What Is a Chargeback: Everything You Should Know
Chargebacks are officially demanded reimbursements claimed by cardholders dissatisfied with the merchant’s goods or provided services. As most businesses nowadays accept card payments, chargebacks are a looming threat for most merchants and a readily available refund strategy for the vast majority of customers. But, there’s more to a chargeback than at first meets the eye, so it helps to be familiar with all the nitty-gritty if you want to get out of a chargeback dispute as a victor.
In this guide, we’re exploring the fundamentals of a chargeback, seeing what the chargeback process looks like, how long it takes, and what both merchants and buyers can do to increase their chances of winning a chargeback dispute and minimizing their financial losses.
What Are Chargebacks?
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Chargebacks are processes set into motion when a customer raises concerns about a transaction conducted using their credit card, which they deem illegitimate or unauthorized. Such transactions are often the result of some kind of fraudulent activity, which led to the transaction in question being executed without the cardholder’s knowledge or consent.
To help the cardholder, the company that issued their bank exercises authority to all in its power to return the funds to the cardholder. Of course, the merchant on whose platform the transaction was made does all in their power to defend their case, too, if the chargeback appears unwarranted.
As you can imagine, each chargeback can turn into something more serious than a simple refund. For one, the merchant can see lower income due to reversed transactions, and finding a legal battle to support their case can be damaging both in regard to finances and their reputation.
The Chargeback Process
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The chargeback process involves the cardholder, the merchant, and their respective banks. From the moment of initiation, it can take months to solve. Sometimes, in more extreme cases, it can even take years, draining all involved parties and damaging the merchant’s reputation.
While banks themselves can occasionally trigger chargebacks if they notice issues like processing errors, it is usually the cardholder who takes the initiative and disputes the transaction. Usually, their dissatisfaction with the charge is the result of fraud or identity theft, but simple transaction errors and other such mistakes are also quite common roots of the problem. Sometimes, the cardholder feels the product or service they paid for was not as good as advertised.
Once initiated, the process branches out into a number of exchanges between the card issuing bank and the merchant. The communication involves the presentation of evidence on each part, documentation submission, and argumentation. The ultimate goal is, of course, to determine whether the chargeback was raised for a legit reason-
In the end, depending on the evidence presented and the quality of the argumentation, either the issuing bank or the merchant yields. In some cases, things can escalate, leading to authorities being involved as well.
Chargeback Duration
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First, it is important to understand that a chargeback is not just a mere reimbursement. It is a complex procedure that can go down many different roads, both short and long, depending on a multitude of factors and complexities.
The swiftness with which a chargeback dispute is taken care of hinges on factors such as the specific reasoning behind its initiation, the card-issuing bank’s stance and policies on chargebacks, the buyer’s credit card network (Visa, American Express, etc.), and the strength and nature of the evidence presented by both the customer and the merchant.
The Fair Credit Billing Act of 1974 states that consumers must be granted a minimum of 60 days to challenge charges they deem spurious. Yet, the entirety of the chargeback process can sometimes take up to 90 days to complete. Within this time frame, several factors influence both the pace and the result of the chargeback resolution. For example:
The Category of the Chargeback
The category of the chargeback itself and the card network are chief determinants. Of course, the nature of the issue will always be in the spotlight. For example, fraudulent activities demand a more intricate approach than something like a processing glitch or disputes arising due to defective products or unsatisfactory services the customer paid too much for.
Different card networks — Visa, Mastercard, American Express — only add to the complexity of the situation, as each of them is subject to different rules and regulations governing various chargeback causes.
The Merchant’s Payment Processor
Another significant factor in the chargeback narrative is the merchant’s payment processor. This is hardly surprising, given the diversity in chargeback protocols employed by different payment processors. Not to mention all the variance in internal procedures.
