What is a Chargeback? Chargeback Definition (2023)

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A Chargeback, in ordinary terms, means a reversal. It's more of a buyer protection measure. The customer gets their money back. Take for instance, if the products they receive are faulty, a chargeback is always the feasible remedy. In usual circumstances, this is the last thing a merchant wants to come across. It brings on board lots of frustrations, more precisely to the retailer.

On the other hand, it's more of a protracted battle between the buyer and seller. It often seems like the buyer takes the edge since chargebacks come into play as a means to resolve unauthorized transactions. Regrettably, the seller risks high chances of incurring huge losses if more customers keep on filing chargebacks.

What is a Chargeback and How does it Work?

The chargeback resolution process involves three parties. The customer, merchant and the issuing bank. The cardholder (customer) usually contacts the issuing bank to request a chargeback.

Once a chargeback claim is filed, the issuing bank initiates the procedure. It will communicate this information to the Merchant. The bank explains in detail the reason for a chargeback claim. To enhance a fair outcome, there is a window period (7days in most cases) which gives the merchant ample time to respond. This usually via a reason code. It's important to note that all credit card brands have their own chargeback reason codes.

This includes brands like:

  1. Mastercard
  2. Visa
  3. American Express
  4. Discover

What follows is a reply from the merchant to either acknowledge the chargeback or contest the action. Consequently, if I'm to challenge a chargeback, I need to back my arguments with proper documents to serve as evidence. If my grounds aren't convincing, then a chargeback takes effect.

In spite of that, it's highly recommended that merchants take steps to acquaint themselves with these procedures. It really helps with future chargeback experiences.

What Amounts to a Chargeback?

Chargebacks happen due to the disputes raised by buyers in relation to a purchase. In the event where a buyer receives a defective product, they're actually allowed to raise a claim. The other common reason for a chargeback is where a buyer pays for goods but the seller fails to ship the item.

Also, customers are prone to credit card theft. If their information gets stolen and is used fraudulently to purchase goods, then this highly attracts a chargeback claim. And this is where a Chargeback comes to enforce customer protection rights. Unfortunately, this isn't quite impressive for any business owner. And the reason is pretty obvious. It's all at my expense as a seller.

The amount is withdrawn from my account. A chargeback is effected on payment transactions made via credit cards, debit cards, and bank transfers.

And here's why most customers demand a chargeback.

Whenever customers detect any discrepancies with their orders, they often contact their credit card issuers and file a claim. Remember, the procedure varies from one credit card company to another since they all have different rules and regulations. What appears staggering for most business entities is that it's pretty difficult to avoid chargebacks. Quite frustrating, right?

To ease the burden, I must be wary and meticulous on the product quality. In particular, if I operate an online retail business I mustn't leave any loopholes for inaccuracies. More importantly, I need to handle my business transactions with lots of precision. This helps me to ultimately mitigate all forms of liability mainly if I accept credit card payments.

As a matter of fact, if I want to analyze all potential risks which come with business transactions, I need to think of all possibilities which might bring about future chargebacks. Quite annoying how chargebacks are always part of the equation in a business setup.

Credit Card Related Chargebacks

This often happens to merchants who receive transactions via a telephone call or mail. Customers will claim a chargeback on grounds that they didn't authorize the process.

To avoid such risks, always gather requisite information from the customer before you fulfill an order. In furtherance of that, be keen to capture the correct CVV(Card verification number) of the customer's credit card. Also, you need to confirm their address. However, there are untrustworthy merchants who want to charge a customer twice for the same transactions.

This might sound a bit trivial but it's so imperative.

Make sure that your systems are up-to-date. This helps a retailer detect if the credit card has expired or if it's invalid. But wait, there's more. A customer might press the Pay button twice. If this happens, it results in two transactions simultaneously. Definitely, this attracts a chargeback.

Poor Customer Service

The consequences for customer discontent are quite inevitable on the merchant's end. In particular, if a customer considers a chargeback as the ultimate remedy. Poor quality items always prompt customers to file for chargebacks. If they experience delays with the order delivery then a merchant is on the verge of getting smacked with a chargeback notification.

Chargebacks vs Refunds

These two terms are so distinct. Although they seem confusingly similar to a layperson, they actually bear totally separate meanings. The reason for their parallelism is because both involve money which comes from the merchant, back to the buyer. Both processes revolve around a buyer's product guarantee. Basically, a bank doesn't meddle in refund issues. Arguably, a chargeback is a far much worse experience if we compare it to a refund. And the merchants can very well attest to this.

Here's a practical illustration.

Merchants who use PayPal business accounts, know how valuable it's to get verified. Propitiously, it really works in favor of the seller by a high scale. This enhances the trust towards the potential customers. On the contrary, if several chargebacks are filed against me, I risk chances of getting my account blocked.

