Understanding Chargebacks

The Definition of a Chargeback

A chargeback (also known as a reversal) is a form of customer protection provided by the card issuing banks, which allows cardholders to file a complaint regarding fraudulent transactions on their statement. Once the cardholder files a dispute, the issuing bank makes an investigation into the complaint. Once the transaction is proven to be indeed fraudulent, the bank will refund the original value to the cardholder.

From the merchant’s standpoint, if you cannot prove the transaction to be legitimate, the bank will take back the entire value of the transaction from your account, along with an additional fee. This chargeback fee will range from $15 to $100, depending on the merchant bank sponsoring your account. If the cardholder complaint is proven untrue, no refund is requested from the merchant, though additional processing fees may be charged.

For obvious reasons, it is in the merchants best interest not to get involved with chargebacks in the first place, and in the second place be prepared with documentation to prove the legitimacy of the transaction if you are. With situations like these, the merchant stands the risk of losing products or services that have already been sold, the payment, the fees incurred for payment processing, money for chargeback penalty, or even possible commissions for currency conversions. It is obviously best to avoid chargebacks at all times.

Also, note that merchant accounts receiving too many chargebacks can be labeled by credit card companies as fraudulent, and this can be potentially damaging to the image and the existence of your business. Know also that credit card issuing banks take chargebacks very seriously, because they are at the most advantage. They don’t only levy fees, but they can also delay merchant remittance for up to three months to cover the fraud, or can even increase their commissions if they choose to label your account “risky.”

By law the cardholder has two years to file a dispute. Your sales can be reversible for two years… That means saving documentation for two years… Most banks will have a policy against handling disputes that are more than six months old but if the cardholder pushes it they have two years to file a dispute.

Valid Reasons for Chargebacks

As a merchant, you need to know the most common reasons why merchants receive chargebacks. These are also the exact circumstances that you also need to avoid at all costs. Most, if not all, chargebacks are initiated by cardholders. These are usually because inconsistencies they find on their credit card statements.

Fraudulent Transactions

The most frequent cause for chargeback is fraudulent transactions. This occurs when the credit card is used without the authorization and consent of the cardholder. In these situations, the merchant is held solely responsible.

Credit Not Processed

A fairly common type of chargeback occurs when the customer may have returned the merchandise to the merchant (when the cardholder receives an item different from what he expected), asked to get their money back, but said that the credit was not posted to their account. In these situations, merchants are also held responsible for the charges.

Item Not Received

One of the most common reasons for chargebacks today. This happens when the customer did not receive the item which they paid for by credit card. As in the other situations, the merchant is held responsible.

Technical Problems

A frequent reason for chargeback requests are because of technical problems during the payment process. Technical problems between the issuing bank and the merchant can on occasion cause cardholders to be charged twice for the same transaction (termed as duplicate processing). Problems with the authorization process may also lead to account being charged, even if the transaction itself was declined.

These are the four most common reasons for chargebacks. There are a few more detailed reasons such as faulty cards and human errors made during the payment process. These cases, however, are beyond your control as a merchant.

The Steps of a Chargeback

What must a merchant do when it happens to them? It is good to take a look at what to expect when a chargeback request against you is initiated by a cardholder. It is unfortunate that many merchants are actually not aware of the process that they need to go through.

Here is the entire process laid out step-by-step:

Step 1: The cardholder files a complaint by contacting his or her issuing bank about the incorrect transaction.

Step 2: The issuing bank looks into whether the dispute is valid. If the bank finds the request invalid, the dispute is declined and the customer is charged with the processing fee.

Step 3: If the issuing bank sees a possible error, a provisional credit is provided to the cardholder. The bank then initiates the usual chargeback process, to obtain credit from the merchant’s sponsoring bank.

Step 4: The merchant bank sponsoring the account then sees whether the chargeback is valid or not. They will send you a notification to inform you of a pending chargeback request.

Step 5: The merchant’s sponsoring bank then checks on the validity of the chargeback claim. If the chargeback is found to be invalid, they will decline the chargeback and inform the card-issuing bank.

Step 6: If the chargeback is invalid, the amount of the chargeback is removed from the merchant’s account and the merchant’s bank will notify the merchant about the outcome.

Step 7: If a processing error has actually occurred, the correction is then sent to the card-issuing bank for representation.

Step 8: The merchant will then be asked to provide the documentation and proof needed to cure the chargeback. If the documentation is satisfactory, the claim for chargeback will be denied and the customer will be charged again for the sale. If the documents are unsatisfactory, the chargeback amount will be provided to the customer.

As is probably obvious, the chargeback process is complicated and involves a number of different parties to cure the chargeback. As a merchant, it will take a while to remedy a chargeback. A typical chargeback process can take anywhere from 6 weeks to up to 6 months.

FAQ about Chargebacks

By now you know that chargebacks are a complicated matter, and also that each case will be different from the next. Here are some of the most frequently asked questions on chargebacks.

What do I do with a Chargeback Notification?

A chargeback notification informs you that your account has been debited for a particular transaction. It should tell about why such an amount was debited from your account. You should review the notice carefully and then determine whether it is correct. If it is not, you should immediately send the notification to the financial institution, along with all of your supporting documentation.

If the issuing bank sees that your rebuttal is sufficient, the chargeback will be reversed and the amount will be credited back to your account.

What do I do when I receive a retrieval request?

When you receive a retrieval request, immediately gather all of your supporting information related to the transaction being questioned, and then immediately fax or send it to the credit card processor.

Why is the chargeback taken from my outstanding balance and not from my rollover reserve?

The reserve amount is set only for security purposes and to protect you, as merchant, from losses caused by chargebacks. A chargeback is usually taken out of your merchant account.

How will I know if the chargeback has already been taken from my account?

