What Is a Chargeback?

Let’s Define – What Is a Chargeback?

So, what is a credit card chargeback? A chargeback is a reversal of a payment made through a credit or debit card, and it’s initiated by the issuing bank. It happens when a customer disputes a transaction, typically due to reasons such as fraud, billing errors, or dissatisfaction with the product or service received. The bank investigates the claim, and if it finds the dispute to be valid, the transaction amount is returned to the cardholder, and the merchant is debited for the amount.

Regulation E of the Electronic Fund Transfer Act sets the rules for refund reversals for debit cards in the United States. Regulation Z of the Truth in Lending Act outlines how chargebacks can be reversed for credit cards.

The Impact of Chargebacks on Merchants

Chargebacks were created to protect customers from transactions that aren’t approved or are fraudulent. They give customers a way to fix problems when they can’t get a refund straight from the merchant. However, businesses can have problems with too many chargebacks. If the chargeback rate is too high, the company could lose money, be fined, or even have their merchant account closed, and even pay some early termination fees.

In-Depth Chargeback Statistics

Let’s look at some valuable statistics. Chargebacks continue to pose significant financial risks, with merchants globally incurring approximately $117.47 billion in losses in 2023. This rising cost is largely driven by the growth of eCommerce and the frequency of card-not-present transactions. As these disputes escalate, businesses are not only losing revenue but also paying substantial fees to cover the chargeback process.

The Rise of Friendly Fraud

“Friendly fraud” – where customers initiate chargebacks for legitimate transactions – accounts for up to 70% of credit card fraud cases. This type of dispute can stem from transaction confusion or intentional abuse of the chargeback system, and it creates considerable challenges for retailers.

Certain sectors, such as subscription services, digital goods, and travel, face elevated chargeback rates. For instance, the education industry experiences a chargeback rate of approximately 1.02%, often linked to recurring subscription charges that customers may later contest.

Preventative Measures and Technology Adoption

About 62% of merchants are using or plan to use AI-based tools that help find chargeback fraud and improve case management to deal with these growing problems. Also, payment networks like Mastercard and Visa have added new case rules to stop people from abusing the chargeback process and protect real transactions. Also, merchants should keep in mind that a significant number of customers – 53% – prefer to file disputes with their bank instead of reaching out to merchants directly.

Understanding Chargebacks Is Relevant for Businesses of All Sizes

As we’ve mentioned, the good thing about chargebacks is that they are a way to protect consumers. They allow cardholders to dispute transactions with their issuing bank if they have problems like fraud, billing errors, or goods or services that aren’t up to par. Chargebacks are a good way for customers to feel safe, but they can be hard for merchants.

In fact, when chargebacks happen too often, they can cost businesses money because transactions are reversed. On top of that, payment companies may also charge extra fees or punish businesses in other ways. High refund rates can sometimes cause a merchant’s processing account to be closed. For merchants, keeping their business healthy and reducing risks means knowing the chargeback process and taking steps to stop them.

The True Cost for Merchants

A chargeback is a lost sale, but it can hurt a business beyond that – it can also cost money for the merchant in different ways. If a chargeback is approved, merchants usually have to give the customer back the amount of the original purchase. However, that’s only the start of the cost effects.

Credit card processing companies can also charge merchants chargeback fees, which they have to pay even if the case fails or the chargeback is thrown out. These fees, related to merchant services and credit card processing, can often be higher than the original amount of the deal, which means big losses. According to MasterCard, merchants have to pay an extra $15 to $70 for every chargeback. These costs cover administrative jobs like keeping records, investigating, and settling disputes.

In some cases, merchants may not be able to recover the products or services involved in the chargeback. This is particularly true with digital goods, fraudulent transactions, or when customers are unable or unwilling to return physical items. The company’s financial difficulties are intensified because these products cannot be recovered, adding an additional layer of loss.

Common Causes of Chargebacks

For businesses to come up with ways to stop chargebacks, they need to know why they happen. Disputes can happen for many reasons, but the most popular ones are usually in three groups.

Credit Card Fraud

This type of chargeback happens when an unauthorized person uses the card to make a purchase. In these cases, the cardholder disputes the transaction because they did not authorize or recognize the charge, and they were a victim of credit card fraud.

