Chargeback FAQ

Table of Contents

  1. What Is a Chargeback?
  2. What Is Chargeback Fraud?
  3. What Are Issuing and Acquiring Banks?
  4. How Does a Chargeback Work?
  5. What Is a Chargeback Fee?
  6. Can You Go to Jail for Chargebacks?
  7. Why Did I Get a Chargeback?
  8. How Can I Fight Chargebacks Effectively?
  9. What Is My Chargeback Ratio?
  10. Does a Chargeback Count Against My Ratio if I Win the Dispute?
  11. There's Always More to Learn About Chargebacks
  12. What Is a Chargeback Prevention Alert?

Chargebacks are becoming an increasingly common problem for merchants of all kinds. E-commerce merchants and those in certain industries are especially vulnerable. Not only do chargebacks drain a merchant's revenue, a chargeback problem left unaddressed can lead to the termination of a merchant's account. When that happens, the merchant will be placed on an industry blacklist and will find it difficult to open new accounts in the future.

Fortunately, there are a variety of tools and strategies merchants can employ to avoid this fate. But in order to figure out the right way to manage chargebacks, you must first understand them. For those who are taking the first steps on their journey to better chargeback management, we've created this article as a sort of beginner's guide to chargebacks, covering the basics along with some frequently asked questions.

What Is a Chargeback?

A chargeback is a forced transaction reversal initiated by an issuing bank on behalf of a cardholder. Chargebacks were created to protect credit card customers from the fraudulent use of their cards.

Chargebacks are ordered by the bank that issued the customer’s payment card. Sometimes the bank will do this on their own when fraud or an error is discovered, but most often they occur because the cardholder has contacted the bank to dispute a transaction for some reason.

There are some legitimate reasons for which a customer might file a chargeback. The main one is true fraud, where the customer's credit card, card number, or account is stolen and used to make a fraudulent purchase.

In most other cases, even if the reason for the chargeback is a legitimate one such as undelivered or damaged goods, the problem will be solved by contacting the merchant for a refund.

There may be rare instances where the merchant doesn't respond to the customer or is unwilling to issue a refund, in which case the customer can dispute the charge with their bank.

What Is Chargeback Fraud?

Chargeback fraud, often called friendly fraud, is when a cardholder pursues a chargeback through their issuing bank for reasons that are not legitimate. It is quite simple for a cardholder to claim that true fraud occurred when in fact it did not.

Chargeback fraud or friendly fraud can happen in one of two ways:

  1. The customer makes an accidental purchase or doesn't remember a purchase, and instead of working with the merchant goes directly to their issuing bank and initiates a chargeback. This often happens when individuals make accidental purchases with online apps or they don't recognize a purchase on their report that they actually made. 

  2. The customer knows that they made a purchase and, either because they're unhappy or because they just want free products, they go to their bank claiming that the purchase was fraudulent. 

Unlike chargebacks due to true fraud (like card loss, card theft, or identity theft), friendly fraud chargebacks are either mistakes better left to customer service or are outright fraud in and of themselves. 

Because of this fact, merchants have to regularly fight chargeback fraud through representment, either by themselves or by employing a chargeback management service.

What Are Issuing and Acquiring Banks?

The issuing bank is the one that issued the card used to make a payment. The acquiring bank is the one that received the payment. These banks may also be referred to as the issuer and the acquirer, respectively.

All chargebacks are handled through these two banks. The issuing bank represents its interests and the interests of the cardholder. The acquiring bank represents its interests and the interests of the merchant. In some cases, the acquiring bank may handle a chargeback itself, but more often the merchant is left to decide how to respond.

How Does a Chargeback Work?

Chargebacks are initiated by issuing banks either on their own or at the request of a cardholder. The merchant must then choose to accept the chargeback or submit evidence to refute it. The issuing bank reviews any evidence and decides whether to reverse the chargeback.

While banks may occasionally decline to file a chargeback if the reason the customer gives is clearly illegitimate, they will usually err on the side of the customer if there's any room for interpretation.

When a chargeback is granted, the bank issues a provisional credit to the customer and contacts the merchant’s acquiring bank to notify them of the chargeback. The acquiring bank will then take the appropriate funds from the merchant's account, including the transaction amount, which is returned to the issuing bank, and the chargeback fee.

If the merchant accepts the chargeback, ignores it, or fails to contest it with the right evidence, the chargeback will be finalized and the provisional status of the credit issued to the customer will be lifted, fully reversing the transaction under dispute.

What Is a Chargeback Fee?

Whenever a merchant receives a chargeback, they are required to pay the chargeback fee established by their merchant agreement. Even if the chargeback itself is fought and reversed, the fee still applies.

Chargeback fees are intended to cover chargeback-related costs accrued by the acquiring bank, and are one of the reasons why chargebacks cost merchants so much more than refunds.

When you add together the transaction amount, the lost merchandise, chargeback fees, and other hidden costs such as customer service, acquisition, and sales, many merchants find that chargebacks are often costing them more than twice the original transaction amount.

Can You Go to Jail for Chargebacks?

Customers who lie in order to receive a chargeback are committing a form of fraud. Depending on the circumstances, the sentence for someone convicted of fraud can include prison time.

Merchants can take customers to court over fraudulent chargebacks, and many jurisdictions will pursue criminal charges for chargeback-related fraud.

