Everything You Need to Know About Chargebacks

The customer is always right — just ask any service worker, customer success manager, or small business owner. That’s why complimentary desserts and chargebacks exist, after all. And while you’re likely familiar with the former, maybe you’ve never heard of a chargeback.

Odds are, you’re probably at least aware of chargebacks. Chargebacks, which are different from returns, are a system between customers, retailers, and banks that help protect consumers from identity theft through fraudulent transactions. While that all sounds good in theory, chargebacks eat up a good amount of time and money, typically due to fraud.

In 2017 alone, retailers and issuers lost a whopping $31 billion to chargebacks. What’s more, retailers are expected to lose $25 billion to the so-called “friendly fraud” by the end of this year!

So whether you’re just starting out or have been hit with the unexpected cost one too many times, it helps to be able to answer the big question, "what is a chargeback?" because you may find yourself having to deal with chargebacks in your eCommerce store.

So, without further ado, what is a chargeback and how does it work? Keep reading to get started and find out!

What is a Chargeback?

Before we get started, let’s once again get aligned on what a chargeback is. A chargeback is a payment dispute that occurs when a buyer questions the validity of a transaction charged on their credit or debit card and initiates a claim with their card-issuing bank to reverse the transaction. It may sound like a return, but it’s an entirely different process — and we’ll get to that later.

A chargeback is different. A chargeback is issued by a bank when a consumer reports a charge that just doesn’t look right. For example, when they’re charged for an item they never purchased due to fraud or are charged the incorrect amount for an item they did purchase due to a technical error.

How Does it Work?

After a consumer recognizes an incorrect charge, they initiate the chargeback process. A Chargeback caused by fraud can turn out to be a costly and time-consuming process for eCommerce retailers. Here is how the process works.

1. A consumer files a chargeback on a disputed purchase within 120 days after the purchase is made.
2. The issuing bank reviews the chargeback and initiates the chargeback process with the merchant’s bank if the consumer’s complaint is valid.
3. The merchant's bank assesses the complaint, researches the transaction in question, and notifies the retailer to provide transactional evidence within 45 days that will help validate the purchase.
4. If the chargeback is found to be unjustifiable, the money is released to the merchant's account. If the claim is valid, the transactional amount is returned to the cardholder, and the merchant pays the fees associated with the claim, which can be anywhere between $20 to $100 or more.

Chargeback vs. Refunds

To truly be able to answer the question “What a chargeback means?” it is important to understand the difference between chargebacks and refunds. That way, you won't confuse the two when dealing with different claims in your eCommerce store. While they are both a return of funds, technically speaking,, they are handled by two different parties.

With a refund or a return, the customer sends the item back to the eCommerce merchant either for replacement or a refund on the amount they’ve spent on the purchase.

A chargeback involves both parties’ banks, and the disputed funds are withheld from both the retailer and the buyer until the card issuer and the merchant's bank settle the disputed transaction and rule on whether it was valid or not.

What Causes a Chargeback?

Let's dive a little bit deeper and look at what causes a chargeback.

There are several reasons why an eCommerce merchant may find themselves dealing with a chargeback. Below, we discuss the most common ones.

• Fraud or identity theft: This kind of chargeback arises when somebody uses someone else's credit card to purchase items from a retailer's store. In this case, the cardholder gets charged for something they never actually purchased. This is called fraud, and it is what credit card chargebacks aim to protect. Credit card chargeback fraud is a common form of identity theft, and over 133,015 Americans reported cases of credit card fraud in 2017 alone.
• Customer dissatisfaction: When customers are unhappy with the products a retailer shipped, they may decide not to inform the retailer and subsequently request a refund or replacement and request a chargeback directly from the bank.
• Fulfillment issues: Packaging problems, lost packages, delivery delays, delivery to the wrong address, or non-delivery are all shipping issues that can result in a customer initiating a chargeback.
• Technical issues or mistakes: This can take a few forms. Sometimes it may be that the customer clicked on something they didn't intend in the checkout process. Other times technical issues such as an expired debit or credit card or cancel transactions that didn't go through due to a website error may arise. The issue could also be attributed to authorization and processing issues on the buyer’s or payment processor’s end. Whatever technical reason or mistake, the buyer may initiate a chargeback if they feel that the purchase was unapproved.
• Friendly fraud: This occurs when a customer disputes legitimate charges as fraudulent in a deliberate attempt to get away with the purchased products. By the end of 2020, the so-called "friendly fraud" is expected to have cost merchants $25 billion!
• Return item chargeback: When a merchant refuses to accept returns or issues refunds and replacement as promised, a disgruntled buyer may decide to file a returned item chargeback to recover their money.
• Miscommunication or lack of clarity: Sometimes customers may feel that they didn’t get all the information they needed to make an informed purchase, or that they were hit with hidden charges that were not displayed transparently like separate shipping costs. Additionally, poor-quality photos and product descriptions that misrepresent the nature and integrity of the product can also be misleading and can lead to a return or chargeback.

How Does it Impact Retailers?

To help you get a complete view of what a chargeback is it’s important that you understand its impact on retailers.

Credit card chargebacks impact businesses in several ways and end up costing retailers much more than the disputed amount. As of 2018, each dollar of fraud cost retailers $2.94. Here are the different ways through which chargeback costs and fees add up, and their real impact on retailers.