Meanwhile, a refund is the most preferable means of settling an issue which involves a purchase. If the problem seems genuine, it's better to set off a buyer with a refund rather than waiting for them to claim for a chargeback.

Consumers have a right to receive a certain level of service, or a product in return for their money. If someone pays for an item, but they never receive it, then it only makes sense that this individual would want a reliable way to get their money back.

If you pay for something and you don’t get what you pay for, or it arrives in an unusable condition, you might try to initiate a chargeback. However, chargebacks aren’t the same as getting a refund. You can get a refund from the acquiring bank of a company, or you can apply for a chargeback, and they will both lead to you receiving credit for an order.

However, a chargeback is a transaction reversal that aims to dispute a card transaction within the card network and secure a refund. Chargebacks work when the bank withdraws funds previously deposited to the retailer’s account.

Notably, chargebacks apply to all debit card goods, although the rules available will be different depending on the scheme you’re using, such as Visa, Mastercard, or American Express. Credit card chargeback can be particularly useful because there are extra rules in place to protect your credit card statement.

Why and When to Ask for a Chargeback

Chargebacks can be suitable in cases where goods don’t arrive at all, or the goods that do arrive are damaged. There’s also the option to use a chargeback if a merchant has ceased trading. If, for instance, you ordered two items, but only one of those items back, you can ask for the money back on the product you didn’t receive.

If you issue a chargeback request and the merchant disagrees with it, or thinks friendly fraud is at play, then they can dispute the chargeback. Remember, companies need to pay a chargeback fee for consumer protection.

If there’s money in the company’s merchant’s account when you apply for a chargeback and it’s approved, then you may receive a refund. Common reasons to request a chargeback include:

  • Unauthorized chargers on your acquirer account that you suspect to be fraud.
  • Packages were never delivered, even after you receive a notice that they have been.
  • Defective or damaged items that aren’t suitable for use
  • Incorrect charges on your account (such as being charged the wrong fee for a product)
  • Identity theft – if you believe that someone has used your identity

Remember, credit card issuers can sometimes help with any unauthorized transactions you see on your account too.

For a chargeback to be successful, you need to be able to breach that there is breach of contract between you and the company. It’s also worth noting there are timeframes on chargeback dispute issues, even in COVID days. You’ll usually have around 120 days from the transaction fee leaving your account (the cardholder’s account).

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Identify the issue as soon as you can by checking your bank statements and let them know when you think an issue is there. There are some rare circumstances where you might have the option to raise customer disputes with credit card companies for longer than the standard time frame.

How Do You Request a Chargeback?

If you’re keen to get money back into your bank account after a purchase you’re unhappy with, the best option is usually to request a refund. If you don’t get any luck with that avenue, you can request a chargeback with the issuer of your credit card. The bottom line is that many card issuers will allow you to dispute card transactions in a variety of ways.

You might be able to submit a dispute directly through the card issuer’s mobile app too, but that won’t be the case for every provider. When you submit a chargeback request, you may need to include some supporting information, like copies of your invoice, receipt, the card number you want to get the money sent back to, and any conversations you’ve had with the merchant.

Once you submit the chargeback request, remember that it can take up to 90 days for you to get any response about the credit card transactions. Some companies are better at dealing with customer contacts than others. If you’re worried about a fraudulent transaction, your first port of call should be your credit card company, the bank you’re using, or the police.

Although the chargeback process that you encounter will depend on the merchant’s bank and payment processor, most of the time, the experience goes as follows:

  • You submit your chargeback request
  • A card issuer or credit card company will review the present transactions up for dispute. If the dispute is accepted, they’ll pass it onto the card network, and you might receive a credit on your account temporarily until the issue is fully resolved.
  • The card network will review the transaction and either request your card issuer to pay, or will send the dispute to the acquiring bank of the merchant.
  • The merchant bank will take a different action depending on the situation. The company can returns the dispute to the network that issued the card to see if the issuer is the one responsible for the problem.
  • If the dispute goes to the merchant, they can agree to pay or they can dispute the chargeback with their provider.
  • If the chargeback is disputed by the merchant, there’s some extra back-and-forth as everyone involved try to settle the issue and see who is responsible.
  • The card network will eventually decide who should pay for what.

Why do Buyers Prefer Chargebacks?

This is the part which puzzles so many merchants.

At the first instance, the bank always requests a buyer to settle the matter amicably with the merchant before any chargebacks are processed. However, this doesn't turn out as expected. In most instances, there are differences in opinion and lack of good communication between the parties. Keep in mind, the buyer always acts out of disappointment and frustration.

