A chargeback is either a credit card payment dispute that involves a customer asking the card-issuing bank to reverse a charge, or a charge reversal initiated by the card-issuing bank due to administrative problems. The positive side of chargebacks is that they help protect cardholders from paying for fraudulent transactions with their cards, and from unethical service/product suppliers that process unauthorized or improper charges. On the negative side, when chargebacks are initiated hastily or unreasonably, they create additional expense for the merchant and often require the merchant to spend a great deal of time defending the chargeback and going through a process of formal arbitration.
Chargebacks fall into four major categories:
- Technical chargebacks occur when, for instance, the cardholder has insufficient funds to cover the transaction.
- Clerical chargebacks occur when the merchant initiates a duplicate bill, charges an incorrect amount, or fails to process a refund or return credit.
- Quality-related chargebacks occur when a customer feels he/she did not receive the product or service, or that the quality of the product or service was less than promised.
- Fraud-related chargebacks occur when a cardholder has been the victim of identity theft and never authorized the transaction at all.
Cardholders have a fixed amount of time in which to file a chargeback, which is generally 120 days. Chargeback resolution follows a structured series of steps that vary somewhat among credit card networks. The merchant always has an opportunity to defend itself if it feels the chargeback is unwarranted, but getting a final resolution can drag out for months or even years, depending on the complexity of the issues and the strength of the merchant’s and cardholder’s cases.
Merchants pay additional processing fees for chargebacks, but that is the least of their worries. Card networks make the merchant ultimately liable for chargebacks, so an unfavorable resolution can create a substantial financial loss. Even worse, merchants that experience a high percentage of chargebacks are in danger of having their merchant accounts terminated, or having restrictions placed on their accounts, such as establishing a reserve fund or transaction cap. These are obviously very serious outcomes that threaten the merchant’s ability to do business.
We very frequently work with merchants to reduce the risk of chargebacks. In many cases, simple changes such as more clearly and visibly explaining the refund policy deters customers from filing a chargeback prematurely. Another simple but effective action is clearly describing credit card charges. Many unnecessary chargebacks are filed because cardholders could not recognize a charge on their monthly statements.
In addition to taking steps such as these that address cardholder-related issues, merchants must also do everything they can to mitigate the risk of fraud throughout their payment processing and data storage systems — this is another area where we can advise.
If you are experiencing a high number of chargebacks or see your chargeback trend moving in the wrong direction, contact us now for assistance, before the problem grows into one big enough to inflict serious damage on your business.