What Is a Chargeback? Everything You Need to Know to Protect Your Business
Any kind of dispute with customers can be an added cost to a business. This is particularly true for chargebacks on credit card payments.
Research suggests that chargebacks impact six in every 1000 transactions and increase by over 20% each year. While chargeback rules are important for consumer protection, these have a significant business impact on sellers.
In this article, we’ll cover everything you need to know about chargebacks and their implications for sellers.
What Is a Chargeback?
A credit card chargeback takes place when a customer purchases an item from a merchant but immediately after, disputes the payment with their issuing bank. The bank issues temporary credit to the customer and then initiates a chargeback process with the seller’s payment processor.
The payment processor notifies the seller and removes the funds from their business account until the dispute is resolved. This can be a complex and time-consuming process. Apart from losing the sale, the business may also have to pay an extra fee to their payment processor for incurring a chargeback.
Common Reasons behind Chargebacks
Chargebacks can happen due to several different reasons.
A customer can file a representment in case of unauthorized charges for a purchase they never made. Such fraud can be prevented by using secure payment services, training employees, and following best practices for accepting payments.
Issues with shipping, delivery, or pricing
In case a customer never receives an order, receives it too late, or seems overpriced for the order, they may file a dispute. Sellers can avoid this by keeping all order tracking numbers at the ready, hiring a reliable delivery partner, and having accurate and updated listed prices.
The customer is dissatisfied with the product
Customers can file a dispute if they are not happy with your products or services. For products, this could be due to a defect, substandard quality, or discrepancy between the advertisement and the actual product.
In the case of services, however, things tend to be more subjective and complicated. Sellers can minimize chargebacks by having a clear refund policy, responding to customers’ service issues promptly, maintaining a transparent return policy, and setting realistic expectations.
The customer doesn’t recognize the business name
Loyal and brand-conscious customers can suspect fraud in case the branding on the product packaging doesn’t seem familiar to them. Often, a cardholder disputes a charge if they are confused by conflicting branding information provided by the seller. To avoid this, make sure your packaging is on brand and there is no confusion about your logos, colors, and other brand insignia.
The credit is not processed
Customers may return an item anticipating a refund or a transfer of credit to their account. In case neither happens, the customer may file a payment dispute. This situation could be a result of a user error or system failure. To avoid this, have a reliable system in place to handle credits and refunds. Also, state your refund, return, and cancellation policies clearly so that there is no confusion among customers.
The customer fails to cancel a subscription
In the case of services like software, entertainment, education, etc., customers may authorize sellers to debit the monthly or quarterly fee from their bank account. While this can be great for your business, it’s also prone to disputes. Customers may fail to cancel subscriptions when they intend to and seek chargebacks for the amount deducted.
You can mitigate this risk by ensuring that your customers understand the terms of the agreement for recurring payments. If possible, get them to acknowledge these terms using an online signature or checkbox. Also, alert your customers about the imminent payment a day or so before so they get plenty of time to decide.
How Do Chargebacks Work?
Let’s now try to understand the dispute process of a chargeback claim from the perspectives of the customer, seller, and card networks (Visa, Mastercard, American Express, Discover).
- Customer seeks a chargeback: After delivering a product or service, a seller bills a customer and collects money from them. Due to any of the chargeback reasons mentioned earlier, if the customer is not happy with a purchase or claims fraud, they may file a chargeback request. Per the Fair Credit Billing Act, credit card issuers must return the disputed amount to customers within a time limit of 60 days from billing. However, the company may seek evidence such as an e-receipt or credit card statement before they authorize the chargeback.
- The chargeback is debited from the seller: The card company sends the chargeback to the seller, debiting the disputed charge from the merchant’s bank account, plus the processing fee.
- The credit card company reviews the seller’s response: The seller may contest the chargeback by submitting evidence such as proof of delivery to the card company. The latter can take up to 75 days to confirm the validity of the seller’s evidence.
- The chargeback is resolved: Finally, the merchant may accept the chargeback or the customer may cancel it. If, however, the parties continue the dispute, the card company may go for further arbitration.
