Chargebacks are a fact of life for businesses small and large. Whether accidental or fraudulent, these types of disputes can have big repercussions including financial losses, strained relationships with payment processors, and potential damage to a company’s reputation.
This means that, for merchants, understanding the intricacies of chargebacks and how to effectively manage them is crucial. Whether you’re a seasoned expert with clear-cut policies or a new business looking to refine your approach, staying ahead of chargebacks is essential for safeguarding your bottom line and maintaining a healthy cash flow.
In this article, we’ll explore the chargeback process, the common reasons behind these disputes, and strategies businesses can implement to minimize their impact.
What are credit card chargebacks?
A credit card chargeback is a process that allows cardholders to dispute a transaction and reverse the payment. This process is intended to protect consumers from fraudulent or unauthorized transactions, ensuring that they aren’t held financially responsible for charges they didn’t authorize or for goods and services that were not received as promised.
How do credit card chargebacks work?
There are many steps involved in the chargeback process. Understanding these steps will help you when the time comes to manage or dispute an existing chargeback.
Step 1: The chargeback process begins when a cardholder disputes a transaction with their issuing bank.
Step 2: The bank then temporarily reverses the payment and notifies the merchant’s acquiring bank.
Step 3: The merchant is given the opportunity to respond to the chargeback by providing evidence that the transaction was legitimate.
Step 4: If the evidence is convincing, the chargeback is overturned, and the funds are returned to the merchant. If not, the chargeback stands, and the funds are returned to the cardholder.
Who can start a chargeback request?
Typically, credit card chargebacks are initiated by the cardholder, but in some cases, the issuing bank may begin the process if suspicious activity is detected. It’s important to note that chargebacks are a consumer protection tool, and cardholders have the right to dispute transactions they believe to be incorrect, fraudulent, or unauthorized.
Common reasons for chargebacks
While some instances of chargeback have fraudulent goals, not all chargebacks have malicious intent. Sometimes credit card chargebacks arise from confusion, miscommunication or when products are ordered online and not received. Ultimately chargebacks can be split into three categories: fraudulent transactions, accidental friendly fraud and legitimate disputes.
Fraudulent transactions
Fraud is one of the most common reasons for credit card chargebacks. This occurs when a cardholder’s information is stolen and used to make unauthorized purchases. Once the cardholder realizes the fraudulent activity, they can dispute the charges, resulting in a chargeback.
Accidental friendly fraud
This type of chargeback occurs when a customer makes a purchase but doesn’t recognize the merchant’s name on their bank statement. While issuing banks are generally effective at identifying this kind of “fraud” and assisting cardholders in recognizing charges, they don’t always catch every case.
Friendly fraud can also happen when customers make a legitimate purchase, receive the goods, and then dispute the charge. It’s a significant issue: according to the 2023 Chargeback Field Report, there has been an average 19% increase in friendly fraud year-over-year, with no indication of slowing down.
Legitimate disputes
Customers may initiate genuine disputes when they encounter issues with a merchant’s products or services. Some common examples include:
• Duplicate charges
• Misplaced orders and processing/shipping errors
• Damaged items
• Charges for canceled subscriptions (e.g., a customer cancels a subscription but is billed anyway)
How to prevent and reduce credit card chargebacks as a merchant
Prevention is key when it comes to chargebacks. Here are some strategies merchants can use:
• Clear and fast communication: Ensure that all transaction details, including billing descriptors, are clear and
understandable to the customer.
• Prompt delivery: Ship products promptly and provide tracking information to the customer.
• Secure payment processing: Use fraud detection tools and secure payment gateways to minimize the risk
of fraudulent transactions.
• Transparent refund policies: Clearly outline your refund policies to customers, making it easy for them to request
refunds directly rather than initiating a chargeback.
While chargebacks are a great mechanism to prevent fraud to the customer, it can also be used for fraudulent purposes towards the merchants. Having clear policies and a merchant services provider with great payment processing partners that can provide fast support are ways to stay on top of chargebacks and reduce its negative effects.
Best practices for responding to chargebacks
Handling chargebacks can be a real hassle—a complex and drawn-out process involving multiple parties. It’s no surprise they can significantly burden businesses. While chargeback fees may start at around $20, they can climb as high as $100 per incident. For merchants facing a high volume of chargebacks, these fees can quickly add up. In fact, Chargebacks911 estimates that global merchant chargeback costs will soar to a staggering $54.5 billion this year.
When a chargeback does occur, responding effectively can make a significant difference in the outcome.
• Collecting and organizing transaction details: Keep detailed records of every transaction, including order
confirmations, receipts, communication with the customer, and proof of delivery. Having this information readily
available can strengthen your case.
• Presenting compelling evidence in a dispute: When responding to a chargeback, it’s crucial to provide clear,
compelling evidence that the transaction was legitimate. This could include signed receipts, proof of shipment, or
correspondence with the customer that confirms they received the goods or services.
Handling chargebacks can be challenging, but by understanding the process, recognizing common triggers, and implementing best practices, merchants can reduce their chargeback risk and protect their revenue.
Manage chargebacks with a payment processing expert
Dealing with chargebacks can be both costly and time-consuming for merchants. To minimize the risk, it’s wise to invest in a reliable payment processing system that ensures accurate record-keeping. Additionally, addressing disputes directly with cardholders before they escalate into chargebacks can save you both time and money.
It’s essential to recognize that chargebacks are an unavoidable aspect of running a business, particularly as eCommerce continues to expand. Understanding the chargeback process and learning how to reduce your exposure is key.
About the Author
At Sekure, we’re dedicated to supporting small businesses by offering expert, unbiased advice on payment processing, POS solutions, and how to save money on credit card processing. Our Payment Experts are committed to securing the best deal for you, ensuring you receive a payment solution that meets your specific needs — with a strong focus on security and fraud prevention.
Have more questions about chargebacks or payment processing? Reach out to our Payment Experts today for a free consultation.
