What Is a Chargeback?

What is a chargeback? It is a payment dispute that a customer initiates directly with their bank after making a purchase with their bank card. The customer asks their bank to return the payment that was made for a product or service. If the bank rules in the customer’s favor, your business loses those funds.

That’s the short answer to “What is a chargeback?” The long answer contains a lot of details, as laid out below.

Differences Between Chargeback and Refund

The first thing to understand is the differences between a chargeback and a refund. While, technically, a chargeback involves a refund, they’re not the same. Here are some key differences between a chargeback vs a refund:

• Chargebacks are initiated by customers by contacting their bank, without the involvement or knowledge of the merchant. Refunds, on the other hand, are usually issued by the merchant after some sort of communication and agreement with the customer.
• In the case of a chargeback, the customer deals directly with their bank. The issuing bank then takes over the process on the customer’s behalf. In the case of refunds, the customer and the merchant resolve the issue via direct communication.
• When a chargeback is issued, the bank takes control over the funds and holds them until a decision is made. The merchant cannot control what happens to those funds after that. On the other hand, the merchant has complete control over the funds in case of a refund, and they decide when and how to release those funds back to the customer.

Main Steps of the Chargeback Process

The chargeback process consists of several steps, starting from purchase and ending in the form of a decision and transfer of funds.

• The first step of the chargeback process happens when a customer buys something from a merchant.
• The merchant then receives the payment for the product or service.
• The customer then initiates the chargeback process when they see the transaction on their bank statement. The reason for initiating this process can be many.
• The customer’s issuing bank starts the chargeback process and gets in touch with the merchant’s bank.
• The merchant then has the chance to refute the claim and provide the necessary documentation in their defense. If they do so, the issuing bank takes it into consideration and then makes a decision.
• The relevant funds are returned to the customer if the decision goes in their favor. If it does not, then the customer has to pay for the charge. If they don’t want to do that, they can enter an arbitration process in which the credit card company takes over the case and issues a final decision.

Origin of Chargebacks

So, we know what chargebacks are, but how did they come around? Originally, this form of disputing transactions was implemented to protect consumers when using credit cards to make purchases. Since using credit cards during the 1970s was new, people were hesitant to make purchases with them as they could easily be stolen and used for unauthorized transactions. To tackle this problem, this system was introduced as part of the Fair Credit Billing Act of 1974 to make credit card use more widely accepted in the US.

What About Deliberate Chargeback Fraud?

As online shopping grew more popular, the instances of chargeback fraud also grew. Also known as friendly fraud, these fraudulent claims have left merchants unprotected. Because of online banking, it has become very easy for people to initiate a dispute with their phones by contacting their bank directly. The ease of this process means that there are increasing rates of chargeback fraud.

Some of the reasons for people to commit friendly fraud include:

• Not liking the product once received
• Wanting to get something for free
• Running out of time to return a product directly to the merchant
• Returning a product purchased by a family member without permission
• Finding the merchant’s return process too cumbersome

Chargeback fraud is a real problem for merchants because the costs they have to pay can add up really quickly.

Know the Facts About Chargebacks

Juniper Research released a study back in 2018 that stated that merchants would lose almost $20 billion only in 2021 as a result of fraudulent activities. Another company, Aite Group, estimated that these disputes would see a massive rise from $23 billion to $35 billion from 2018 to 2021. This should be enough to show the huge scale of this problem and why it is so important for merchants to be aware of what to do about it.

What Are Chargeback Reason Codes?

Chargeback reason codes are what tell a merchant why a customer is disputing a charge. This can provide important information to fight the dispute. However, it is important to note that this reason code is based on the reason given by the customer to their bank. In the case of friendly fraud, that reason could be completely invalid and unrelated to the actual situation.

Fighting a payment dispute usually comes down to how prepared you are. You might have all the proof and evidence, but you should be aware of the actual reason the transaction is being disputed to tackle the issue properly. And when you know what each of them entails, you can more easily deal with the situation.