• Credit card processing fees: Credit card processors charge retailers a small percentage for every transaction. Anytime a credit card chargeback occurs, retailers do not recoup this transactional cost, and they have to absorb the expense.
• Acquiring bank fees: Depending on the risk associated with the merchant, the acquiring bank adds a chargeback fee that can range between $20 to $100 when a retailer receives a chargeback. After the dispute is filed and confirmed, this amount is not returned, meaning the retailer will be out any fees associated with the chargeback.
• Risk of being fined and blacklisted: Retailers are required to maintain a monthly chargeback rate of less than 1%. An increased chargeback rate can make a retailer to be classified as high-risk by credit card companies, leading them to get slapped with higher chargeback fees or fines exceeding $10,000. Depending on the rate of chargebacks, retailers can even be blacklisted by the acquiring banks.
• Marketing expenses: Perhaps this is intuitive, but anytime a retailer incurs a chargeback, they lose their precious time, money, and effort spent marketing products to bring customers on board to purchase their items.
• Investment and operational costs: In that same vein, it takes money for retailers to purchase, store, process, and deliver goods to their buyers. In the event of a chargeback where the buyer keeps the item, the retailer loses the value of the product in question and the operational expenses of processing and shipping the order to the customer.

How to Deal and Protect Your eCommerce Business From Chargebacks?

The first step to dealing with a transactional problem like a chargeback is establishing awareness. The good news is that there are several proactive measures you can put in place to protect your eCommerce business from costly, time-consuming chargebacks.

Here is how you can respond to chargebacks.

• Keep your communication lines open.

Most of the time, all customers want is to know that there is someone available to listen to them and resolve their problems. You can give your customers the peace of mind they seek by enabling customer support via a call center, live chat, or email.

Your company’s contact information should be displayed online and on credit card receipts to encourage your customers to contact you with any issues before they resort to filing a chargeback.

• Use secure payment technologies.

One way to stay proactive is to put an eCommerce chargeback management system in place that will help you detect, prevent, and protect your business against fraud.

Implementing a secure payment system will enable you to detect fraudulent behavior, identify high-risk transactions through address verifications service (AVS), and use Credit Card Verification code –CVV/CVC number –to validate transactions with credit card companies before authorizing payments. To be on the safe side, you’ll want to look out for a system that uses an encrypted database.

• Have a clear service and return policy.

It’s all about dotting your i’s and crossing your t’s, so to speak. Publishing a clear return policy in writing on your eCommerce site and also clearly stating the policy on receipts will keep everyone on the same page. Unhappy buyers will be encouraged to return items for a refund or exchange instead of filing a chargeback with the policies clearly laid out.

A thoroughly defined return and services policy will not only discourage fraudsters but also give your business a strong foothold during disputes. That way, you will be able to avoid much of the return item chargeback.

• Sell your merchandise as advertised.

No one likes to be surprised. Make sure that the product photos and descriptions you use speak to the actual quality of your merchandise. Chargebacks are less likely to occur if the look, design, performance, and packaging of your items match the standards of your descriptions and online presentation of products. You will less likely be liable for any unsatisfactory purchases.

• Live up to your shipping promises

Transparency is the name of the game. To keep everyone happy, ship your orders on time, and give your customers the ability to track their packages. This will allow anxious buyers to cope with much of the anticipation and worry that comes with shipping issues such as delivery delays, items being delivered to the wrong address, or lost packages.

You can keep your buyers engaged with delivery notifications or emails, delivery details, order summaries, updates about delays, and delivery confirmations. In case of delivery issues, appease any disgruntled shoppers with freebies, gift cards, or discounts on their next purchase to avoid a costly chargeback.

• Abide by all credit card processing rules

Make sure you follow all payment card industry (PCI) compliance standards when processing and storing credit card data. Keep accurate records of buyers' credit card transaction dates, authorization details, amounts, and receipts.

You will need them to fight back in a chargeback. If you don't, you risk being liable for any chargeback fraud in your eCommerce store.

• Have a clear checkout process

No hidden costs here! A major culprit of chargebacks is a murky checkout with surprise shipping costs that surprise customers. Avoid this by making sure your checkout process is clear, clearly displays all the information and charges customers can expect upfront before they make their purchase.

• Gather information for a rebuttal

In the event that the chargeback claim is already filed, there is little else to do but to prepare to fight back. To prepare, research the purchase in question and verify the chargeback’s reason code — AKA the reason why the buyer has filed a chargeback.

Then gather all the evidence you need such as address verification system (AVS) matches, signed delivery receipts, CVV confirmations, and any other valuable information. Next, you’ll write up a detailed account of the transaction and submit it to the acquiring bank. Finally, the bank will review your rebuttal and make the final decision on whether to process the chargeback.

Delight Your Customers with a Seamless Post-Purchase Experience

So there you have it. Now you can answer the question, "what is a chargeback?" with full confidence. You also know how the chargeback process flows from start to finish, and how to prevent or deal with chargeback fraud in your e-store.

Perhaps most importantly, you now know how to respond to chargebacks and proactively take measures against them in your eCommerce store. After all, fraud, even “friendly fraud,” costs your business money and eats up a great deal of your valuable time that would be better spent brainstorming innovative ways to scale your online business.

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Chargeback FAQS

Can I get a chargeback on a debit card?

Yes. You can get a chargeback on a debit card when a debit cardholder files a claim on a transaction that has taken cash directly from their bank account.

Is there a chargeback fee?

Yes. The acquiring banks add a chargeback fee that varies among different banks and can be anywhere between $20 to $100 or more per claim depending on the risk associated with the merchant. This fee is charged to the retailer when the chargeback is confirmed.

Can a chargeback be denied?

Yes. A merchant can either accept the chargeback and refund the transaction value to the customer or dispute it with evidence that will help validate the purchase.

What are chargebacks reasons codes?

A chargeback reason code is a 2 to 4 alphanumeric code sent with each dispute explaining to the merchant why a chargeback is being requested. Common reasons include non-delivery of goods or services, processing errors, or fraudulent payments arising from identity theft.

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