The fact that this is one of the most frequently searched questions about chargebacks should demonstrate to merchants that most customers who commit friendly fraud already know that what they're doing is wrong, and are more concerned about whether or not they can get away with it.

Therefore, merchants should always fight friendly fraud chargebacks, not only to win back their revenue, but to discourage this bad behavior. If a customer files a fraudulent chargeback and gets away with it, they're likely to do so again, either with the same merchant if they haven't been blacklisted, or with another.

Why Did I Get a Chargeback?

Merchants can receive chargebacks because of true fraud, friendly fraud, poor customer service, or a number of other reasons. Identifying the causes of chargebacks you receive is one of the most important aspects of chargeback management.

When a customer requests a chargeback from their credit card issuer, it means they’re disputing a transaction and asking the card issuer to refund their money instead of asking the merchant with whom they made the purchase.

In e-commerce, chargebacks play an important role in giving customers confidence that they can shop online without worrying about being liable for thousands of dollars in credit card charges if their payment credentials are stolen.

Unfortunately, many customers abuse the chargeback process by disputing charges for problems that should be handled directly with the merchant. The banks are supposed to encourage customers to contact the merchant before disputing a transaction, but they have no way of verifying that the customer has actually done so.

Merchants should fight back against illegitimate chargebacks whenever possible. Chargebacks used for their intended purpose—as a remedy against fraud—can't be fought effectively, but when customers dispute valid transactions in an attempt to avoid dealing with the merchant directly, that’s known as “friendly fraud” and merchants can and should contest these chargebacks.

How Can I Fight Chargebacks Effectively?

To fight a chargeback, you have to resubmit the charge to the bank along with evidence proving that the charge was legitimate. This process is called representment.

If the bank reviews the evidence and finds that the transaction was processed and authorized properly, the money will be returned to the merchant’s bank account and the cardholder’s provisional credit will be revoked. This is not necessarily the end of the chargeback process—banks, cardholders, and merchants can appeal to the card network for arbitration in the event of an unsatisfactory decision. This will incur more fees, and the card network’s decision will be final.

Most chargebacks shouldn’t be ambiguous, hard-to-decide cases. The right evidence should put an end to any illegitimate chargeback, and there is no evidence a merchant can present that will enable them to reverse a chargeback when true fraud occurred.

That said, our experience has shown us that there are some best practices merchants can follow to increase their chances of succeeding at representment.

  • Timing matters. The more quickly you can respond to a chargeback, the better your chances.
  • Be proactive. By monitoring your customer and purchase activity, you can see patterns emerging in terms of product returns, sales numbers, and issuer charges. This can help you identify transactions that have a higher likelihood of turning into chargebacks, and you can document and preserve evidence accordingly.
  • Know the facts about chargebacks. Don’t waste time fighting chargebacks you can’t win. Don’t submit extraneous evidence that won’t help your case. The bank employees who review representment aren’t going to spend hours playing detective over your claims—your argument against the chargeback must be concise, specific, and backed by the right evidence.
  • Know your reason codes. Each chargeback notification will come to you with a reason code attached. These codes tell you exactly what type of chargeback you’re dealing with.
  • Attentive, proactive customer service can be a great way to prevent chargebacks from happening in the first place—when a customer knows they can get help from the merchant when they’re dissatisfied with a purchase, they’re less likely to take the complaint straight to their bank. Additionally, emails and other customer correspondence can serve as evidence in your favor when customers engage in friendly fraud.

What Is My Chargeback Ratio?

Your chargeback ratio is exactly what it sounds like: The ratio of chargebacks compared to your total transactions over a given period of time, usually a month. Merchants that have high chargeback ratios can be penalized by credit card networks until the problem is solved.

The penalties for an excessive chargeback ratio can include fines, higher fees, limitations placed on the merchant account, and even termination of that account entirely. Merchants whose accounts are terminated for this reason are added to an industry blacklist called the MATCH list.

Blacklisted merchants will only be able to sign on with the handful of payment processors that accept high-risk merchants, which charge higher fees and have other restrictions. In addition, it can take years of good behavior for a merchant to be removed from the MATCH list.

Does a Chargeback Count Against My Ratio if I Win the Dispute?

Unfortunately, a chargeback always counts against a merchant’s chargeback ratio, even if successfully disputed and reversed.

That’s because networks are not interested in the number of fraud cases you face (or friendly fraud cases you successfully dispute). Instead, they are interested in the measures you take to mitigate payment problems.

A high chargeback ratio could mean that you operate in a high-risk industry, or don’t adhere to best security and payments practices. The best ways to handle chargebacks, ultimately, are mitigation and prevention.

There's Always More to Learn About Chargebacks

Hopefully, this provides some grounding in the basics of chargebacks for perplexed merchants, but we know we haven’t answered all of your chargeback questions. Every chargeback tells a story, and sometimes those stories are strange and convoluted.

When you’re dealing with chargebacks that don’t fit the mold and you can’t figure out how to fight or prevent them, don’t be afraid to reach out to the experts.

Even merchants who have been in the eCommerce business for years sometimes get confused by new or complex chargeback scenarios. If you’ve got questions about chargebacks, you’re in good company—and we’ve got answers for you.

What Is a Chargeback Prevention Alert?

A chargeback prevention alert is a service provided by an alert network that notifies a merchant of a potential chargeback initiated by a customer. This alert will put a hold on the process and allow the merchant to preempt the chargeback by issuing a refund.

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