Sometimes, it happens that a customer wants a chargeback since it quickens the results over a refund. Unfortunately, there are a number of unscrupulous buyers who just want to fraud a merchant. They file for a chargeback even when they receive a product in good shape.

Can a Transaction Equate to Both Chargeback and a Refund?

Good question.

Flexible refund policies have their own setbacks. In most situations, a buyer will contact a merchant for a refund. On top of that, they go ahead and reach their bank to request a chargeback. For the most part, the merchant is ordinarily not aware that the chargeback process is underway.

If both transactions are successful, then a merchant suffers a loss twice. To resolve such an unfair encounter, a merchant can present clear and compelling evidence against the incident. This acts as proof that a refund has already been given once they receive a chargeback notification.

How to prevent Chargebacks

Consequently, the need to avoid chargebacks at all costs is so essential. A merchant needs to get geared towards all preventive measures available. To fend off chargebacks as much as possible, you might want to observe the following pointers;

Use a Unique and the Same Business Name for all Transactions.

When customers realize that they've authorized a payment to a company whose name seems strange and unknown to them, they frequently end up requesting a chargeback. It happens even where the payment is made to a legitimate merchant account. The primary solution is to make all charges straightforward and use a name which is pretty much familiar to my potential customers.

In a bid to effect this, make sure that you are within the scope of all credit card rules and regulations. It helps a merchant avoid all sorts of chargebacks by a significant margin.

What seems to work for the high-end merchants are their elaborate online receipts. It's far-reaching if I include my phone details and email address on the receipts or any other billing statements. A customer will first contact me before going an extra mile to file a chargeback.

Good Communication With Customers

One thing I need to comprehend is that the customer is always right. Save for those with fraudulent intentions. Principally, this is a very sound and simple means to keep off the chargebacks. You need a responsive customer support mechanism in check. If you handle massive sales on a daily basis, a 24/7 live chat support is actually, a feature you need to include in your virtual online store.

Credit Card Protection

Credit card Fraud is prevalent in so many ways. Eventually, it's the merchant who bears liability. Admittedly, it's quite cumbersome to detect transactions from stolen credit cards. As a result, a merchant might have to deal with so many chargebacks. Above all, what matters most is the need to make your online retail business an effortless experience.

By doing so, I need to work with a secure checkout plan. What sounds promising, are the number of profound companies with top-notch technology which helps to reduce risks for merchants in online businesses. In the long run, it's a means to be sure that you're not dealing with stolen credit cards.

Here's one more.

Don't hesitate to contact the issuing bank and verify all the details via their address verification services. Seek assistance from the bank to ascertain the accuracy of the customer details. For countries which are blacklisted as credit card fraud hotspots, it's highly advisable to set stringent verification steps. Ultimately, it saves you the risk of future chargebacks.

Also, it's perilous to accept expired credit cards. This is unsafe and regrettably exposes you to potential losses.

Enhance your product quality

It goes without an iota of doubt. A customer needs a product which matches the description. Besides, you need to sell items which are of merchantable quality. No more no less. It's the only way to keep your customers happy. As a matter of fact, a chargeback will be the last thing they'll think of.

To advance the customer's confidence in my products and services, I need to include a viable return policy. This works towards sorting out any claims as soon as possible before a customer thinks of requesting a chargeback.

Keep all transaction reports

There are so many transaction reversals escalating on a daily basis. To the merchant's end, this is so overwhelming if we entirely take into account the chargebacks made by fraudulent means. In the event where a claim by an unscrupulous buyer is raised, a merchant will have an upper-hand to dispute if they have all receipts on board. Detailed receipts always expedite the investigations by the issuing bank.

Abide by the credit card processing rules

The regulations vary from one credit card brand to another. If a card gets declined, it's quite insightful to not attempt swiping it several more times. It often results in a chargeback. This is also a measure to avoid duplication of transactions. To most e-commerce retailers, it's wise to use address verification systems as a way of validating a customer's information. It fends off all sorts of ambiguities.

If a transaction is made but in the absence of the actual credit card, insist on CVV and CVC card verification numbers.

Last Words

When you're dealing with a chargeback, it's ideal to act promptly. Any delays will cost you in the end. If you're responsive enough, it's quite easy to settle any complaints with the consumer without having to involve the issuing bank. Also, you can provide reliable information as proof that you actually delivered the goods to save yourself from chargebacks.

For customers receiving chargebacks, it’s important to build all the right information. See what you’re entitled to as part of the lending act with a credit card provider. Get information from the company you purchase from about whether you can get a refund. A chargeback isn’t always the only answer.

In the general run of things, follow all steps listed above which give a useful cognizance of how to minimize the number of chargebacks in your enterprise.

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