- Arbitration: In case neither the customer nor the seller is satisfied with the outcome, the card company has the final say in the dispute. If the verdict favors the seller, the customer’s bank returns the payment along with any applicable fee. However, if the chargeback is deemed to be valid, the seller will have to pay additional fees.
What Is a Chargeback Fee?
Every time a seller concedes a chargeback, their acquirer charges a fee. This chargeback fee acts as a penalty of sorts to push sellers to avoid chargebacks in the future. Depending on the seller’s agreement with the acquirer, the chargeback fee can vary between $20 and $100.
How Can You Dispute a Chargeback?
When you dispute transactions, make sure to respond as fast as possible to avoid chargeback losses.
- Collect all the relevant information: As soon as a customer disputes a payment and you discover that a chargeback has been filed, gather all information about the customer and the card transaction.
- Submit your response: Submit all the evidence you have if you feel the buyer has filed the chargeback unfairly. Follow all chargeback dispute instructions, especially concerning the formatting and deadlines.
- Wait for the decision: Once you have submitted your response, wait for the decision by the processor’s acquiring bank.
How to Prevent Chargebacks
Several tactics can help you prevent or at least minimize chargebacks:
- Before choosing a payment processing provider, read all their terms and conditions, and learn about their chargeback process and fraud prevention tools.
- Ensure that your processor is PCI-compliant. You must also follow all credit card guidelines such as using secure POS and payment gateways, training employees on security procedures, and using fraud prevention tools.
- Develop a clear business policy especially when it comes to product delivery and returns. Provide tracking information, estimated timelines for delivery, and refund information to your customers.
Chargebacks end up eating away your precious time and resources, thus impacting your bottom line. They also affect your reputation. However, if you process a large number of credit card transactions at your business, there’s no way you can avoid them completely.
The good news is that you can certainly prevent them from happening to an extent and also dispute them following due process to minimize losses. To manage all of this easily while keeping costs under control, partner with a small-business-friendly payment service provider like Payment Depot. Contact us today to learn more.
FAQs about Chargebacks
Q: What is chargeback and how does it work?
A chargeback is a process initiated by a credit card holder with their bank, requesting to reverse a transaction. It usually occurs when a cardholder disputes a charge on their account, claiming it to be fraudulent or for a transaction where the goods or services were not received as expected. The bank then investigates the claim, and if it finds the claim valid, it reverses the charge, taking the money back from the merchant and returning it to the cardholder.
Q: Does chargeback mean refund?
Not exactly. While both chargebacks and refunds result in the cardholder getting their money back, they are initiated differently. A refund is processed directly by the merchant, usually upon the customer’s request due to dissatisfaction with a product or service. A chargeback, on the other hand, is initiated by the cardholder through their bank and often occurs without direct communication with the merchant.
Q: What qualifies for a chargeback?
Common reasons for chargebacks include fraudulent transactions (unauthorized charges), errors in billing (like being charged twice), not receiving the goods or services as described, or not receiving anything at all. However, the specific criteria can vary depending on the credit card company’s policies.
Q: What is an example of a chargeback?
An example of a chargeback could be if a person buys an item online, but the item is never delivered. The buyer can then contact their bank to initiate a chargeback, claiming they did not receive the goods they paid for.
Q: Who loses money in a chargeback?
In a chargeback, the merchant is usually the party that loses money. If the chargeback is approved, the disputed transaction amount is taken from the merchant’s account and returned to the cardholder. Additionally, merchants often incur chargeback fees from their payment processors.
Q: Can a bank refuse a chargeback?
Yes, a bank can refuse a chargeback if it determines that the chargeback request does not meet the necessary criteria, such as in cases of a valid transaction or if the claim is made outside of the designated time frame.
Q: Can a company refuse a chargeback?
A company (merchant) cannot directly refuse a chargeback since it is a process initiated by the cardholder with their bank. However, they can dispute the chargeback by providing evidence to the bank that the transaction was valid or that the goods or services were provided as agreed. The final decision rests with the bank or the card network.