No merchant is immune to chargebacks. Whether you run a brick-and-mortar store or an online business, you will likely experience a chargeback at some point. So, what is a chargeback? A chargeback occurs when a cardholder disputes a debit or credit card transaction with their bank or credit card company, and the bank issues a temporary credit to the cardholder. In other words, chargebacks are refunds that are processed outside of the standard return policy.
There are many reasons why a cardholder might file a chargeback. For example, they may have yet to receive their purchased product or service. Or they noticed unauthorized charges on their account. Or there were billing errors from the processor. Or maybe they changed their mind about a purchase after the fact.
No matter the reason, chargebacks can be costly for merchants. You lose the original sale, including any shipping and handling fees, and you also incur costs from the card issuer and your acquiring bank (usually around $20-$50 per chargeback). And if a customer files multiple chargebacks, you could even lose your merchant account altogether.
That’s why it’s so essential for merchants to understand how chargebacks work and what they can do to prevent them. Let’s take a closer look.
Chargebacks are a service offered by financial institutions that allow consumers to dispute transactions and potentially receive a refund. While there are many instances in which chargebacks are valid, they can also be abused and have an adverse impact on merchants.
Continue reading to learn how you can reduce your chargebacks.
What is a Chargeback?
A chargeback is a provisional credit processed by a card issuer when a cardholder disputes a transaction on their credit or debit card. Credit card chargebacks were designed to protect consumers from fraudulent activity. However, scammers can use them maliciously to get free products and services. Merchants may also experience “friendly fraud” chargebacks, which occur when a consumer buys something and then requests a chargeback from their bank for any reason.
The Fair Credit Billing Act (FCBA) is a federal law that protects consumers from unfair credit billing practices. The FCBA applies to credit card transactions and gives consumers the right to dispute incorrect, unauthorized, or improperly processed charges.
- Suppose a consumer believes that there has been a billing error. In that case, they can contact their issuer and request a credit card chargeback.
- The issuer will then investigate the dispute and decide whether or not the charge is valid.
- If the issuer finds that the charge is indeed valid, the consumer will be responsible for paying the amount in question.
- However, if the issuer finds the charge invalid, they will reverse it and refund the consumer’s account.
The FCBA provides an essential safeguard for consumers against unfair credit billing practices.
What Causes Chargebacks?
Here are several reasons a cardholder might initiate a credit card chargeback request:
- Fraud, including unauthorized transactions, identity theft, or scams
- Payment processor errors, such as duplicate transactions or charging incorrect prices
- Customer disputes, such as when customers are unhappy with the quality of a product or service they received
Chargeback vs. refund
A chargeback is when a cardholder disputes a charge with their card company. On the other hand, a refund is when a merchant cancels and refunds a transaction to the customer.
Only the cardholder or the issuing bank can initiate chargebacks, while only the merchant can issue refunds. Chargebacks are often used in cases of fraud or error, while refunds are used for voluntary cancellations. The chargeback process can be costly for merchants, as they often involve fees and may result in the loss of merchandise.
Refunds, on the other hand, involve returning money to the customer. As a result, they are usually less disruptive for businesses.
Ultimately, whether to issue a chargeback or refund will depend on the situation and the customer’s preferences.
How Chargebacks Work
When a cardholder files a chargeback, their bank or credit card company contacts your acquiring bank (the bank that processes your credit card transactions) and requests a refund on behalf of the cardholder. The acquirer then contacts you and asks you to provide documentation to prove that the transaction was legitimate. This documentation could include invoices, order forms, or delivery receipts.
If you can provide this documentation and prove that the transaction was legitimate, then the acquirer will reverse the chargeback, and you will retain the sale proceeds. However, if you cannot prove that the transaction was legitimate—or if you don’t respond to the acquirer’s request for documentation—then the acquirer will likely side with the cardholder and issue them a refund.
Of course, just because you lost a chargeback doesn’t mean it’s over. You still have the right to representment when you re-submit evidence to get the decision reversed. Representment can be time-consuming and costly, so it’s not always worth it for merchants to pursue—but in some cases, it may be your best option for getting back your hard-earned money.
