The basics of no chargeback agreements: what you need to know

What are no chargeback agreements?

A no chargeback agreement, commonly known as "nochargeback" or "chargeback agreement" is a document under which parties agree not to reverse a transaction. Specifically, in a business transaction context, a no chargeback agreement is an agreement made between a merchant and a payment processor which expressly states that the card payments for certain transactions cannot be refunded , such as with the sale of gift cards.
Such agreements may also provide that if a particular charge is disputed, it must be promptly resolved through arbitration, rather than charged back to the merchants merchant account. In contrast, a standard merchant agreement will provide that chargebacks will be processed through the credit card company and then collected from the merchant, subject to the fee.

How do no chargeback agreements work?

In a no chargeback agreement, a merchant agrees to waive the right to chargeback a transaction, but this does not simply mean that they cannot chargeback a transaction. If the merchant files a chargeback, the transaction will be instantly approved, without the normal delay of first refusing a chargeback. This means that the acquirer will then have an open fraud chargeback with the issuing bank, who will eventually make demand on the acquirer if and when they find it proper, subject to the schedule of adjustments. However, as discussed in greater detail below, there are nuances that separate how these agreements work for credit card transactions as opposed to recurring billing and ACH transactions.
For credit card transactions the no chargeback agreement is enforced solely between the acquirer and the merchant. The merchant signs a waiver form which they submit to their acquirer, which is then locked in. This agreement is not kept with the issuing bank. Therefore, if you chargeback the transaction both the merchant and the acquirer expect the transaction will be immediately reversed in favor of the acquiring party. The way this works is that the acquirer has 120 days to deliver the proof of delivery or the sales slip to the issuing bank. If the acquirer fails to do so then the issuing bank will reverse the chargeback. In the case of a no chargeback agreement, the acquirer can submit the waiver form to the issuing bank denying the chargeback. Because there is no dispute between the merchant and the acquirer, the transaction is instant approved if the chargeback appears on the issuing bank’s list. If for some reason the issuing bank denies the chargeback there may still be a dispute between the acquirer and the merchant, but usually once the no chargeback agreement is accepted there is no further dispute. If the acquirer charges the merchant the amount of the no chargeback transaction plus fees, and goes into dispute then the acquirer gets their share of the fees back from the issuing bank when there is a dispute.
ACH transactions are a different story however. ACH transactions are governed by NACHA guidelines and are subject to a 45 day chargeback window. 120 days is not even a negotiable window for ACH transactions. However, the merchant agreement is between the merchant and the processor, but the way that the chargeback process is handled is different with respect to the issuing bank. Therefore whether or not the merchant is under a no chargeback agreement they will always be charged back for a valid ACH chargeback. There is, of course, a chance that the merchant may not be charged back in due time and the chargeback expires. However, the merchant then runs the risk of having a pending fraud chargeback on the dispute report. Moreover, unless there is a documentation problem in the chain of distribution, so that the merchant does not have a counter-proof of delivery available, the issuing bank is not likely to deny the chargeback. For ACH fraud chargebacks the issuing bank gets the money back from the merchant bank, and the merchant bank gets the funds back from the merchant. So again, because this process goes beyond just the merchant and the acquirer, a no chargeback agreement does not absolve a merchant from their chargeback liability for ACH transactions.

Advantages of no chargeback agreements

No chargeback agreements provide several advantages to businesses and consumers, and the first is lessened financial risk. For consumers, using this type of agreement can mean avoiding large, deductible bills or transaction fees that are associated with disputed charges. Consumers should know that in the event they need to reverse a transaction, they have to forego using the services that come along with paying a fee. For businesses, the reduced risk is seen through ecommerce security, fewer transaction disputes, and improved trust between the business and consumer. With these agreements in place, businesses show their customers that they are secure and trustworthy when it comes to maintaining agreed upon contract terms. When a business has a well-established reputation for trustworthiness, consumer disputes are less likely (and if they do happen, they will likely not go very far). Consumers may be more likely to do business with a known, trustworthy business that features no chargeback agreements. Businesses that institute these agreements may also find greater loyalty amongst past customers, who are more likely to purchase a product or service from someone they know they can trust to make good on their services. This means more repeat business and a larger bottom line.

Industries using no chargeback agreements

There are a number of different industries in which no chargeback agreements are commonly – and perhaps, even routinely – used. While even there, they are generally more broadly used in large-volume agreements with strong relationships among the parties where high order volumes are anticipated and disputes are otherwise expected to be rare. However, here are some of the most common industries that implement no chargeback agreements:
Communications / Telecommunications. Sales of products used in telecom systems and components such as switches, cell phones, PABX systems, etc.; cabling materials and products; and even site and subscriber maintenance services.
Contract Manufacturing / Components. Products sold by contract manufacturers or component suppliers are often sold under no chargeback agreements; as are products and services attributable to contract manufacturing and components suppliers.
Information / Computer Systems. No chargeback agreements are also common in information systems and computer software, hardware, peripherals and related items where a purchase may be made for a very specific project. Similarly, it is not uncommon for these agreements to apply to ongoing support services provided by the vendor to the purchaser.
Medical Services / Supplies Health insurers may use no chargeback agreements for a wide range of medical services and supplies.

