Credit Card and Bank Chargebacks Explained: Why They Happen and How You Can Fight Back
A chargeback is defined as the act of reversing a payment and returning funds to a customer. At first glance, a credit card chargeback may seem like traditional refund, but there is one crucial difference. Rather than reaching out to the business to process a refund, the customer goes directly to the issuing bank to forcibly take money from the merchant’s account. Should the following investigation reveal that the customer’s request is valid, the funds are then removed from the business account, and returned to the customer. However, the customer is not required to return the purchased item.
How Chargebacks Work
If you’re a consumer, chargebacks provide a safety net against dishonest merchants. In the early 1970s, bank credit cards were not yet fully accepted by consumers in the U.S., due to the fear of unauthorized transactions and fraudulent charges. Thus, chargebacks were created based on the Fair Credit Billing Act, with the purpose of:
- Helping customers feel safe and secure
- Preventing merchants from making money out of sub-par products or services
- Encouraging merchants to be honest and transparent, especially in advertising
- Protecting consumers from the effects of criminal fraud
With every chargeback, the issuer must select a reason, represented in a numeric code. There are plenty of reasons why customers dispute charges, but they generally fall into four categories:
- Technical, such as insufficient funds
- Clerical, such as incorrect or duplicate billing
- Quality, such as late or undelivered goods
- Fraud, such as unauthorized purchased due to identity theft
The codes help merchants identify errors, resolve issues, and eventually deliver better products or services. Overall, chargebacks have been designed to improve customer satisfaction.
If you’re a merchant, however, frequent instances of chargebacks can be a lengthy, costly, and frustrating threat to your business. High chargeback rates can result in your merchant account being frozen or shut down. Furthermore, if your company belongs to an industry known for excessive chargebacks, your business can be classified as high risk, which means you need to find a high risk payment processor before you can accept other forms of payment.
Although chargebacks are unfortunate and inevitable in any kind of business, there are ways to reduce a chargeback rate. First, you need to understand the specifics of the chargeback process.
Credit Card Chargebacks
Credit card chargebacks typically occur when a consumer is unable to get a refund directly from the merchant. Policies may differ, as they are set by the credit card company of the consumer, be it Visa, Mastercard, American Express, or Discover.
In general, consumers need to file the chargeback within 60 to 120 days from the date of the original purchase. Should merchants wish to dispute a reversal, they have typically 45 days to respond, and 12 days to submit documentation for proof, such as:
- Sales receipt
- Proof of delivery (tracking number, shipping receipt)
- Matching bill-to and ship-to addresses
- Positive AVS response
- Conversations with the consumer
- Any other evidence that proves the merchant has fulfilled the transaction
If the merchant fails to provide sufficient evidence, then the credit card company will reverse the transaction, debiting the amount from the merchant's account and credit it to the customer’s account. In addition, a chargeback fee will be charged as a penalty.
How a credit card chargeback processing works
- The consumer must contact their credit card company and submit a complaint.
- The issuing bank verifies the validity of the dispute.
- If the dispute is invalid (the customer is at fault), the process is terminated.
- If the dispute is valid, the consumer is immediately refunded with the transaction amount.
- The consumer’s bank contacts the merchant’s bank.
- The merchant’s bank verifies the chargeback request, investigates the evidence, and notifies the merchant.
- If the chargeback is determined as invalid by the merchant bank (acquiring bank), the processor contacts the consumer’s bank to present the findings.
- If the chargeback is determined to be valid by the acquiring bank, the merchant needs to provide documentation, such as tracking information or sales receipt, to prove that they properly delivered the product or service involved, and begin the chargeback dispute process.
- The merchant can file a chargeback dispute where evidence is submitted that they’re not at fault.
- If the merchant provides sufficient evidence, the issuing bank will remove the refunded amount from the consumer’s account and transfer it back to the merchant.
- If the merchant fails to provide sufficient evidence, the chargeback remains, and a penalty fee is charged.
For high risk merchants, your high risk payment processor can be more lenient with chargebacks, as high rates are to be expected in the high risk industry. However, the chargeback process is not only time-consuming but also expensive; the penalty fees range from $20 to $100, depending on your payment service provider. This is why reducing consumer chargebacks is crucial for your business to succeed.
A bank chargeback happens when the issuing bank detects processing errors in the transaction. It is used as a preventive measure to avoid further issues. Because this type of chargeback is involuntary or is not initiated by the consumer, both the consumer and the merchant are often unaware of a bank chargeback being processed. Imagine the customer’s frustration when they find out that their purchase has been canceled. Not only will you have to deal with it so you can still keep the customer, but you will also have to spend the time and money necessary to investigate and file the chargeback dispute.
The types of errors which can result in a bank initiating a chargeback are as follows:
- Required information is incomplete or illegible
- Declined authorization request
- Invalidated/No authorization
- Expired card
- Blocked, invalid, and/or non-matching account number
- Domestic transaction processing violation/li>
- Incorrect code for currency or transaction
- Incorrect transaction amount
- Duplicate processing
- Late presentment/transaction was only received after a determined time frame
- Merchant fraud
Fortunately, like as is the case with credit cards, bank chargebacks also have numeric reason codes, which you can use to identify the error and to best address the chargeback. Providing services and products in a timely fashion with complete records can help during a chargeback dispute process.
Bank chargeback fees are assessed by your acquiring bank. Keep in mind that for every dollar lost to chargeback fraud, it can cost you an additional $2.40. If they pile up, your business can lose a substantial amount of money.
How to Prevent Chargebacks
A chargeback dispute can take a long time and are rarely won, so it pays to prevent them from happening in the first place. Remember, the higher your chargeback ratio, the greater the fees, and the more you are unlikely to maintain good standing with your card issuers. Here are a few tips to trim down your chargeback ratio for the good of your business:
- Know the primary reason
Be familiar with the numeric reason codes, and identify which codes make up the majority of your chargebacks. Being able to track down the cause of the chargeback can help you make the necessary changes to prevent future chargebacks from being issued. For example, if most of your customers file chargebacks for undelivered products, you may consider changing your courier or offering tracked shipping.
- Make customer service and technical support accessible
Customers turn to their banks for chargebacks when they can’t get help for a refund from you. Make sure that your customers can contact your customer support at any time. It’s also wise to provide various channels, such as live chat, phone, and email, so customers can reach you in their preferred way.
- Address issues promptly
When problems arise, you need not only be available to assist your customers; you also need to resolve the issues effectively and as soon as possible. A complaint from a customer who is not satisfied with your product or service doesn’t always have to end up in a chargeback when you can efficiently give solutions to their concerns.
- Use accurate descriptions for your products and services
Have you ever experienced seeing a delicious-looking menu item and ordering it, only to be let down when the food arrived and it’s nothing like the picture made it look? If so, then you know the exact feeling of being misled.
Never lead your customers into thinking that your products or services can do more than they actually can. Honest advertisements, detailed and precise descriptions, realistic photos, and product videos can all help set your customers’ expectations before they order your goods.
- Have clear policies regarding returns, refunds, and cancellations
Ensure that your customers understand the return, refund, and cancellation process, including products that are exempt from return. Post your policies where your customers can see them. The process also needs to be smooth and free from glitches.
Does your business have a higher chargeback rate than the norm? At Allied Payments, we can provide efficient payment solutions for your high-risk business to thrive in the competition and succeed. For help with a current or future chargeback dispute, or to learn how to prevent them, contact our team.