Official 2021 Chargeback FAQ
Table of Contents
- What is a chargeback?
- What is chargeback fraud?
- What are issuing and acquiring banks?
- How does a chargeback work?
- What is a chargeback fee?
- Can you go to jail for chargebacks?
- Why did I get a chargeback?
- How can I fight chargebacks effectively?
- What is my chargeback ratio?
- Does a chargeback count against my ratio if I win the dispute?
- There's always more to learn about chargebacks
- What is a chargeback prevention alert?
What is a chargeback? A chargeback is a forced reversal of a transaction by an issuing bank, and it's one of the more costly aspects of business that retailers deal with every single day.
More problematically, retailers often find themselves dealing with chargeback fraud. Chargeback fraud is when cardholders abuse the chargeback system to receive free goods and services, or to correct mistakes in purchasing or budgeting.
They don’t teach you about chargebacks in school, but understanding the rules, causes, and consequences of chargebacks can have huge implications for the health and profitability of an eCommerce business. Myths and misconceptions about chargebacks abound, and it doesn’t help matters at all that the landscape of the card payments industry is under constant change.
In 2021 we're making it a priority to answer every merchant's burning questions about chargebacks: How to fight them, how to prevent them, and how to gather information from them to improve your business.
What is a chargeback?
A chargeback is the forced reversal of a transaction on behalf of a cardholder by their issuing bank. This process foregoes customer service and requires the merchant, if they want their revenue back, to undergo a process called representment to prove that the transaction was legitimate.
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 can happen in one of two ways:
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.
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?
During a chargeback, refunds and disputes are handled through two banks: The issuing bank and the acquiring bank.
The issuing bank is the cardholder's bank. This bank usually represents the provider of the card and the line of credit, and represents their interests and the interests of the cardholder.
The acquiring bank is the merchant's bank. When a chargeback occurs, the acquiring bank issues a refund of the transaction in question. It is up to the merchant to dispute that refund and resubmit the transaction if they so choose.
How does a chargeback work?
The dispute process begins when a customer contacts their bank to question or challenge a transaction posted to their account. The bank may attempt to gather more information from the customer to determine if a chargeback is appropriate.
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?
Chargeback fees are assessed to merchants by their acquiring banks. The chargeback fee is intended to cover chargeback-related costs accrued by the acquiring bank. Fees may vary depending on the card network, the banks and payment processors involved, and other factors. Chargeback fees are one reason 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?
Yes, absolutely you can go to jail for fraudulent chargebacks! Don’t charge something back without excellent cause because you can and will be caught eventually. Fraudulent chargebacks are just another form of theft, after all.
Merchants can take consumers 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?
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.
Chargebacks were invented to give customers recourse against unscrupulous merchants who take their money without delivering the promised goods. In eCommerce, chargebacks serve an important purpose in giving consumers confidence that they can shop online without worrying that hackers or scammers are going to steal their payment credentials or defraud them.
Unfortunately, many consumers abuse the chargeback process by disputing charges for problems that should be handled directly with the merchant. The banks are supposed to encourage consumers to contact the merchant before disputing a transaction, but they have no way of verifying that the consumer has actually done so.
Here are some common chargeback reasons:
- Never received the product ordered
- Received a damaged or defective product
- Payment card was used without permission
- Transaction not recognized
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 consumers 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 and present the bank with evidence that the transaction was carried out properly.
How can I fight chargebacks effectively?
To fight a chargeback, you have to resubmit the charge to the bank within the time frame allowed by the card network. This is called “representment,” and it must also include submission of the documentary evidence that shows why the transaction should be upheld as valid.
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 consumer’s provisional credit will be revoked. This is not necessarily the end of the chargeback process—banks, consumers, 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 retain a fraudulent transaction.
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. Merchants that have high chargeback ratios can be penalized by credit card networks until the problem is solved. This penalization may include fines, higher fees, limitations placed on the merchant account, and even termination of that account and blacklisting.
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, the industry blacklist for high-risk merchants.
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. 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?