Normally you will be sent be a Notification of Chargeback as soon as the debit is sent by your bank. The debit of this amount from your merchant account will usually be done the same day.

Why was there a chargeback issued to my buyer without a retrieval request being sent to me?

Not all chargebacks require that the cardholder bank send a retrieval request before a chargeback is initiated. Chargebacks that are obviously deserved by the cardholder will be automatically issued without consulting you, because no consultation is needed.

How much will I be charged for these chargebacks?

Typically when the credit card institution does a chargeback, expect it to immediately be charged to your account. You should allot anywhere from $50 to $75 for every chargeback filed. This fee should cover all of the processing expenses. Reversing a chargeback in your favor will not cost anything.

How many chargebacks am I allowed a month?

Banks take chargebacks very seriously. There is a certain limit provided by the bank, which varies from one bank to another. The chargeback ratio consists of the ratio between the number of chargebacks to the number of transactions you have. The maximum ratio allowed is probably 1% or less. If you happen to go over this limit, there is a very good chance that your merchant account will be closed.

How long does the chargeback process take?

It depends upon the reason why the chargeback was filed. It can last anywhere from a month to about six months.

What happens after a chargeback is filed?

Once filed, the amount to be reimbursed will be taken from your account, in addition to the processing and penalty fees. If you can provide enough documentation to demonstrate that the customer did not deserve the chargeback, then the amount taken from your account will be returned to your account.

What is the first thing I should do when I receive a chargeback?

The first step after receiving a chargeback is to contact your customer about their concerns. If both parties can agree to a mutually agreeable solution, then you would avoid going through the usual chargeback process.

Consider these tips to avoid potential Retrieval Requests and Chargebacks on E-Commerce and phone orders:

Avoid Duplicate transactions
Ensure that transactions/orders are only made once. Entering the same transaction more than once by customers pressing the back button or clicking on the CheckOut button more than once, can result in”duplicate transaction” Chargebacks.

Display your Refund policy
Your refund policy should be clearly visible on your website. Make it a requirement that customers read the policy before their order can be processed.

Process refunds in a timely manner
Failure to process credits in a timely manner can result in Chargebacks for “credit not issued.” Also inform your customer on how long it will take before the refund will hit their account.

Immediately cancel a rebilling

If a customer requests cancellation of a recurring transaction which is billed periodically (monthly, quarterly, annually), always respond to the request and cancel the transaction immediately or as specified by the customer. As good customer service, advise the customer in writing that the service, subscription, or membership has been cancelled and state the effective date of the cancellation. Failure to respond to customer cancellation requests almost always leads to Chargebacks.

Clearly Display your contact information

Your contact details should be clearly visible on your website. Including a physical address and a telephone number, so not just an email address or contact form.

Clearly Display you shipping policy

Your shipping details should be clearly visible on your website. If your customer knows when they will receive their product they will not issue a Chargeback because they feel it has been too long and that they should have received the product by now.

Order status update

Keep customers informed on the status of their order.

Notify your customer of any delays in shipping

If the merchandise or service to be provided to the cardholder will be delayed, advise the cardholder in writing of the delay and the new expected delivery or service date.

Notify your customer if an item is out of stock

If the merchandise ordered by the cardholder is out of stock and delivery will be delayed or this item is no longer available, advise the cardholder in writing and offer the cardholder the option of purchasing a similar item or canceling the transaction. Do not substitute another item unless the customer agrees to accept it. By giving the customer notice and the option to cancel, you may help avoid a customer dispute regarding the merchandise and a possible Chargeback.

DBA on customers’ statement should be easily recognizable.

Use a clear DBA (Doing Business As) name that customers will recognize. Vague corporate names that do not accurately describe what your company might do or sell will only confuse customers when they review their billing statements. An unrecognized DBA name on billing statements is one of the most common causes of Chargebacks. Inform your customers on your website what the billing name on their statement will be: “Please note: Our billing name on your statement will be: …”

Place your phone number on customers’ statement

Put your phone number on your customers’ statements. If they do not recognize your DBA, they can call you to find out who you are and why you charged them, allowing you to avoid a chargeback.

Respond to a retrieval request right away

Always respond to a Retrieval request as quickly as possible. A limited amount of time is available to resolve a dispute. If you miss the window of opportunity to respond, you forfeit your ability to fight the Chargeback. If your processing bank has any more questions or requests, your quick response will ensure that they have enough time to get the relevant information from you.

Customer satisfaction

Some disputes are not the result of unauthorized credit card use. Rather, they start because the customer disputes the quality of the goods or services purchased. The best way to avoid this type of Chargeback is to work closely with the customer to establish a mutually satisfactory solution.

Always make contact on suspicious orders

Call, fax, or email any large or suspicious orders to ensure the order is legitimate. If you are unable to reach the customer, you might have intentionally been given incorrect contact information. Issue a refund to prevent a Chargeback by the credit card holder.

Watch for high-ticket sales/Fast delivery requests

Be suspicious of high-ticket sales requested to be sent next-day air or if a runner will be in to pick up the purchase at a later time. Be wary of orders for which the customer is willing to pay more for faster delivery.

Verify the customer’s address

It is possible to verify the customer’s name, address and phone number with the card-issuing bank. By calling the Voice Authorization Center for address verification, you can verify the address and also provide proof that you verified the address.

Always get signed proof of delivery

Be able to provide a shipping tracer log that shows that the customer received the shipped goods.

Post accurate product information on website

Provide accurate descriptions and images of your products on your website.

Beware of foreign orders

Be very cautious of any foreign orders. Generally, orders from Asia, the Middle East, and most parts of Africa are considered high-risk.

Be careful of orders having a different billing and shipping address

Be wary of orders with domestic billing addresses and foreign shipping addresses. They are usually fraudulent.


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