A chargeback is a transaction reversal that occurs when a customer disputes a charge on their credit or debit card and requests their bank or card issuer to return the funds.
This process serves as a consumer protection mechanism, allowing cardholders to recover money in cases of unauthorized transactions, billing errors, fraudulent activity, or when goods or services were not received or did not match what was promised. When a chargeback is initiated, the customer’s issuing bank temporarily removes the funds from the merchant’s account and begins an investigation.
Both the merchant and the customer may be asked to provide evidence to support their case. If the bank rules in favor of the customer, the funds are permanently returned to them. This can result in significant financial loss for the merchant, who may also face chargeback fees and a higher chargeback ratio, potentially threatening their ability to continue accepting card payments.
Although chargebacks are essential for consumer protection, they are sometimes abused in cases of friendly fraud, where a customer disputes a legitimate purchase. To protect their business, merchants must have strong fraud prevention strategies, maintain clear communication with customers, and ensure accurate product descriptions and policies.
Common Reasons for Chargebacks
Chargebacks can occur for a variety of reasons, and understanding the most common causes can help businesses take proactive steps to prevent them. These disputes typically fall into a few major categories, including fraud, customer dissatisfaction, and merchant error. Here are some of the most common reasons for chargebacks:
- Fraudulent transactions: The cardholder claims they did not authorize the purchase, which is common in cases of stolen card information or identity theft.
- Unrecognized charges: The customer sees a transaction on their statement that they don’t recognize, often due to unclear billing descriptors or forgotten purchases.
- Goods or services not received: The buyer reports that they never received the item or service they paid for, which can result from shipping delays, errors, or service cancellations.
- Defective or not as described products: The customer receives an item that is damaged, defective, or significantly different from what was advertised.
- Duplicate charges: The cardholder is billed more than once for the same transaction, either due to a system error or processing mistake.
- Refund not processed: A customer requests a return or refund, but the merchant fails to issue it or takes too long to do so.
- Subscription billing issues: Recurring charges from subscriptions may be disputed if the customer believes they canceled or never agreed to ongoing payments.
How Do Chargebacks Work
This is how chargebacks work:
- Customer disputes a transaction: The cardholder notices a charge they believe is incorrect, unauthorized, or problematic and contacts their bank or card issuer to dispute it.
- Issuer reviews the dispute: The bank reviews the customer’s claim and determines if it is valid enough to proceed with a chargeback.
- Temporary reversal of funds: The issuer places a temporary hold on the disputed amount, removing it from the merchant’s account while the investigation is underway.
- Merchant is notified: The merchant receives a chargeback notification, often called a retrieval request or representment request, and is asked to provide evidence supporting the legitimacy of the transaction.
- Merchant responds with evidence: The merchant submits documentation such as proof of delivery, transaction records, or customer communication to contest the chargeback.
- Issuer reviews evidence: The issuing bank evaluates the evidence from both the cardholder and the merchant.
- Final decision made: Based on the information provided, the issuer decides whether to uphold or reverse the chargeback.
- Funds are settled: If the chargeback is upheld, the funds remain with the customer; if reversed, the money is returned to the merchant’s account.
- Chargeback fees applied: Regardless of the outcome, the merchant usually incurs a fee for the chargeback process, and excessive chargebacks can affect their payment processing privileges.
How Much Do Chargebacks Cost Businesses
Chargebacks can be quite costly for businesses, impacting them far beyond just the lost sale amount. When a chargeback occurs, the merchant not only loses the revenue from the disputed transaction but also typically pays additional fees charged by payment processors, which can range from $20 to $100 or more per incident.
These fees cover the administrative costs of handling the dispute. Moreover, merchants may face indirect costs such as increased processing fees if their overall chargeback ratio rises, which can lead to penalties or even the termination of their merchant account.
There are also hidden costs like the time and resources spent investigating and responding to disputes, potential damage to reputation, and inventory loss if physical goods were shipped but payment was reversed. In cases of frequent chargebacks, businesses may need to invest in better fraud prevention tools or customer service improvements, adding further expenses.
How to Prevent Chargebacks
Effective prevention involves clear communication, strong security measures, and responsive customer service. Here are the ways to help prevent chargebacks:
- Provide accurate and detailed product descriptions to set clear customer expectations
- Use transparent pricing and clear billing descriptors on statements
- Implement robust fraud detection and secure payment processing systems
- Maintain a clear, accessible refund and return policy
- Respond promptly and professionally to customer inquiries and complaints
- Keep thorough records of all transactions, communications, and delivery confirmations
- Monitor chargeback ratios regularly and address any unusual activity quickly
How to Dispute a Chargeback
When a chargeback occurs, merchants have the opportunity to challenge it and provide evidence that the transaction was legitimate. This requires careful documentation and timely response to the issuing bank or payment processor. Successfully disputing a chargeback involves understanding the reason for the dispute, gathering relevant proof, and presenting a clear case that supports the validity of the transaction. Below are the typical steps businesses should follow to dispute a chargeback:
- Review the chargeback notification: Understand the reason code and the details provided by the issuing bank.
- Gather supporting evidence: Collect all relevant documents such as sales receipts, delivery confirmation, correspondence with the customer, and refund policies.
- Prepare a clear response: Organize the evidence into a concise and professional rebuttal letter addressing the dispute reasons.
- Submit the dispute to the payment processor: Send your evidence and response within the specified deadline.
- Follow up on the dispute status: Monitor communications from the payment processor or issuing bank and provide additional information if requested.
- Accept the outcome or appeal if possible: If the chargeback is denied, evaluate if further appeals are an option or take steps to prevent future disputes.
