Chargeback is an important safety measure that makes people feel better about paying with credit and with debit cards, especially online. But they can also cause a lot of trouble for the people who have to deal with them. Many customers challenge transactions that don’t come within the specific list of issues that chargebacks are designed to solve or submit a dispute without first contacting the business.
The total number of chargebacks goes up every year, and the pandemic in 2020 and 2021 caused a huge rise in disputes. As the number of chargebacks has grown, more and more companies are taking steps to stop and fight them. What are chargebacks, and what do merchants need to know to stop them and fight them as effectively as possible? If you have these questions about chargebacks, please feel free to read our blog to learn everything you need to know.
What is a Chargeback?
A chargeback is a debit or credit card transaction that is reversed by the cardholder’s bank following a charge dispute. Chargebacks are sometimes known as payment disputes.
The definition of the term chargeback is quite simple. The bank will charge back the amount of the disputed transaction to the merchant and return the funds to the cardholder without the agreement of the merchant.
When a cardholder rejects a charge, banks normally evaluate the transaction and, if the protest is justified, issue a provisional credit to the customer’s account until the chargeback claim is processed.
Chargebacks were created as a direct response to widespread fraudulent usage of stolen credit card information, which the customer had little protection against.
Consider it in this manner: A lost, or stolen credit card is used to make fraudulent purchases. Before the Fair Credit Billing Act, the cardholder had little or no remedy to obtain a refund once the merchant had been paid.
The chargeback procedure enables consumers to receive reimbursements from their banks and allows banks (rather than cardholders and merchants) to manage the matter. While the procedure was not then known as a chargeback, it would establish the basis for the modern dispute resolution system.
What is the Chargeback process?
Either the merchant or the cardholder’s issuing bank can initiate the chargeback procedure. If initiated with a merchant, the process is comparable to a regular transaction; however, funds are transferred from the retailer’s account to the cardholder’s issuing bank.
A chargeback launched by a merchant, for instance, might begin with a request from the merchant to the merchant’s acquiring bank. The acquiring bank would then communicate with the card’s processing network to transfer funds from the merchant’s account at the merchant bank to the cardholder’s account at the issuing bank.
Types of Chargebacks
Chargebacks can be of three different types: true fraud, friendly fraud, and merchant error. As each type is the product of a unique set of circumstances, it requires a unique approach. Friendly fraud is by far the most prevalent form of chargebacks, accounting for 60% to 80% of all chargebacks.
1. True fraud
True fraud chargebacks are what chargebacks were designed for, fraudulent charges made on a credit card by a con artist or identity thief. It is strongly encouraged for merchants not to waste time or resources trying to challenge these chargebacks.
The most effective way to stop true fraud chargebacks is via fraud prevention technologies. The bare minimum is AVS and CVV matching, but many retailers also use 3-D Secure 2.0 or outside solutions that employ machine learning to try to identify fraudulent transactions.
2. Friendly fraud
Customers who want to have legitimate charges reversed can file friendly fraud chargebacks. They might do something on purpose, with hatred or criminal intent, or they might do it because they’re confused or impatient. Friendly fraud chargebacks frequently pass for genuine fraud chargebacks since the consumer makes up a story that they didn’t authorise the charge.
Although it is challenging to stop these chargebacks, they can be challenged in court to restore lost money. Consumers who submit chargebacks for friendly fraud may also be blacklisted.
3. Merchant error
Chargebacks with a merchant error are those where the merchant committed a mistake, such as shipping the wrong item. Disputes of this nature can occasionally be contested successfully, but the faults in merchant operations that these chargebacks expose must be fixed to prevent similar chargebacks in the future.
Improved business procedures, easily accessible and helpful customer care, and a large return policy can all help to reduce merchant error chargebacks.
Why avoid Chargebacks?
It is preferable to prevent chargebacks, as banks and card networks may classify your firm as fraudulent or high-risk, harming your reputation. A consumer has 120 days to file a chargeback, which means your sales are subject to reversal during this period.
A high number of chargebacks may result in banks withholding payment remittances to the business. The worst-case situation would involve the business being prohibited from accepting online payments.
How to prevent and manage Chargebacks?
To begin with, it is advantageous to be a trustworthy merchant who offers high-quality goods on time and gives enough customer service. Here are some other tips for preventing chargebacks:
1. Provide specific information to your customers
If you’re selling anything online, you must give accurate photographs and descriptions of the items you’ve posted. Adding your contact information and return and shipping policies will allow your customers to contact you in the event of a problem rather than initiating a chargeback. Consumers are more likely to pursue chargebacks if they do not identify a charge on their credit card account. To avoid customer confusion, you must include your company’s name and an accurate description of the transaction.
2. Confirm with your consumers by email
When sending order confirmation emails to consumers, be careful to include the invoice and shipping information to avoid this. Verify the card and customer information before initiating the sale if the shipping address and billing address are different.
3. Look out for potential warning signs
Watch out for transactions including repeated orders for pricey goods, odd bulk orders, or repeated orders conducted quickly. These are frequent indicators of fraudulent card use. Numerous orders placed with separate credit cards but shipped to the same address may also be cause for concern.
Conclusion
It is important to understand that chargebacks are a complex process that involves various parties, including the cardholder, merchant, acquiring bank, issuing bank, and card networks. Chargebacks are meant to protect cardholders from fraudulent transactions and merchant errors, but they can also be abused by cardholders who dispute legitimate transactions or engage in friendly fraud.
To avoid chargebacks, merchants should prioritize providing excellent customer service, implementing fraud prevention measures, and ensuring accurate billing and shipping information. In the event of a chargeback, merchants should respond promptly and thoroughly, providing all necessary documentation and evidence to support their case.
Ultimately, chargebacks can be a costly and time-consuming process for merchants, and prevention is key. By staying informed on chargeback policies and best practices, merchants can minimize their risk and maintain positive relationships with their customers and financial partners.
FAQs
1. What is a Chargeback in banking?
Ans: A chargeback is a debit or credit card transaction that is reversed by the cardholder’s bank following a charge dispute. Chargebacks are sometimes known as payment disputes. The definition of the term chargeback is quite simple. The bank will charge back the amount of the disputed transaction to the merchant and return the funds to the cardholder without the agreement of the merchant.
2. What is the Chargeback process?
Ans: Either the merchant or the cardholder’s issuing bank can initiate the chargeback procedure. If initiated with a merchant, the process is comparable to a regular transaction; however, funds are transferred from the retailer’s account to the cardholder’s issuing bank.
A chargeback launched by a merchant, for instance, might begin with a request from the merchant to the merchant’s acquiring bank. The acquiring bank would then communicate with the card’s processing network to transfer funds from the merchant’s account at the merchant bank to the cardholder’s account at the issuing bank.
3. What is the distinction between Chargebacks and Refunds?
Ans: In a chargeback, the cardholder contacts the bank that issued their card to request that a transaction be reversed. In a refund, the customer contacts the merchant first, and the merchant can then initiate a return payment, thereby avoiding the fines and other repercussions associated with chargebacks.
4. How much time do I have to request a Chargeback?
Ans: The chargeback period, or the window within which a chargeback must be submitted, varies depending on the payment processor and can last anywhere between 60 and 120 days. The Fair Credit Billing Act lets people ask for their money back within 60 days of the date of the bill.
