What Is A Chargeback?

Chargeback is a term that every merchant knows, but not all understand the nature of this costly industry problem. To fully understand how to stop them from occurring, merchants must take a deeper dive into what is a chargeback.

A chargeback refers to funds being returned to a cardholder for a specific charge that is disputed by the consumer. A consumer triggers the chargeback process by calling their card issuer or card issuing bank. That organization then determines if the consumer should receive a refund for the dispute, which often leaves the merchant on the hook.

This is where the chargeback process gets a little more complicated. The merchant has the opportunity to fight the chargeback dispute, but this process is handled on a case-by-case basis. This creates a lengthy and expensive task that can strain relationships with consumers and card issuing partners.

The problem with chargebacks is that up to 76% of the time, consumers will bypass merchants all together and go directly to their card issuer to report a problem with their account. Merchants are left in the dark and forced to play catch up long after the dispute was actually filed. The structure of the chargeback process makes it hard for merchants to keep up with, which leads to many businesses paying for unnecessary disputes.

How the Chargeback Process Plays Out

After a consumer disputes a charge, the issuing bank/card issuer acts on behalf of the cardholder to reach out to the acquiring bank. This process plays out a little like this:

  • The merchant acquirer is tasked with contacting the merchant to inquire about the chargeback.
  • The merchant then has roughly 30 days to respond to the chargeback dispute.
  • While the merchant must respond in a timely manner, a consumer has 120 days after a charge shows up on a billing statement to dispute a charge.
  • The merchant has the ability to accept the chargeback (along with the associated costs), or fight the dispute with documented proof that to prove the consumer did, in fact, make the purchase.
  • The merchant bank acts on behalf of the merchant to inform the issuing bank/card issuer about the decision made by the merchant and manages the documentation necessary to prove which side should be held accountable.
  • The cardholder is then informed about the result of the chargeback dispute and the funds are either returned, or the claim is rejected and the funds are not returned.

 

Why Chargebacks Occur

There are a number of reasons why chargebacks occur, which only complicates the entire dispute process for merchants. A consumer may dispute a charge that is, in fact, fraudulent, or they could be intentionally trying to defraud the card issuer. Within those two reasons, there are many more instances that could lead to chargebacks. Here are some common examples of what triggers the chargeback dispute process.

    • Fraud: A consumer may find what they believe is a fraudulent charge on their statement and contact the card issuing company. This can be caused by a data breach or a person who may have stolen the card to make a purchase.
    • Friendly Fraud: This type of accidental fraud can also trigger the chargeback process. The consumer unknowingly reports a charge as fraudulent that was actually a legitimate purchase on that account (another authorized user made a purchase or a consumer forgot about a purchase are two common examples).
    • Unsatisfied Customer: A consumer may also initiate the chargeback process if they weren’t happy with the goods or services received. This could be as a result of damaged or missing goods, a service that didn’t fit a consumer-merchant agreement or a missed refund that the merchant had agreed to.
    • Merchant Error: A merchant may charge a consumer twice and cause a duplicate transaction. A merchant’s payment processing system may also cause errors that lead to chargebacks if not properly entered into the system.

What Merchants Can Do to Prevent Chargebacks

Chargebacks are estimated to be a $31 billion annual problem for the payment industry. Luckily, there are methods and tools merchants can rely on to be proactive in both preventing and recovering from unnecessary disputes. The first approach is finding a payment processing partner that has the right chargeback resources — and partner of their own.

For example, Verifi’s chargeback prevention platforms Cardholder Dispute Resolution Network™ (CDRN©) and Order Insight. These solutions were designed to provide merchants with more effective tools to fight chargebacks, such as Chargeback Representment. Combined, these solutions are designed to stop chargebacks before they happen, while also helping merchants retain more of their sales.

Order Insight tool resolves billing confusions and disputes in real-time. By providing more enhanced order details, the cardholder’s billing details provide more accurate merchant or product descriptions to avoid a charge from being accidentally disputed. For consumers who still contact their card issuer, the call center is equipped with more order details and the evidence necessary to protect a merchant from illegitimate disputes. This can resolve disputes quicker by either validating the sales or flagging it as legitimate fraud.

For managing the dispute process, merchants can greatly benefit from a tool like Verifi’s Chargeback Representment to help recover lost profits that occur as a result of the dispute process. Too often, merchants accept chargebacks as the cost of doing business. By relying on a suite of chargeback fighting tools, merchants can reduce fines and penalties — while stopping chargebacks before they happen.

Preventing chargebacks also can be done through better business practices. This includes:

  • Providing better product/service descriptions: Be transparent about what product and services are being offered and what the consumer should expect.
  • Have easy-to-understand terms of service: Whether it be about additional charges, shipping logistics and return policies, the consumer should always be presented with all the terms up front. Merchants should have all these details readily available on their website and in any communication with consumers.
  • Better transaction descriptions: Many chargebacks can be avoided simply by overcoming confusing descriptors. Ensure a store’s name/product name is available for the consumer to access when viewing their billing details.
  • Being easier to contact: When a consumer wants to dispute a charge, they often bypass the merchant and go straight to the card issuer/bank. Make it easier to be contacted and provide a seamless process to resolve the dispute before it escalates into a chargeback.

 

All merchants know that chargebacks can lead to fines and penalties, but not all merchants know that the right industry partners can help avoid chargebacks. The chargeback process is getting continually convoluted as credit/debit card rises. With the right payment processor — coupled with the right chargeback fighting tools — a merchant can have the resources to get ahead of the chargeback problem before it cuts deep into their bottom line.

 

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Anna Kragie is a content contributor for Payline Data. She previously wrote for PYMNTS.com, as a Sr. Content Producer, where she focused on financial services and payments innovation, fraud and security, emerging payments, and FinTech news, research and thought-leadership content across the payments industry.