Preventing chargebacks is always better than fighting them after they’ve already occurred. So what can merchants do to reduce their risk of chargebacks? Let’s take a look at some chargeback prevention strategies now.
What Are Chargeback Fees?
A chargeback fee is a charge levied by a credit card issuer when a customer disputes a transaction on their credit card statement and the issuer finds it in favor of the customer.
A merchant could be forced to pay charges that the payment processor charges to cover the costs of the administrative handling of a transaction. This fee is between $20 and $50 per transaction but can be as much as $100, depending upon the payment provider and the overall risk level. In addition, processors may apply larger chargeback charges to companies considered risky based on their industry/history.
In some cases, the merchant may also be required to refund the cardholder the total amount of the disputed charge. Chargeback fees can be costly for merchants. However, you can avoid them by providing excellent customer service and being clear about pricing and terms before you complete a transaction.
Debit Card vs. Credit Card Chargebacks
The consumer generally uses credit cards interchangeably with debit cards. Although debit cards are very similar to credit cards, they also feature different levels of anti-fraud protection. For credit card fraud, consumer protection laws reduce the cardholder’s liability to $50. There is no consumer protection for debit card fraud for the cardholder’s liability. Debit cards are tied to the consumer’s bank account, and the cardholder is liable for the entire amount.
What is Representment?
Representment is the dispute resolution process that allows merchants to submit evidence to fight chargebacks. The issuer will investigate the merchant’s evidence and may reverse the chargeback based on the merchant’s response. Therefore, you must maintain good records, including details about the transaction amount, shipping details, and the customer’s account.
How to Prevent Chargebacks?
The best method to prevent chargebacks is to have clear and concise policies outlining your refund and return policy. You should also make it easy for customers to contact you if they have any questions or concerns about their purchase.
If you do end up with a chargeback, there are a few steps you can take to try to reverse it. These include providing documentation that proves the transaction was authorized or that the product or service was delivered as advertised.
While chargebacks can be costly and time-consuming, there are some things merchants can do to reduce their risk. For example, ensuring customers enter their billing information correctly and providing clear product descriptions can help to minimize disputed transactions.
Additionally, keeping accurate records of all transactions can help prove the legitimacy of a transaction if a chargeback occurs. By taking some simple precautions, merchants can help to reduce their risk of chargebacks.
Here are a few more tips to reduce chargebacks:
Use AVS Checks
Implementing AVS checks on your transactions is a straightforward way to reduce your risk of fraud-related chargebacks. AVS stands for Address Verification Service, and it works by comparing the billing address provided by the customer with the address on file with their bank or credit card company. If there’s a mismatch—say, if the customer inputs a different billing address than what’s on file—then that’s usually an indication of fraud. In these cases, you should either obtain another payment from the customer or ship their order to their verified billing address rather than their shipping address (if it’s different).
Educate Your Customers
Another way to reduce your risk of chargebacks is by educating your customers about your policies before they purchase from you. For example, ensure that your refund/return policy is prominently displayed on your website so customers can see it before checking out. And if you have special conditions—like no refunds on sale items—be sure to list those. Customers who know what to expect up front are less likely to file a chargeback later.
Have Excellent Customer Service
One of the best methods to prevent chargebacks is to provide helpful customer service. For example, if a customer has a problem with a purchase, they are more likely to reach out to the merchant first to resolve the issue. When customers feel valued and well-taken care of, they are much less likely to file a chargeback. By providing prompt and courteous service, businesses can often avoid the hassle and expense of chargebacks.
Excellent customer service is essential for preventing chargebacks and promoting customer loyalty and repeat business. By ensuring that customers have a positive experience with your company from start to finish, you can minimize the risk of chargebacks and keep your business thriving.
Is a chargeback a refund?
A chargeback is not the same as a refund, though they are often confused. A refund is when a customer returns an item to the seller and receives their money back. On the other hand, a chargeback is when a customer disputes a transaction with their credit card company. The issuer then investigates the claim and reverses the amount if they find it in the customer’s favor.
