A chargeback is a protection strategy that customers use to dispute unauthorized credit card payments and transactions.
Unfortunately, chargebacks can be a huge problem for merchants. They are not only costly but they often lead to a merchant being banned from accepting and processing credit cards.
But before we go any further, let’s look at what is a chargeback and the chargeback dispute process.
What is a chargeback?
One of the commonest questions we get from many of our customers is what does a chargeback mean?
Well, a chargeback also known as a payment dispute is a reversal of a credit or debit card payment made by a customer. The chargeback process was created by the Fair Credit Billing Act of 1974 to help protect customers from fraudulent transactions.
So, how do chargebacks work?
A chargeback works after a customer challenges a credit charge through their issuing bank. If the bank feels the claim is valid then the payment is reversed. This reversal of funds from the merchant to the customer’s bank is what is referred to as a chargeback or merchant chargeback.
What is a chargeback process?
Now that you have the chargeback meaning let’s look at what is a chargeback dispute process.
The chargeback dispute process includes all the steps that occur from the time the cardholder contacts their issuing bank to file a dispute to the time the dispute is resolved. In this process, there are various parties involved, including the cardholder, card network, the card issuer, the acquiring bank, and the merchant.
Below is a brief explanation of what happens during each of the steps in the chargeback process.
Initial dispute is made by the cardholder – The chargeback process starts when the cardholder contacts their issuing bank to file a payment dispute. In some instances, the chargeback may be initiated by the issuing bank on behalf of the cardholder.
The issuing bank determines if the chargeback is valid – The next step involves the issuing bank determining if the cardholder’s claim is valid. In case the reason for the dispute isn’t valid, the claim is declared invalid.
Provisional refund – In case the cardholder’s claim is valid, the issuer will issue a conditional refund that is equal to the disputed amount to the cardholder. The card issuer will then notify the acquiring bank, who will debit the original payment amount and any other additional fees from the merchant’s account. The withdrawal of the funds from the merchant’s account is often the first sign that alerts the merchant that there is a pending chargeback request.
Notice is given to the merchant – The issuer will then assign the chargeback a reason code and transfer this information to the acquirer. The acquirer will forward the same information to the merchant, and the merchant will then make a decision if they fight or accept the chargeback.
Rebuttal letter – If the merchant decides to fight the chargeback, they’ll need to submit a rebuttal letter and a reversal request to the acquirer. Any applicable evidence that can help substantiate the merchant’s claim is also attached to these documents.
Representment – Once the acquirer reviews the submission, they will forward it to the card issuer. This process is what is referred to as representment. The issuer will consider the letter and the attached evidence to make a decision on whether to uphold or reverse the payment dispute.
Issuing bank decision – Once the issuing bank reviews the submission, they may decide to:
- Rule in the merchant’s favor which will lead to the reversal of the chargeback. The transaction money will also be recharged to the customer’s account and the credit card payments transferred to the merchant’s account.
- Rule in favor of the cardholder where the decision of the issuer stands and the chargeback remains.
- The card issuer files another chargeback in case the merchant wins. For instance, they can change the reason for the chargeback and issue another dispute based on a different reason code.
Arbitration – If the merchant isn’t satisfied with the issuing bank’s decision, they can appeal to the credit card company to make a decision on the case. The card network decision is final and in case they decide in the cardholder’s favor the merchant has to pay some fees.
How to submit a chargeback
As a credit cardholder you have a right to file a chargeback in case you’re disputing a transaction.
However for the merchant, chargeback is a costly process and will often result in loss of revenue.
Notably, most customer disputes can be easily resolved by contacting the merchant. So, it’s always advisable to contact the company first before filing a chargeback.
However, if you contact the merchant and they’re unwilling to work with you, you may need to file a payment dispute.
To submit a chargeback you need to contact your credit card company. Ensure you let them know that you want to file a payment dispute. Also, indicate the transaction under dispute and the reason why. Provide as many details as possible and in case you have copies of supporting documents ensure you include them as well.
Once you file the dispute, the process will vary depending on the card issuer. However, most card networks will forward the information to the merchant and their payment processor. The merchant will then decide whether to give you a refund or fight the chargeback.
Reasons for chargebacks
A card holder may decide to dispute a card payment for a variety of reasons. For instance, if they aren’t happy with the services or products received they may ask for a refund. Other reasons that may warrant a payment dispute from a customer include:
- Billing error
- Unauthorized charges
- Goods not delivered
- Non processed return credit
- The amount charged was incorrect
- A subscription was not stopped after cancelation
- Damaged or defective products
- Duplicate charges
- Unresolved complaints
It’s also important to note that some customers misuse the chargeback process and file payment disputes based on illegitimate reasons such as claiming that a purchase made legitimately was fraudulent. This is typically referred to as friendly or legitimate fraud.
Difference between a chargeback and a refund
If you’re wondering if a chargeback is similar to a refund, the answer is no.
A chargeback is a payment dispute that is initiated by a customer and the issuing bank is the one responsible for facilitating the chargeback process on behalf of the cardholder.
On the other hand, a refund is a repayment initiated by the merchant to pay back a customer who isn’t satisfied with products bought from the merchant. In case of a refund, the customer and the merchant often come to an agreement to resolve the issue. Also, unlike the chargeback process, a refund takes a shorter period as the customer is dealing directly with the merchant.
How to prevent bank chargebacks
A chargeback is costly for businesses as they lose the money from the sale and they also have to pay an additional chargeback fee. A too high chargeback ratio can also lead to the business being classified as high risk or result in the closure of the merchant’s payment processing account.
This is why it’s important for a merchant to come up with strategies that can help keep chargebacks to a minimum. Some of chargeback prevention strategies include:
- Provision of friendly customer service that will make it easy for customers to contact you in case they have issues with any of your products instead of filing a dispute
- Partner with a reliable payment processor such as eMerchant Authority that offers merchant accounts with chargeback and fraud prevention tools
- Follow credit card guidelines and be PCI-compliant
- Have a clear return policy
- Inspect products for defects or damage before you sell them
- Make your pricing transparent and avoid hidden fees
- Use reliable shipping services and track your orders
In closing, a chargeback is a customer protection tool that helps customers’ dispute fraudulent transactions or charges. Hopefully, as a merchant you now understand why customers file for payment refunds and the steps you can take to prevent them.