The Location of Both the Merchant and the Consumer
Further, we have the geographical location of the merchant and their customer. We usually overlook this factor, but it can greatly increase the duration of the process. If the merchant and the consumer live in different countries, they will face a number of challenges. Those include the more obvious problems, such as time zone disparities, as well as more intricate problems, such as communication issues and legal discrepancies.
The Quality of the Evidence Presented
As you can imagine, the evidence you present, no matter from what angle, is going to be your chief defense in the process. If legal entities are involved, the quality of evidence and the manner in which you present it have tremendous sway over the resolution pace. Well-organized evidence accelerates the process greatly, while vague or insufficient data only prolongs it.
What counts as good evidence? Receipts, invoices, delivery confirmations, communication screenshots, and transcripts. Such evidence can give the bank a holistic view of the case, leading to a faster and more favorable resolution.
Response Time
Respecting deadlines set by card networks is important. A prompt, well-crafted response followed by a variety of relevant details and documentation can speed up the resolution process drastically. In contrast, delaying responding to the chargeback alert or failing to do so will only prolong the process and likely lead to an unfavorable resolution. The absence of a response may result in case dismissal, which will only incur additional costs.
Most Common Reason for a Chargeback
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As mentioned, chargebacks predominantly arise as the result of fraud, that is, unauthorized transactions. However, some customers opt for a chargeback even after they have authorized the transaction. This is called friendly fraud, but the moniker is misleading — it still puts a lot of strain on the merchant’s financial well-being.
But, to get back to the usual causes that make customers go down the chargeback path, we can mention:
- Fraudulent transactions: It will come as no surprise to anyone that fraudulent transactions are responsible for the highest frequency of chargebacks. That is, transactions conducted without the buyer’s knowledge and consent, typically those conducted in an identity theft scheme, constitute the largest chunk of this kind of chargeback. Being that fraud and identity theft are serious crimes, chargebacks that accompany them undoubtedly represent the biggest challenge for businesses of all sizes, but especially the largest enterprises, due to the potential financial and reputational losses they can suffer;
- Disputes over quality: Chargebacks are common when a buyer receives a receipt of the purchased item but deems the item unsatisfactory or contrary to what is advertised. In this type of scenario, the buyer has the fundamental right to invoke a chargeback should they want to. On the other hand, businesses have to do their best to address all claims of misleading business practices;
- Transaction errors: In certain instances, chargebacks result from nothing other than simple errors that tend to trouble us during billing and refunding processes. Such cases include instances where the buyer is billed more than once for the same transaction or when they are charged for something they did not even put in the same order. These chargebacks are less serious and often get resolved quickly;
- Technical issues: We’ve all been using the internet for a long time now, so we know how annoying unexpected technical glitches and banking errors can be. If something like that happens, the customer might think that they were wronged and, thus, demand a refund or involve their bank to settle a chargeback process.
Should You Fight a Chargeback?
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In those situations where a merchant recognizes that the chargeback is illegitimate or groundless, they should always try to support their case and fight the customer. They can do that by engaging in the process called representment, which basically boils down to a defense presentation, including all necessary evidence to debunk the erroneous claims. Should they succeed, merchants stand a chance to mitigate losses and get back on track.
The merchant can collaborate with their team and lawyers to gather quality evidence. Then, their acquiring bank relays the evidence to the credit card network to the customer’s issuing bank, which is then given the freedom to assess the evidence and come to a conclusion as to whether the chargeback was legitimate or not.
If you are a merchant and want to dispute a chargeback, you must remember that speed and time are of the essence. Failing to meet the deadlines and present compelling evidence on time will result in unnecessary prolongation of the process and likely incur additional fees. Conversely, having a professional chargeback representment team on your side can help you resolve all issues promptly, regardless of deadline restrictions.