Customers can benefit from chargebacks if they have been charged for something they did not purchase or were unsatisfied with a product or service. However, customers can also abuse them, so it’s essential to know how to prevent and resolve them.
What are the valid reasons for a chargeback?
The customer didn’t receive the product or service.
The merchant didn’t provide the product or service on time.
The product arrived damaged, missing part, or defective.
The merchant didn’t refund the cost after the customer initiated a return.
The merchant charged the customer the wrong amount.
Fraudsters illegally used the cardholder’s account in the purchase.
Is there a penalty for a chargeback?
If you’re a merchant, it’s essential to know that there are potential consequences for chargebacks. A chargeback happens when a customer initiates a dispute with their card issuer. The issuer then contacts the merchant and requests a refund on behalf of the customer. If the merchant does not have enough evidence to prove that the transaction was legitimate, they will lose the chargeback dispute and will be required to refund the customer.
The merchant may also be assessed a fee by their payment processor. In addition, repeated chargebacks can lead the processor to place the merchant on a list of high-risk businesses, further increasing costs and making it difficult to obtain future payment processing services.
The merchant also loses the shipping and handling fees and the product’s cost.
As a result, merchants must be aware of the potential risks of chargebacks and how to mitigate these costs before accepting credit and debit cards as payment.
Can you get banned for chargebacks?
The chargeback process is designed to protect consumers from fraudulent charges. However, there are some cases where a customer can fraudulently file a “friendly chargeback.” If your chargeback ratio is too high, your acquiring bank may place you on a blacklist, making it challenging to process future transactions.
Sometimes, a merchant may be fined or required to provide additional documentation to prove that future chargebacks are valid. While being placed on a blacklist can be frustrating, it is important to remember that the chargeback process is designed to protect consumers.
As long as you take steps to prevent fraud and handle chargebacks promptly, you should not have any problems remaining off the blacklist.
What are the three types of chargebacks?
Chargebacks are transaction disputes in which the cardholder requests a refund from their card issuer. There are three main types of chargebacks: fraud, merchant error, and customer dispute.
1. Fraudulent chargebacks, such as identity theft, occur when the cardholder does not authorize the transaction. These fraudulent transactions are why consumer protection laws exist.
2. Merchant errors can happen when they charge the customer the wrong amount or a product is not delivered as promised.
3. Customer disputes occur when the cardholder is dissatisfied with a purchase but does not meet the criteria for fraud or merchant error, also known as friendly fraud. One example of this is canceling a subscription service instead of going through proper channels to stop the service.
Chargebacks can cause lost revenue for businesses, so it is crucial to take measures to prevent them from happening. For example, merchants can offer clear and concise refund policies and train their employees in processing transactions.
What is chargeback software?
When a customer processes a chargeback with their credit card company, the merchant’s acquiring bank typically charges the merchant a fee. This fee can be very costly, especially for small businesses.
In addition, the merchant may also lose the product or services the customer purchased. Chargeback software helps to reduce chargebacks by providing real-time alerts when payment disputes are made. These alerts allow the merchant to quickly address any issues that may have led to the chargeback.
Additionally, chargeback software provides extensive data reporting so merchants can identify and resolve any systemic issues causing chargebacks.
You can also use fraud prevention tools that use analytics and Artificial Intelligence (AI) to analyze transactions, compare buyer data to databases of known offenders, and flag transactions before they are approved.
By using chargeback software, merchants can significantly reduce their financial losses due to chargebacks.
Chargebacks are costly for merchants—not only do you lose the sale proceeds, but you also incur fees from the issuing bank and your acquirer. And if a customer files multiple chargebacks, you could even lose your merchant account. That’s why it’s so essential for merchants to understand chargebacks and what they can do to prevent them.
Use AVS checks, educate your customers about your policies before they purchase from you, ship orders to the verified billing address, and have great customer service are some ways to help prevent chargebacks.
No merchant is immune to it because it’s bound to happen simultaneously. So the best way to process each event is to prepare as much as possible in advance.