Chargebacks: What are they?

Before you start selling online, you should know that accepting card payments comes with chargebacks. It doesn’t mean that it will affect your business but it’s better to prepare for such a situation when a chargeback occurs. But first, what is a chargeback?

In short, a chargeback is a form of customer protection — when a transaction is proven to be fraudulent, the bank refunds disputed value to the cardholder.

Chargebacks can be costly for a merchant and, in a worst-case scenario, they can cause huge losses.

What are the reasons for chargebacks?

Simply put, chargebacks happen when a customer disputes a charge on the bill. There could be different reasons for them, so you should know the most common ones.

Fraudulent transaction

This one happens when a credit card is used without the authorization of the cardholder or fraudulent activity happened due to identity theft.

Item not received

Cardholders might claim that the product they paid for wasn’t delivered, and this is one of the most common reasons. The same could be when the customer isn’t satisfied because a product or service wasn’t as described.

Credit not processed

Another common reason is when the customer returns the product to the merchant and requests to get their money back, but claims that the credit wasn’t posted to their account.

Technical problems

This could be, for instance, when the customer’s card is accidentally charged twice for the same transaction because of some technical issues. Also, when there’s a problem with authorization, the account could be charged even if the transaction was declined.

There are a few parties involved in the chargeback process, and these are a cardholder (customer), issuing bank, card network (such as Visa, MasterCard or American Express), merchant, acquiring bank, payment gateway, and a merchant account. As you can see, it’s a quite complicated process.

To make a traditional refund, a customer contacts the merchant directly. When it comes to a chargeback, they ask the bank to “remove” funds from the merchant’s account and give it back to the customer. Simply put, a chargeback is a transaction reversal that protects consumers from fraudsters.

The procedure generally starts when the bank issues a code for the dispute. Subsequently, the merchant’s bank withholds the funds being referred to while the client gets a refund. Generally, the sale is reversed.

Once the transaction is proven to be fraudulent, the original transaction value is refunded to the cardholder. And what about the merchant? If you don’t prove that the transaction is legitimate, the bank will take back from your account not only the original value, but also an extra fee. However, when the customer’s complaint is proven untrue, a merchant won’t pay any refund.