appear on their credit or bank card statement.

Descriptors

One card payment will have a retail descriptor that looks something like Government Agency ST, and the service or convenience fee will have a retail descriptor of GovtAgencyST*Service Fee. A key component of the two-transaction service or convenience fee is for the constituent to opt into the transaction by verbally agreeing or checking a box acknowledging they are paying the service or convenience fee to use their credit or debit card.

How Chargebacks Work

A constituent has 120 days to charge back a card payment on their statement. After reviewing their statement, a constituent will contact their credit or debit card issuer online or over the phone to dispute the card payment.

A constituent has 120 days to charge back a card payment on their statement. After reviewing their statement, a constituent will contact their credit or debit card issuer to dispute the payment. Because there are two card payments, a constituent can dispute one or both card payments. As soon as the constituent files a chargeback dispute, the card issuer issues them a provisional credit for the card payment amount.

What Happens Next  – Back-end Processing

Before we jump into what happens on the back-end, it is essential to understand the role of a back-end processor. Their role is to route transactions from the issuing bank (constituents card account) to the acquiring bank (government agency’s payment solution processor sponsoring bank) and ultimately deposits the funds into the government agency’s bank account

Now back to our narrative, so when the constituent files a dispute, the card payment amount is debited from the fees bank account on file with a back-end payment processor. Payment solutions processors are the ones who pay the card payment processing fees for the agency.

Like it Never Existed

At this point, the card payment the constituent made technically no longer exists. The government agency’s books are now over, and they must back out the card payment. Their payment solution processors’ books are now short because that card payment amount has come out of its bank account.

Since the government agency has already deposited the card payment amount, the payment solutions processor works with the agency to debit the agency’s bank account so that both entities’ bank accounts are whole.

Some payment solution processors charge a higher service or convenience fee to cover the chargeback payment. These processors pay the chargeback amount because it is easy revenue for them. In addition, government chargebacks are so infrequent the processor absorbs the cost with the generated from the higher service or convenience fee.

Payment solution processors such as IntelliPay do not believe in charging a government agency’s constituents a higher service or convenience fee for a rarely-occurring situation so that we can boost our revenue.

Two charges a government agency might see are chargeback and retrieval fees. The government agency’s backend processor debits the payment solution processor’s bank account first. The payment solution processor then debits the government agency’s bank account.

After constituent charges back a card payment, a government agency will receive a chargeback notice asking for supporting documentation.

A Word About EMV

EMV is a security technology and payment standard developed By Europay, Mastercard, and VISA. EMV’s goal is to to reduce in-person credit card fraud. EMV-compliant payment cards have a chip embedded and produce a single-use code when inserted into EMV reader or terminal.

 

EMV chip on a payment or credit card

When a card is inserted or dipped, the terminal authenticates the card, and a single-use transaction code is issued. For some transactions, the customer is required to input their PIN or to sign to provide an additional verification step.

Verifone V200c with dipped credit card

 

A wrinkle is the EMV Liability Shift which went into effect in October 2015. The shift moved the liability for card-present (in-person) fraud from the card payment acquirer to the government agency. If the agency does not have an EMV-compliant device and the constituent made a card payment with an EMV card.

If the agency has an EMV card device and the constituent’s card payment issuer did not issue them an EMV chip card. And there is fraud. In that case, the card payment issuer is responsible for the fraudulent transaction.

If the agency has an EMV card device and the card used during the card payment is EMV, the card payment acquirer is still responsible for the fraudulent card payment.

One of the many nuances to government payment processing is that government agencies have their recourse because they can put a lien on your house, a red tag on your building project, or a parking boot on a constituent’s car. Not to mention a government agency could have a constituent arrested and put in jail. So there is not much incentive for a constituent to chargeback a payment.

The Odds are Stacked Against You

Whereas if that same constituent charged back a card payment from a local business, the only recourse the business has is through their back-end payment processor. According, to Chargeback 911 statistics, merchants only win 21% of the chargebacks when they submit supporting documentation. Assuming agencies wouldn’t fare any better in chargeback disputes, agencies should reach out to the constituent to settle the dispute or have the constituent use another payment method.

After the government agency submits its supporting documentation, the issuing bank will decide. If the issuing bank finds in favor of the constituent like they do 79% of the time, it creates a hardship for the government agency. It is important to emphasize that chargebacks in government payments are rare.

This article aims to help government agencies know what to expect when a chargeback occurs. It is also to give them some food for thought about their chargeback processes. The benefits of  giving constituents another way to pay, and speeding up revenue collection, far outweigh the chargeback risk.

In our next post, we examine in more detail why chargebacks happen and how to prevent them.