How to Prevent Chargebacks

Even though it is impossible to prevent them from happening at all, there are various steps that can be taken to prevent chargebacks from occurring. Here are some quick steps you can take:

• Ask customers to provide information like their ZIP code and CVV code for secure transactions. This will add another layer of security to avoid fraudulent transactions.
• Make sure your contact information is easily available. This will help customers share their complaints directly with you.
• Be very responsive if and when you receive a customer’s complaint. The quicker you respond to them, the better the chances of resolving the issue directly with them.
• After making a sale, reach out to the customer and ask them if they are satisfied with their purchase.
• Clearly outline your business policies. This should include any refund and return policies you have. If you make these processes easy, then people are more likely to contact you instead of their bank in case of any issue.

Following some simple tips and healthy business practices can go a long way in helping you prevent chargebacks if you want to retain your revenue and reputation.

Steps to Help You Dispute Chargebacks

If and when you face a dispute, you need to be aware of the right steps to follow. The first thing is to find out whether the claim is legitimate. If it is, you can accept the charge and simply return the money back to the customer.

For illegitimate claims, however, here’s what you can do:

• Get in touch with the customer directly and try to come to an agreement. If you can resolve the issue directly, ask them to retract their claim.
• If a direct resolution is not possible, then you should respond to the issuing bank within the given timeframe to let them know what you are disputing the claim. This has to be done within the provided timeframe though, as being late will lead to the decision being made in favor of the cardholder.
• In this response to the bank, you should provide as many pieces of evidence as you can to show that the transaction being disputed was legitimate. This evidence may include things like invoices, confirmation numbers, details of shipping and delivery, and any other records you may have reflecting the transaction.

One thing to always keep in mind is that you need to dispute illegitimate chargebacks. A lot of merchants don’t do this as the charges seem small, but they can add up to a very significant number over time.

How Much Are Chargeback Fees?

Many business owners decide not to fight such claims because they feel like the money they have to pay isn’t all that much. But that is very wrong, especially in the long run. Depending on the acquiring bank, the actual chargeback fees often lie between $20 and $100, which does seem like a low enough range for large businesses.

However, there are plenty of other fees that have to be paid as well. These charges like processing fee, fulfillment cost, operations cost, marketing cost, etc. can make the total chargeback fees up to 2.5 times the value of the actual transaction. That is why every merchant needs to be aware of just how much money they will have to pay in such cases because all these numbers can add up to a very significant chunk of cash that’s spent each year.

How Long Do You Have to Fight a Chargeback?

Merchants usually have somewhere between 7 and 30 days, depending on the card network, to give their response when faced with a dispute. It is crucial that you respond to the claim within the specified time period. If you fail to do so, the issuing bank will automatically decide in favor of the cardholder. A good way to get notified as soon as someone contacts their bank for a dispute is to set up automated Verifi or Ethoca alerts. These will give you the chance to resolve the issue directly with the customer.

Save Your ROI with These Steps

To make sure you don’t lose ROI on such disputes, you can take the following steps:

• Analyze all the data you have to solve problems as soon as they take place.
• Monitor everything that’s going on in real-time. This includes all orders being placed, returns being requested, etc.
• Take help from services like Chargebackhit to reduce the number of chargebacks you face as well as to fight illegitimate claims to recover your revenue.
• Use secure payment technologies to minimize the number of fraudulent transactions taking place.

Contact Chargebackhit Today to Fight Chargebacks

The easiest way to manage chargebacks is to use a service like Chargebackhit. We can ensure you can prevent chargebacks and fight claims to resolve them as quickly as possible. Using products like Order Insight and Consumer Clarity, the company transmits all the relevant data to the issuing bank if a customer complains of a dubious transaction on their card. This process can lead to the customer recognizing the transaction, which means you can avoid an unnecessary chargeback.

If you want to get some custom help from professionals to manage chargebacks, get in touch regarding our solution. You’ll be able to increase your ROI and save money significantly.