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Do you want to know what a chargeback is?
I’ll tell you.
Then, I’ll show you how to avoid 99% of them.
Let’s get straight to it.
What is a Chargeback?
In general, a chargeback is a process that begins with a cardholder disputing a transaction they found on their credit card statement. The dispute can result in the transaction amount being returned (charged back) to the cardholder at the merchant’s expense.
Specifically, a chargeback is the reversal of the cardholder’s transaction, resulting in the loss of the merchant's revenue, damage to their reputation, additional fees, and, in the case of excessive chargebacks, loss of the ability to accept credit and debit card payments.
Chargeback Purpose
Credit card providers designed the chargeback process to protect consumers from unauthorised or fraudulent transactions. The process requires merchants to keep detailed electronic records to defend against unjustified chargebacks.
In practice, cardholders can abuse chargebacks, but they still retain the right to question merchants’ transactions if they wish. Merchants can fight the dispute and possibly reverse the chargeback, but it’s time-consuming and difficult. Chargebacks are best avoided if possible.
Chargeback vs. Refund
- A refund is when the merchant returns a cardholder’s money voluntarily.
- A chargeback is when the card issuer debits the merchant’s account for cause because of a cardholder dispute.
- A refund can avoid a chargeback if you catch the transaction in process and mitigate the issues a cardholder may dispute. Automated services exist to provide this protection.
What Is A Chargeback Dispute?
The difference between chargebacks and disputes will become more understandable if you see the process from beginning to end.
The words "chargeback" and "dispute" are often used interchangeably, but they each mean something different.
- The cardholder raises a dispute to their bank or card issuer. The dispute can escalate into a chargeback if the merchant doesn’t prove their transaction was valid.
- A chargeback is the actual transfer of funds back to the cardholder from the merchant’s account. If the merchant wins the dispute, there is no chargeback, or the chargeback will be reversed.
How Are Chargebacks Processed?
Initiation
A dispute begins when a cardholder reports a transaction, seeking a refund from their bank or credit card issuer instead of the merchant.
Merchant's Right to Contest
Merchants are notified of the dispute and can defend themselves against a chargeback by providing evidence to prove the transaction's legitimacy.
Investigation
The card issuer investigates by collecting evidence from both the cardholder and the merchant to assess the dispute's validity.
Required evidence from the merchant may include receipts, proof of delivery, or communication records. It’s essential to capture this information during the transaction in case a dispute arises.
Issuer's Decision
If the issuer sides with the cardholder, the transaction amount is withdrawn from the merchant's account and refunded to the cardholder.
If the merchant wins the decision, they keep their money.
After Effects
Chargebacks come with additional fees on top of any revenue lost in a dispute. You’ll almost always pay a fee regardless of whether you are found responsible or not.
The card issuers monitor chargebacks, and a chargeback ratio is calculated. You, the merchant, must stay under a set chargeback ratio (see below). Failure to do so results in fines, penalties, and financial difficulties in the future.
What is the Chargeback Ratio?
Every card network—Visa, Mastercard, AMEX, etc.—has its own thresholds for acceptable chargebacks.
The typical industry chargeback ratio is around 1% of transactions.
If you exceed the chargeback ratio, you begin to have troubles.
This means that if more than 1% of your transactions result in chargebacks, it could be considered "too many,” depending on which card network is active.
How Long Do I Have To Fight A Chargeback?
Generally, merchants are given between 20 to 45 days from the date the chargeback is initiated to respond and submit evidence to defend against the dispute.
While each card network has its own policies, the banks also have policies that affect the time you have to submit your evidence. If you’re not on time, you lose the dispute. You must know all the rules, deadlines, and policies of banks and card networks.
How Do I Avoid Chargebacks?
Because fighting them is so complex, some businesses ignore chargeback notifications and pay the chargebacks and additional fees.
But this can spiral out of control, resulting in severe consequences, significant loss of revenue, increased fees, and potential loss of the ability to accept credit cards.
And as we've seen, banks and card networks monitor your chargeback ratio. Overstep it, and new fees and penalties will kick in.
Our service, ChargebackStop.com, provides a complete, automated chargeback prevention platform.
You have the power to reduce your chargebacks by 99%.
ChargebackStop can intercede and notify you when a potential chargeback situation occurs by monitoring your transactions online. Then, you can respond in real-time to mitigate the circumstances that might become a chargeback in the future.
Looking Forward
Visit ChargebackStop.com for a free demo of our platform.
You can also reach us at ChargebackStop.com/contact-us with any questions or comments. Our customer support is free of charge and quite helpful!
FAQ: What is a Chargeback?
Why would a customer initiate a chargeback?
Customers might initiate chargebacks for unauthorised transactions, not receiving items or services as described, or dissatisfaction with the product or service received.
What types of evidence can merchants provide to dispute a chargeback?
Merchants can defend against chargebacks by providing transaction receipts, proof of delivery, customer communications, or any other documentation that proves the transaction was legitimate and fulfilled as promised.
Can a merchant prevent chargebacks?
Merchants can reduce chargebacks by providing clear product descriptions, maintaining good customer service, and using chargeback prevention tools. Using a chargeback prevention tool like ChargebackStop.com is an effective way to avoid chargebacks before they happen.
What is the financial impact of a chargeback on a merchant?
Beyond the refunded transaction, merchants may face additional fees, increased payment processing costs, or even the loss of their ability to accept credit card payments if their chargeback ratio is too high.