Credit card chargebacks are a problem that nearly every business owner has to face. If left unchecked, they can jeopardise your good standing in the payment processing industry. While chargebacks are an important form of consumer protection, the chargeback process can also be abused. Here, we’ll cover what a credit card chargeback is, how it works, and recommended business practices to prevent it.
“What Is a Credit Card Chargeback” Explained
A credit card chargeback is the reversal of a credit card transaction that is initiated by a customer through their card issuer. This is different from a refund that is initiated and issued by the merchant.
The customer has to initiate a chargeback within the time limits set by their credit card company—usually, the chargeback period is 60 to 120 days in accordance with consumer rights—and may be asked to provide compelling evidence such as credit card statements to substantiate their claim. The burden of proof often falls on the business, so it’s important to maintain detailed records.
Reasons Customers Initiate a Payment Dispute
There are several reasons why customers might seek to reverse credit card payments:
- They have become a victim of credit card fraud, and unauthorised transactions were made without their knowledge.
- They made online purchases, and the goods or services were never delivered.
- They received the wrong product or faulty goods.
- They cancelled a subscription payment, and the billing cycles continued to be charged.
- They were subjected to incorrect charges or received a repeat charge by mistake.
- The consumer thought a chargeback would be easier than asking for a refund.
- Their refund for a returned product never arrived.
- The consumer is committing friendly fraud and is trying to get goods and/or services for free.
How the Chargeback Process Works
When a customer wishes to initiate the dispute process, they will usually contact their credit card issuer (either the issuing bank or card network) and they will request what is known as a credit card chargeback. The bank may ask for supporting documentation, such as a billing statement, before going ahead and ordering a chargeback from the merchant’s acquiring bank. In the meantime, the issuing bank may give the customer a credit for the disputed amount.
Then, the acquiring bank or merchant bank may contact the merchant to notify them of the chargeback request. In this case, the merchant has an opportunity to provide evidence that the consumer was at fault and have the customer charged again. If the merchant can’t show that the billing dispute is in their favour, they must refund the amount plus a dispute settlement fee. A chargeback fee typically costs between $15 and $100. However, it may be more if the merchant has passed their permitted number or percentage of chargebacks.
How to Prevent Credit Card Chargebacks
Of all of the various chargeback reasons, the only type of dispute that is entirely the consumer’s fault is friendly fraud—a crime that can result in the cardholder’s card and/or bank account being cancelled if they are caught. Every other situation is at least partially in the hands of the merchant.
Make Sure the Items Shipped Are Correct
Taking extra care with packing and shipping can prevent several of the situations that lead to chargebacks. When a customer transmits an order through your online payment gateway, review the order and shipping address carefully and provide tracking on the shipment if possible. A few days later, follow up to see whether the customer has received the goods and finds them satisfactory. By taking the initiative and providing this level of customer service, you can resolve any problems with the order before the customer initiates a credit card chargeback.
Offer An Easy Return and Refund Policy
Difficulty finding the returns policy is another reason customers perform a chargeback. If your company accepts returns and/or issues refunds, make this policy easy to find and clearly outline the steps to follow:
- Under what conditions do you accept returns (time limit, damaged product, change of mind, satisfaction guarantee)?
- How does the item need to be packaged?
- Who should the customer contact for a return authorisation?
- Who will cover the cost of the return?
- Will you issue a refund or a store credit, or send out a replacement product?
- How will you issue the refund (if any) and how long will the refund take?
Once this is all laid out clearly, get back to the customer with a decision and follow through with the refund as quickly as possible. This will help to prevent the customer from despairing and initiating a chargeback.
If You Don’t Accept Returns
Some companies don’t accept returns or issue refunds (on any or all products). If this is the case, communicate it clearly on your website or in-store and repeat the condition with a tick box for the customer’s acknowledgment at the time of purchase. If the customer later initiates a chargeback, you will have written evidence that the customer was aware of this condition and therefore is the one at fault.
Billing problems (subscription not cancelled, repeat charge, incorrect charge) can be prevented in several ways:
- Train your sales and accounting staff thoroughly in the software and how to use it, including correcting mistakes.
- Automate recurring billing cycles to cease automatically when cancelled.
- Automate alerts on customers’ saved cards that are about to expire.
- Choose a merchant services provider that provides recurring billing as part of their merchant services.
Unfortunately, friendly fraud is the kind of credit card chargeback that is the hardest to prevent and also the hardest to dispute. However, you can protect yourself by using a shipping service that provides tracking and requires a signature on receipt. This paper trail can be used as evidence to dispute the chargeback.
If there are certain customers who you know have engaged in these types of fraudulent charges, you can also put their card numbers on an internal blacklist to block any future transactions. Even if the deception worked once, you can prevent the customer from trying it again.
When goods or services are purchased with a stolen card, neither the company nor the customer is entirely at fault. However, you still need to do your due diligence to prevent these transactions and/or detect them as soon as possible:
- For in-person transactions, have employees check the signature on the back of the card against the physical signature of the customer. Never process a transaction with a card that is not signed.
- Use fraud scrub software to recognise and flag anomalies in online transaction behaviour. You can either block suspect transactions, flag them in case you need to follow up, or contact the customer to check if the transaction is authentic.
- Implement additional safeguards to prevent fraudulent transactions, including:
- Restricting employees’ access to customer card details
- Sending customers a verification code before approving a transaction
- Asking to speak with the cardholder if it’s a different name to the customer
Chargeback Mitigation Tools
Some payment gateways, including Unicorn Group, offer chargeback mitigation tools as part of a merchant services package. These tools recognise and flag chargebacks before they are processed by your acquiring bank, giving you time to get in touch with the customer and resolve the issue directly. Always remember that the chargebacks that are counted against you are the ones that are initiated by the customer. Refunds that are initiated by the merchant are not counted in this percentage.
The Cost of Passing the Threshold for Chargebacks
If a merchant passes the threshold for chargebacks (usually 1% of your total transactions), what is the consequence of a credit card chargeback?
- You may be placed on the MATCH list. This list (which stands for Member Alert to Control High-Risk Merchants) is maintained by Mastercard and prevents blacklisted merchants from opening a new merchant account.
- Your acquiring bank may close your account. If this happens, you will be automatically placed on the MATCH list.
- If you only just passed the chargeback threshold, you may be issued a warning by either Mastercard or your acquiring bank along with measures such as higher chargeback fees and a period of time to bring your chargeback rate down.
If despite your best efforts you are still blacklisted for excessive chargebacks, you may be able to open an account with a high-risk payment processor to avoid losing your card-processing privileges altogether. However, in order to cover the risk, you may be charged high fees and a percentage of your income might be withheld (as a security measure for the merchant provider).
What Is a Credit Card Chargeback? Breaking It Down
- Credit card chargebacks are forceful reversals of credit card payments that customers can initiate through their issuing bank.
- Chargebacks frequently occur due to true fraud, friendly fraud or merchant error.
- An excessive number or percentage of chargebacks can have you placed on an industry blacklist.
- The best ways to reduce and prevent chargebacks are to address the three causes:
- True fraud. Implement robust fraud protection (security) measures.
- Friendly fraud. Keep detailed records of inventory and shipping, and blacklist cards associated with friendly fraud.
- Merchant error. Maintain quality-control practices, train staff in error avoidance and correction and use software that automatically recognises duplicate charges to stop these charges from going through. Display your refund and return policies clearly and issue refunds in a timely manner.
In every case, chargeback mitigation tools can recognise and block chargebacks before they go through. This puts the control back in your hands and gives you the chance to resolve any issues directly with the customer. Ultimately, that’s the best solution for everyone.