A Comprehensive Overview of Chargebacks

Taking credit cards for payment is a fantastic way to increase revenue for your business; many consumers use credit cards for their convenience over cash – and, their generally high spending limits, not to mention their lesser tangible property (lesser than that of cash, anyway) both silently urge consumers to buy far more than they ever would if they had only had cash.

However, the credit card system is not without its flaws.  As a growing number of transactions happen over the internet or the phone (or an otherwise card-not-present situation), it becomes easier for certain pieces of transactional information to be lost or forgotten, both by the merchant and by the consumer.  This lost information can result in customer dissatisfaction, which culminates in a chargeback, in which the customer is refunded the money he spent on a product, and the merchant loses the money he earned, plus an additional fee, plus the product he (ostensibly) shipped out.

With so many possible negative repercussions, a chargeback can be one of the more detrimental things  for a merchant to incur; business owners will want to take care to understand chargebacks and, in doing do, understand how to manage chargebacks and ultimately prevent them from ever happening.

Put simply, what is a chargeback?

Essentially, it’s protection for the cardholder.  A successful chargeback is a reversal of a charge on a customer’s credit card – that is, the money leaves the merchant’s bank account and is credited back to the customer’s card.

The reversal process begins when a cardholder files a complaint about a strange transaction on his billing statement.  The card issuer (like a bank, for example), upon receiving the complaint, investigates the transaction in question.

If the card issuer concludes its investigation and finds the transaction to be fraudulent, the charge under discussion is reversed and the merchant incurs an additional chargeback fee (up to $100), in addition to losing the money he earned from the sale and the value of the goods or services he rendered.

On the other hand, if the transaction is found to be legitimate, while the merchant will get to keep his money, he will still incur a fee simply from his involvement in the process.

Plainly, regardless of the outcome, a chargeback is bad for a merchant.

For a merchant, what are the negative repercussions of being involved in a chargeback?


Here is a more detailed list of what losses a merchant incurs by being involved in a chargeback:

  1. Products or services already sold or rendered
  2. In a loss, all of the money earned from the disputed sale
  3. The credit card processing fee paid to accommodate the transaction
  4. The chargeback penalty from the merchant bank, up to $100
  5. In some situations, commissions paid for currency conversions

Furthermore, if your merchant account has too many chargebacks on record, you may be labeled “high-risk” and thus be charged additional processing fees to compensate for the increased chargeback potential (not unlike a higher auto insurance rate for a more accident-prone driver).  Other credit card processors will not want to accommodate such a high-risk merchant account and may simply terminate your service.

Word to the wise: A chargeback is allowed up to two years from the transaction date.

This means saving transaction records for up to two years is a must.

For all these reasons, chargebacks are nothing for business operators to take lightly; owners and other executives should take steps to avoid them at all times.

Why do merchants receive chargebacks?

Merchants receive chargebacks when their customers can’t reconcile certain items on their credit card billing statements.  And, that lack of reconciliation can be for a number of reasons:

  • The transaction was fraudulent – This is the most common cause for chargebacks. Transactions that occur without a cardholder’s consent are considered fraudulent; the merchant is held solely responsible for these kinds of transactions.
  • The customer didn’t receive the item or service he paid for – This is another very common cause for chargebacks. Again, merchants are liable in these cases.
  • The customer doesn’t remember making a purchase – This is unfortunately all too common in certain industries where alcohol and other judgment- and memory-clouding items go hand-in-hand with the items being charged back – or, are the items themselves.
  • The customer is embarrassed about a particular purchase – Some industries with stigmas against them (such as certain nutritional supplements sellersadult novelty sellers, and firearms and peripherals sellers) are more chargeback-prone simply because a cardholder doesn’t want the embarrassment of sharing a particular purchase with someone else who may view his billing statement – or, he has already incurred the embarrassment and is trying to save face.
  • The customer didn’t receive credit for a return – A customer can file a chargeback if he returns an item to a vendor for a refund and isn’t issued that refund (the offending charge isn’t removed from his account). In these cases, the merchant is again held solely responsible.
  • The transaction wasn’t processed the right way – As with any imperfect system, sometimes glitches in payment processing can lead to a credit card being charged twice for a single transaction, or a charge on a credit card for a transaction that was actually declined. In addition to computer glitches, sometimes information can be manually entered incorrectly.

How does the chargeback process work?


Unfortunately, many merchants aren’t aware of the process they’ll need to adhere to in the event of a chargeback notification, or the life cycle of a chargeback itself.  Here’s what happens:

  1. A cardholder files a complaint by contacting his card issuer about the transaction in question. (In addition, some banks have fraud monitoring programs and will actively contact consumers whom they believe have been victimized.)
  2. The card issuer ensures the validity of the dispute. If the dispute is found to be invalid, the matter is dropped and the cardholder pays a fee.
  3. If the card issuer sees a potential inaccuracy, the cardholder is given a conditional credit and the card issuer begins a process with the merchant’s bank to obtain the money from the merchant.
  4. The merchant’s bank receives the chargeback request and sends a notification to the merchant about the pending chargeback review – usually by mail, but in some cases by phone or email. This is the merchant’s first knowledge of the chargeback.
  5. The merchant’s bank conducts a review of the claim.
    1. If the claim is found to be invalid, the merchant’s bank notifies the card issuer and the merchant of this. If the faulty charge is found to be due to a technical error, the merchant’s bank also notifies the card issuer.
    2. If the claim is found to be valid, the merchant is asked to supply proof that a given service was rendered, an item was shipped properly, necessary care was taken not to damage the item, etc.
      1. If the documentation furnished by the merchant is satisfactory, the chargeback is dropped and the cardholder loses his provisional credit.
      2. If the documentation is unsatisfactory, the merchant loses his funds (see the “Negative repercussions” heading above) and the cardholder keeps his credit.