Friendly Fraud

More commonly known as chargeback fraud, it’s a form of first-party fraud that happens when a cardholder disputes a legitimate transaction, often due to confusion. The cardholder might not have seen the charge on their statement or might have forgotten about the purchase, which could have been made by someone else in the family.

Service-Related Issues

Sometimes, chargebacks are filed due to dissatisfaction with the product or service. Instead of reaching out to the merchant to resolve issues like shipping delays, damaged goods, or poor service, customers may choose to dispute the transaction to obtain a credit from their bank. This method avoids talking to the merchant directly, which makes it harder for businesses to deal with the problem before it gets worse.

The Process of Chargebacks

The chargeback process involves several steps designed to resolve disputes between customers and merchants over credit or debit card transactions. Here’s an overview of how it typically works:

• The customer initiates a dispute. The process begins when a cardholder contacts their issuing bank to dispute a charge, often due to unauthorized use, billing errors, or dissatisfaction with a product or service.
• Evaluation by the issuing bank. The issuing bank assesses the dispute to determine if it is valid. If deemed valid, the cardholder is given a temporary credit for the disputed amount.
• Information collection by the card network. The card network (such as Visa or Mastercard) gathers details about the dispute and communicates this information to the relevant acquiring bank, which processes payments for the merchant.
• Notification to the merchant. The acquiring bank informs the merchant about the chargeback, allowing them the opportunity to respond.
• Merchant’s decision to challenge the chargeback. If the merchant believes the chargeback is unwarranted, they can choose to dispute it by providing evidence that supports the legitimacy of the transaction. This may include receipts, shipping records, or other documentation.
• Review by the acquiring bank. The acquirer takes a look at the submitted evidence and possibly makes a recommendation to the issuing bank regarding whether to approve or perhaps deny the chargeback.
• Final decision by the issuing bank. The issuing bank makes the final determination and informs the cardholder of the outcome. If the chargeback is approved, the temporary credit becomes permanent. If the dispute is rejected, the provisional credit is removed, and the cardholder is responsible for the original charge.

Effective Merchant Strategies on How to Prevent Chargebacks

One of the best things that sellers can do is make sure that billing statements are clear about how to describe products. Customers are less likely to challenge charges that are easy for them to understand. Also, when you have great customer service, people are more likely to ask for help when they have problems instead of filing chargebacks. Problems that are solved quickly build trust and make conflicts less likely.

Further on, it is very important to put in place strong security methods. Advanced tools for finding fraud, like address verification systems (AVS) and card verification value (CVV) checks, can help find transactions that might be fake before they are handled. If there is a chargeback dispute, keeping detailed records of all transactions, such as receipts, shipping information, and contacts with customers, is very helpful.

Additionally, a return and refund policy that is clear and easy to find manages customer standards and lowers the chance of a dispute. Also, when a merchant is keeping an eye on chargeback rates on a regular basis, they can spot trends or problems early on and fix them before they get worse.

Practical Issuer Strategies For Preventing Chargebacks

Issuers play a key part in stopping chargebacks by using a number of important strategies. Using advanced fraud detection technologies helps find possibly fishy behavior before it leads to a dispute because banks that issue cards can look at patterns of transactions for signs of fraud.

Also, teaching customers how to spot valid charges also cuts down on misunderstanding and stops pointless arguments from happening. Making the dispute process easier will encourage customers to work out their problems with businesses directly instead of filing chargebacks. Lastly, issuers can better understand common chargeback reasons when they work closely with merchants.

Take Charge of Your Chargebacks with Merchant Chimp

Managing chargebacks is essential for card-accepting businesses. Although these processes safeguard consumers from fraud, they can be costly and troublesome for businesses. Knowing the root causes of chargebacks and how to respond to reduce financial losses and safeguard your bottom line. Merchants require clear communication, strong fraud prevention measures, and technology to manage chargebacks due to fraud, friendly fraud, and service difficulties.

For businesses looking to take control of their chargeback process, our credit card processing company offers solutions that help reduce disputes, automate processes, and minimize costs associated with chargebacks. Our tools are designed to simplify chargeback management and enhance your business’s payment processing experience.