What is a chargeback?
A chargeback is a required reversal of a transaction filed by the card issuer, on behalf of the customer, against the merchant. Chargebacks can occur due to a fraudulent sale or a problem with the transaction that has not been resolved between the customer and merchant directly.
What is the chargeback process?
The chargeback process starts when the customer contacts their card issuing bank to explain their situation and what attempts they have made to resolve the problems associated with the merchant and the transaction. At that point the card issuing bank will begin their investigation into the transaction by checking if there was any instances of fraud or stolen identity, then further investigating into the sale to confirm if there is enough reason to reverse the transaction through the use of a chargeback. During this part of the investigation by the issuing bank, the bank will credit the amount of the transaction back to the customer’s account until they render a decision.
If the card issuer feels that the customer has not received the agreed upon product or service or that the merchant has not fulfilled their part of the sale, the card issuer will inform the payment network of their findings and the impeding chargeback. In the case of fraud, the card issuer will work with the customer to resolve the problems and will issue new card account information and the customer might not have any legal liability for the transactions that occurred fraudulently.
If a chargeback is authorized, the card issuers will inform the card network to inform the merchant acquiring bank and payment processor that a chargeback has been filed and that the merchant does have the opportunity to dispute the claims by the customer. At this point, any fees incurred from the chargeback, including the amount of the transaction, the administrative cost of the chargeback, plus any additional transaction fees are assessed to the merchant.
If the merchant decides to file a dispute, the merchant can include copies of receipts, signed documentation or any other information that might help explain their side of the transaction and the reasons for the problems. The card issuing bank will review the documentation and decide if they feel that the customer claims are valid, warranting the need of chargeback or if the merchant has delivered on their promised goods or services, eliminating the need of the chargeback. If the issuer feels that the customer was correct to file this chargeback, the funds will remain with the customer – if the issuer feels that the merchant has fulfilled their part of the transaction, the funds will be returned to the merchant.
Merchants do have the opportunity to dispute the finding of the card issuing bank, requesting a second round of review of the chargeback claim. If during the second phase of the chargeback investigation, the findings are in favor of the other party, the transaction can be escalated to an arbitrator who will provide a final answer.
Types of Chargebacks
There are a few different types of reasons why charge backs are filed, while some can be due to theft of payment card information, other types can be as simple as a friendly misunderstanding or fall on the other side of the spectrum and stem from malicious intent by the cardholder.
From time to time, transactions can occur where the customer authorized the payment at the the point of sale, only to dispute the charge once the transaction appears on their statement history. While the customer might have all intentions of paying for that transaction, the name or the amount of the transaction may have slipped the customers memory or information on the statement might not appear correct and trigger the call to the card issuing bank that begins the chargeback process.
The largest and most common reason chargebacks are filed is due to unauthorized purchases made using a customers bank card. Credit card theft can occur with either a physical card being swiped in a retail location by a thief or using stolen card account information for an online purchase, which has become most common place where fraud occurs today.
In some instances, customers will authorize a transaction at the point of sale, whether online or in a storefront only to decide to chargeback the transaction as a way of obtaining the product for free. Customers that commit this type of chargeback fraud cause significant and unnecessary costs and problems for merchants in the hope of receiving free products, knowing that it is very hard for merchants to dispute or challenge the claims made by the customer. Merchants do see this as a common problem with the adult credit card processing industry since many customers do use this tactic after a trial period or an impulse purchase.
How do I know I have a chargeback?
Depending on the card network and the merchant acquiring bank, the notification policies can differ between networks, banks and payment processors. While some networks and acquiring banks will inform merchants with a physical letter, other banks and processors might only provide an online notification, requiring merchants to periodically check to ensure that there are no losses for preventable reasons.
It is wise for merchants to check with their payment processors to know exactly how they will be informed of a chargeback and if they can assist at all in the dispute process, possibly helping stop any preventable fraud before it happens.
How to Dispute a Chargeback
One of the best ways to prepare and remain ready for any potential chargebacks is by keeping complete files to all of your transactions. While this might seem like a daunting and challenging task, by simply requiring customers to sign receipts, checking signatures on payment cards and filing all transaction information is a great start to remaining prepared for any problems.
Merchants must remember, the more information you can provide to prove that the services you provided or the products that you sold were complete and accurate, the better the chance you will have to win the dispute. Keeping records of service calls, warranty information and a clear and concise terms and conditions can make a merchants claim hold water in the event that anything is contested.
How to Prevent Chargebacks
Shipping items or delivering services in a timely fashion or billing clients quickly and correctly can prevent many unnecessary costs from unhappy customers who were expecting what you had offered at the time of the sale. Batching settlements late or billing incorrectly can be a recipe for a slew of chargebacks, but being astute and organized can prevent any of these problems before it becomes costly.
Offering an easy line of communication, such as a help line or website, can ease customers in the event of delays or problems and can help prevent many immediate chargebacks. Speaking to merchants first can drastically help curb chargebacks, allowing for customers to have their questions answered and get the information they need.
Online merchants can help lower chargebacks by insuring that their contact information is readily available and information displayed on credit card statements clearly states the product name or website address and a phone number where customers can call for questions and more information.
For more information, the Visa website provides some good information about chargebacks and how insulate your business from them in the future.