Obviously, the system is quite complicated, and the process lengthy.  A regular chargeback cycle can last anywhere from six weeks to six months.

Fighting chargebacks as a merchant


If you ever find yourself saddled with a chargeback, you’ll receive a retrieval request from your bank.  This is a request for documentation about the sale in question.  In case you receive a retrieval request from your bank, it’s a very good idea to keep documentation for every sale you conduct over the past two years.

Retrieval requests need to be supplemented with information like a cardholder’s account number, transaction date, sale amount, and reference number; the request itself is for a copy of a physical document proving the purchase, such as a signed contract or a sales receipt.  If you receive a retrieval request, make its completion one of your top priorities as it usually comes with a deadline, which results in an automatic loss if you don’t adhere to it.

Preventing chargebacks completely

Circumstances that you can control that may lead to chargebacks have to do with your business: Your speed in delivering a product, your effectiveness in communication, the truthfulness of your various policies, etc.  Therefore, the best way to prevent chargebacks is to be very communicative and attentive – and, transparent about your policies.  Eliminating inefficiencies in communication, unclear advertisements, and the like will eliminate the fodder certain customers will use to complain to their card issuers and initiate chargebacks.

Surveilling for fraud

Of course, some circumstances that lead to chargebacks – like credit card fraud – are out of your control.  Fraud isn’t completely preventable, but you can certainly keep an eye open for anything that looks suspicious.

Here’s a short list of suspicious activity to be on the lookout for:

  • Large orders, beyond the scope of what’s considered normal for your company
  • New customers ordering very expensive items from you, especially if rush-requested or overnighted
  • Multiple orders in a short period of time
  • Billing and shipping addresses that don’t match
  • Order attempts with multiple (different) card expiration dates
  • Multiple orders made with several credit cards but shipped to a single address

Seeing activity like this isn’t a clear indication of fraud, obviously, but it’s better to be safe than sorry.  Do your due diligence: Investigate anything that looks out of the ordinary.  Be friendly but ask tactful questions of customers whom you have your eyes on.  If you stop fraud at its source, you’ll avoid the chargebacks that will inevitably come from those bad transactions.

Eliminate roadblocks to prevent complaints


Strong, open communication is the hallmark of any successful relationship, and the business-client one is no exception.

Here are some things you can do to ensure good communication between you and your customers and eliminate any potential for chargebacks related to communication lapses or mixed messages:

  1. Provide customers with proper contact information, and answer all incoming calls or messages promptly and professionally. Customers will be more likely to want to speak to you directly rather than their card issuers in the event of problems with their purchases.
  2. Make sure your shipping and return policies are very clearly written, and make sure you communicate or otherwise transfer these policies to your customers before they do business with you.
  3. Before accepting a credit card order, record the card’s billing address for verification. Ask for the CVV code as well, and, if you want some extra ammunition, the name of the card-issuing bank.  Though uncommonly requested, this is not personal or identifying information.
  4. Send automated confirmation emails containing invoice copies to your customers as soon as they complete purchases from you. When you ship their orders, send automated emails containing shipping and tracking information.
  5. Make sure your company name is clearly represented on your customers’ credit card billing statements, as unrecognizable names are sometimes cause for chargebacks. If you need to use a DBA, make this abundantly clear to your customers.

What about Friendly Fraud?

This is when a customer completes a legitimate transaction, has no problem communicating with you (or never attempted to do so) and for that reason has no problem with your product, ostensibly – but, you still get a chargeback notice from him.  It happens all too frequently, and for that reason needs must be addressed.

Here are some quips you might hear from customers (via their card-issuing banks) trying to steal from you:

  • “I never received the item I ordered from you.” In response to this, provide a copy of the sales receipt, card transaction authorization number & CVV, and a copy of the delivery receipt from the shipping service you use, along with any correspondence from the customer indicating he did, indeed, receive the item.
  • “The item isn’t how you said it would be; I’m not happy with the item.” Provide the same card information and sales receipt listed above with the addition of your refund policy.
  • “I returned the item to you and I was never refunded.” Provide the same card information, and sales receipt from the first example.  If you have not received the item at all from this customer, ask him for a delivery receipt, as it could be he just returned the item later than one might have expected given his chargeback query.  If the customer did indeed return the merchandise, albeit after the period covered by the return policy you implement, provide a copy of that policy.
  • “I cancelled my order, but you had already shipped the item to me.” In these cases, you’ll need to provide the usual items (authorization number, CVV, receipt) and make sure your return policy specifies that customers can’t cancel orders after you’ve shipped their items.  (You can, however, refer customers or an inquiring card issuer to your refund policy in this case.)
  • If you’re already processing a customer’s chargeback and that same person levies another against you for the same charges, it’s an obvious attempt to cause trouble. You can report cases like these to your police department.

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