Law issues in no chargeback agreements

The commercial and business considerations related to no chargeback transactions are well known and compelling, but what about the legal side? What jurisdictions and regulatory bodies have jurisdiction over no chargebacks? How should a no chargeback agreement be drafted? What limits exist on the ability to enforce these agreements? Though we are not giving legal advice in this article, commercial parties must consider amongst themselves and especially with an issuer the various legal issues that may arise in connection with a no chargeback agreement. The jurisdictional issues relate to the location of the customer, the location of the merchant, and the location of the payment acceptance location. If customer disputes arise regarding a transaction in which a no chargeback agreement was signed between the merchant and transaction processor, the issuer must look at a combination of each of these locations when determining if it should resolve the dispute in a manner that is not favorable to its card-issuing bank . The problem can become even more complicated when the merchant chooses to move around to different locations. For example, will a struggling restaurant owner open up at a new temporary location in order to avoid a dispute resolution procedure referenced above? When the commercial party travels across jurisdictions, the no chargeback also becomes subject to the laws of those other jurisdictions. Are there any reasonable limits on how far the commercial parties should travel or where they should venture in order to enter into agreements that save issuers’ losses? Issuers may also be subject to regulation by federal and state banking regulatory agencies. Will no chargeback instruments be acceptable to those regulators and regulators of third parties throughout the hierarchy of the payment processing system? Would a transaction be unacceptable because regulators fear consumer abuses? The answers here will depend on the jurisdiction and regulatory authority involved, the level of sophistication of the parties to the agreement and the terms of contract itself.

Drawbacks and limits

As encouraging as no chargeback agreements can be for merchants, they are not immune from potential challenges. First, because chargebacks are designed to protect consumers from wrongful debits, some consumers may view them as a conduit for fraud, especially if they are unable to successfully obtain a refund or chargeback through the issuer’s pre-chargeback processes. For example, one recent dispute between a consumer and PayPal in the media regarding an online purchase for a safety training course questioned whether PayPal had violated the card brand rules by not issuing a chargeback for the consumer rather than just refunding her. Likewise, merchants should consider the risk that a plaintiff may use a chargeback-related issue as a predicate for a false advertising or deceptive claims lawsuit. For example, a recent lawsuit regarding a "free trial" offer in print advertisements on late-night television and social media alleges the retailer failed to honor the terms of the offer to provide a "free trial" leading to unauthorized charges on the consumer’s card.
Second, because certain state and federal agencies view consent-based agreements with caution and reject any waiver of statutory rights as contrary to public policy, there is potential for an issue under applicable consumer protection statutes and/or the Unfair Trade Practices and Consumer Protection Law ("UTPCPL") (73 P.S. § 201-3). The FTC has long held that a promise to honor a merchant’s guarantee must be honored when requested and construed any effort to get around it as an unfair act under the FTC Act (15 U.S.C. Section 45). Moreover, the FTC’s Telemarketing Sales Rule (TSR) abrogates the right of a consumer to request a chargeback or dispute a credit card charge if, inter alia, the defendant failed to disclose material information at the point of sale [e.g., "money back guarantee"] or sent unsolicited merchandise. See 16 C.F.R. Section 310.4.
A third challenge may be presented in instances where no chargeback agreements are disputed by either consumers or issuers. Recently, a class action was filed against the Trustwave Corporation in Chicago alleging that its web products and services did not comply with PCI Standards and their failure to comply led the plaintiffs to incur overseas exchange fees and endure foreign transaction holds on their credit cards. While the complaint did not name Trustwave’s merchants as defendants, the plaintiffs challenged the adequacy of the steps taken by Trustwave’s merchant customers who may have attempted to stave off chargebacks and reduce the potential liability to Trustwave as a result of the alleged breach. There may be additional claims or causes of action asserted under the Card Issuer Agreement with the acquirer, including issues involving PCI Standards.

How to draft a no chargeback agreement

When bargaining and executing a no chargeback agreement, there are basic elements that should be included to ensure enforceability and clarity. First, to the extent practicable, any chargeback that will not be eligible for reimbursement should be specifically defined, whether it relates to condition (e.g., a product not meeting specifications), delivery (e.g., late delivery) or quality (e.g., defective product). Second, the effect of a successful claim on the contract price needs to be clearly identified (e.g., a 10% reduction in price for a defective product). Third, any relevant documentation should be referenced. For example, if a product is not subject to a chargeback expressly because a supplier is addressing a problem through warranty credits, the supplier may want to reference the documents related to the warranty credit program.
A no chargeback agreement is also effective in requiring that the seller or supplier indemnify the buyer for chargebacks. Essentially, this type of indemnification clause will require the supplier indemnify the buyer for any chargebacks and/or warranty claims that are triggered by conduct of the seller or supplier. This type of provision is similar to the requirement that a supplier or seller reimburse or refund a buyer for chargebacks, except that in this circumstance, the buyer will look to the supplier or seller if it is forced to reimburse or refund a customer for a chargeback.

Examples and cases

A large online ecommerce company utilized a no chargeback agreement when they had a customer that was always late to ship items for a refund and the customer was creating unnecessary chargeback liability. The customer was extremely unhappy with an advisor who was in charge of approving all items for return and refund. Once they decided to try to implement the no chargeback agreement, they made the point that since they do not have a brick and mortar store front and the company has always accepted returns, customers cannot feel entitled to have their purchase refunded because their expectations were not clear. They would consider each request for a return and refund on a case by case basis and they would only issue a refund if it was approved by the advisor and shipping department. Once the customer learns that they can no longer receive refunds , they either stop trying to return items or stop trying to purchase from the company, which is the desired result.
Another large online retailer has implemented the use of no chargeback agreements. They take into account the volume of returns that a customer has already returned before implementing the no chargeback agreement. They will review the account history and if the customer is satisfied with refusing merchandise but continues to return it rather than being overcharged for an item, the customer is allowed to keep ordering without the ability to return for refund. In fact, they have a large number of no chargeback agreements with many of their customers. The company feels that the customers are pleased that they can no longer return items for refund and they continue to stay loyal to the company and make sufficient purchases without returning merchandise.