Everything You Need to Know About Payment Chargebacks

With all the promise of modern-day payment processing for law firms, one issue continues to rear its ugly head—payment chargebacks. A chargeback occurs when a payment is returned to a client’s debit or credit card due to a payment dispute. While accepting card payments from clients is a worthwhile practice for law firms, the threat of chargebacks will always be looming.

Your firm must be prepared to handle chargebacks when they occur. This includes understanding why a legal client might request a chargeback in the first place. You also need to understand the process, including how your law firm can respond and dispute the chargeback. And for legal practices using Clio Manage for billing and payment management, we explain how Clio Payments is a built-in option that works with your firm to handle the chargeback process.

What is a chargeback?

A chargeback is a debit or credit card payment that is reversed by the cardholder’s bank when the cardholder disputes the charge. The bank “charges back” the amount of the disputed payment to the merchant or service provider. In the context of payments for legal services, the money is returned to the client without the law firm’s approval. The firm then has a limited amount of time to challenge the payment dispute and fight the chargeback.

Why might a legal client request a chargeback? 

For merchants and non-legal service providers, their customers file chargeback requests for several reasons. The customer may not recognize the transaction and suspect it is fraudulent. They may not be satisfied with the goods or services provided. Alternatively, the customer may simply be making a bad-faith effort to obtain goods or services free of charge.

As for legal clients, their reasons for chargeback requests are similar. It is possible they simply do not recognize your firm’s charge, which is an easily resolved dispute. However, they may simply be dissatisfied with the legal services they received or the amount charged. Areas where this issue often arises include prepaid consultations or flat fees that are paid upfront.

What happens when a chargeback is requested

Broadly speaking, the chargeback process has two main phases—the client’s initiation of the chargeback and the firm’s opportunity to challenge the payment reversal.

Client initiation of the chargeback

The chargeback process begins when a legal client disputes the validity of a payment they made using a credit or debit card. For Clio Manage customers, these accepted cards include Visa, Mastercard, American Express, Discover, JCB, and UnionPay among others. Whereas accepted debit cards include Discover, Visa and Mastercard. The chargeback initiation results in the funds being returned to the client immediately. The burden is then on the law firm to prove the payment was legitimate and the chargeback should be reversed. 

The issuing bank will assign a reason code to the chargeback, based on the client’s reason for disputing the charge. Each of the major card carriers has a different set of standardized reason codes. For example, the American Express reason code AO1 signifies “Charge Amount Exceeds Authorization Amount.” Each reason code comes with different types of required evidence and standards of proof. 

It’s important to remember that chargebacks are administered by the debit and credit card networks, and anyone using those networks is obligated to follow their rules. For law firms using Clio Manage, this means that Clio must follow those network rules when the client requests a chargeback. Only the firm’s client can initiate a chargeback, not Clio.

Challenging the client’s chargeback

Once a client initiates a chargeback, a law firm may either accept the chargeback or fight it through the process of representment. In representment, the firm submits evidence to the “issuing bank”, the bank that issued the credit card, that the transaction was valid and the chargeback claim should be overturned. The issuing bank then reviews the evidence and makes a decision. If the decision is in favor of the law firm, the funds will be returned. Accordingly, the law firm needs to submit the strongest evidence possible in order to prevail.

For firms that are Clio Manage customers, Clio’s Payment Operations department will contact them if they receive a chargeback and offer assistance  in disputing it. The time limit for the firm to respond to the chargeback will vary depending on the card network and the reason code.

The chargeback process at Clio

Chargebacks are a breeze when you’re a Clio Manage customer. The payment operations team at Clio will help your law firm every step of the way. From supporting you with disputing the chargeback, to helping you respond in a timely manner, and submitting all the best evidence.

Differences from eCheck returns

Another key point is that a chargeback is not the same as an eCheck return. Electronic checks (eChecks) are electronic transfers of funds between bank accounts and another form of payment facilitated by Clio Payments.

Unlike chargebacks, eCheck returns are not disputed or charged back to the firm. Instead, the funds are simply returned to the client. eCheck returns are generally done with transactions that are not authorized or have incomplete information. Since eCheck reversals cannot be challenged by the firm, the firm will have to directly contact the client to resolve the issue. 

This should be an important consideration for law firms when requesting echeck payments as the preferred method of payment. Unlike credit cards, echeck (ACH) payments offer no merchant dispute resolution process that can be mediated by the bank or card network. Therefore, more risk is implied.

Final notes on chargebacks 

Law firms can be prepared for client chargebacks by knowing how to effectively respond. If your firm is a Clio Manage customer, Clio will help you respond to the dispute and provide the best evidence possible. Chargebacks may be a hassle, but they’re a solvable challenge and should not dissuade your firm from accepting online payments.

We published this blog post in May 2022. Last updated: April 14, 2023.

Categorized in: Technology