Chargeback Prevention
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If you want to win a chargeback dispute as a merchant, you will need a highly strategic approach. The specifics will, of course, depend on each specific case. After all, the battle can unfold swiftly, but it can also drag on for months or even years. To mitigate the hazards associated with chargebacks, ensure your finances are safe, and make sure your reputation does not suffer, you can employ some proactive measures and prevent chargebacks from occurring in the first place. Let’s consider some common chargeback prevention measures:
- Swift responses: Acting promptly as soon as you receive any chargeback notifications is imperative, especially considering the fact that cardholders adhere to specific timeframes for disputing charges as well. As a merchant, though, you are the accused party, so your odds of winning the dispute and streamlining the entire process will increase significantly if you are swift to respond;
- Compelling evidence: Speed is important, but the key to making sure chargebacks are as mild as possible lies in amassing and presenting comprehensive, compelling evidence that will help you substantiate your claim to innocence. The more comprehensive and the more well-presented your evidence, the more swiftly you will be able to get the case over with. Good evidence entails transaction records, delivery confirmations (especially if the customer claims your goods were defective), and correspondence with your customers. A coherent presentation will, of course, also help your case;
- Chargeback-protective payment processors: Finally, partnering up with a payment processor that provides solid chargeback protection services can do wonders for chargeback prevention. Payment processors employ teams that can help merchants win chargeback disputes and assist them every step of the way. By relying on their expertise and help, you can rest assured the dispute process will go in your favor;
- Have clear product descriptions: Clear and accurate product descriptions can go a long way in preventing chargebacks. After all, chargebacks often occur when customers feel tricked or unsatisfied with their purchases and the services they receive. By providing them with transparent and informative product descriptions and by not overhyping your services, you can minimize the chances of misunderstandings and, thus, disputes.
What Is a Chargeback Fee?
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So, chargebacks are a universal concern for all merchants, regardless of the size of their business, their financial status, the nature of the goods and services they provide, etc. That implies that chargeback-associated fees are likewise a universal concern for all merchants.
Chargeback fees can harm businesses by reducing their profits, diverting the management team’s attention away from growth, and depleting resources that could be used elsewhere, for example, in marketing. Of course, the more the chargeback process drags, the worse the accumulated fees are.
How much can you expect to lose? Well, your acquiring bank will charge you fees just to offset the costs of all subsequent chargeback-related processes. The exact numbers are hard to determine without specific details of each case, but they can range from 20$ to even $100 for smaller enterprises, depending on your bank. Of course, if you’re running a larger business, you can expect much larger fees.
Businesses operating in industries prone to high chargeback rates, such as e-commerce, should consider chargeback insurance to mitigate the risk of fees associated with things such as:
- Transaction processing: This fee covers the cost of the transaction and the payment processor markup;
- Operational costs: In addition to the chargeback costs themselves, merchants will have to cover operational expenses tied to the transaction. That means evidence compiling and shipping, inventory management, anti-fraud software, etc.;
- Elevated chargeback ratio fees: If you are familiar with how insurance premiums rise in tandem with the rising number of accidents, you will easily figure out how excessive chargebacks can lead to escalated chargeback fees piling up. In fact, businesses with a chargeback ratio exceeding just 1% might be categorized as high-risk, which immediately incurs added charges for each new chargeback.
FAQs
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What’s the difference between a chargeback and a refund?
A lot of people often use the terms chargeback and refund as mutually synonymous. However, a chargeback is much more serious and complicated. In essence, it refers to the process when a cardholder contacts their card-issuing bank with the request that their transaction be reversed. In the case of a simple refund, the customer establishes direct communication with the merchant, allowing them to reimburse them without any intermediaries. Thus, refunds are much simpler, take much less time to resolve, and are not as damaging to the merchant’s reputation.
What is a chargeback ratio?
Simply put, a chargeback ratio is the proportion of chargebacks in comparison to the total number of all transactions processed by the same merchant. The higher the chargeback ratio, the higher the risk of disputes and financial losses for the merchant.
What should merchants do if they receive a chargeback?
Most importantly, merchants who receive chargeback notifications should try to respond to them as fast as possible. They should gather evidence to support their case if they are unable to reach out to the customer and resolve the issue directly.