What is a chargeback?
Chargebacks are essential to the payment ecosystem. They are a tool that customers can use to address fraudulent transactions and protect against undelivered or damaged items. This increases confidence in online card payments.
However, charges for handling chargebacks and resources that are required to manage them make them costly for merchants. As well as this, the rules are weighted in the consumer's favor which has provided fraudsters the ability to 'game' the system.
In this article, we explain more about what a chargeback is, how chargebacks work and how to minimize their impact. Specifically, we cover:
- What is a chargeback?
- How do chargebacks work?
- Where do chargebacks come from?
- When can consumers use chargebacks?
- How long does a chargeback take?
- What are the different types of chargebacks?
- What do chargebacks mean for merchants?
What is a chargeback?
A chargeback is the return of funds to a customer’s account after they dispute a card payment.
Some reasons chargebacks may happen are if a cardholder claims:
- a card payment was fraudulent,
- the services were not provided, or
- the merchandise never received
Chargebacks are also known as disputed payments or disputes. The classical definition of a dispute in the card industry is a transaction that an issuer returns to an acquirer.
Once a consumer initiates a chargeback, the disputed charge will essentially go back and forth between the issuer and the acquirer. That’s until one of them agrees to accept liability for the charge, the dispute resolution process is exhausted, or the card scheme resolves the dispute—whichever comes soonest.
How do chargebacks work?
The chargeback process begins when the cardholder disputes a transaction. It then goes through several stages before it's resolved. The process differs slightly depending on the card scheme, but all disputes follow a similar pattern.
1. Cardholder contacts their issuer
The cardholder initiates the chargeback process by contacting their issuing bank to query a disputed transaction.
2. Issuer creates a dispute case via the card scheme
The issuer reviews the disputed transaction, creates a formal dispute case via the relevant card scheme and assigns a chargeback reason code, which describes why they are charging back the transaction.
3. Acquirer receives and reviews the chargeback
The acquirer receives notification of the chargeback via the relevant card scheme. If they have evidence to counter the chargeback, they submit it on the merchant’s behalf. If no such evidence is available, the acquirer will ask the merchant to supply evidence.
4. Merchant receives and reviews the chargeback
The merchant reviews the chargeback and responds via their acquirer. If the claim is legitimate, the merchant will merchant accept the chargeback. Or they challenge the chargeback if they have compelling evidence the claim is illegitimate.
5. Issuer reviews evidence and decides on the chargeback
The issuer reviews the evidence received from the acquirer and decides on the case. If the evidence refutes the cardholder’s claim, the merchant wins. If the evidence does not refute the cardholder’s claim, the merchant loses.
6. Cardholder and merchant are notified of decision
The cardholder and merchant are notified of the case decision. If either party disagrees, they may have the option to argue further via an arbitration process, depending on the circumstances of the case.
When can consumers use chargebacks?
Consumers may be entitled to use chargebacks if they see fraudulent or unauthorized charges on their account. Or if they are dissatisfied with goods or services and have not been able to resolve the issue directly with the merchant.
For example, in cases where:
- Goods never arrived or services were not rendered
- Goods arrived damaged, defective or not as described when purchased
- Incorrect charges were applied e.g. incorrect totals, additional or duplicated charges, recurring payments that were cancelled
What are the different types of chargebacks?
If a card issuer initiates a chargeback to an acquirer, they must use specific codes defining the reason the transaction is being disputed.
Visa and Mastercard organize their dispute or chargeback reason codes into groups for ease of use. They include:
- Processing error
- Non-receipt of goods/service
Most transaction-related disputes happen when businesses don't follow standard procedures. For example, when they fail to check a card’s expiry date, forget to authorize a transaction, or accidentally submit a transaction more than once.
Other common causes include failing to cancel regular transactions when requested, an unrecognizable business name on the card statement, non-receipt of goods, or the cardholder claiming that the transaction never took place.
For a remote transaction, a cardholder may allege fraud if a payment is processed without permission.
There’s also so-called chargeback fraud, when a legitimate customer claims they don’t recognize or didn’t make a card purchase. They then keep the goods or benefit from the service purchased without paying for it. This is sometimes known as ‘first-party fraud’ or ‘friendly fraud.’
Learn more: chargebacks vs. refunds
How long does a chargeback take?
The chargeback period, or the time limit for filing a chargeback, depends on the card scheme and the chargeback reason code. It can range from 60 to 120 days from the billing date.
The time limits for responding to a chargeback also vary based on the card scheme and the chargeback reason code. It’s important to note that time starts when the issuer creates a dispute case via the card scheme, not when the merchant is notified of the potential dispute or chargeback.
Acquirers may set their own deadlines for merchants to respond. But typically, merchants have 10 to 20 days to respond to a chargeback notification and provide compelling evidence.
Resolving a chargeback can take anywhere between a few days to several months depending on the complexity of the case and other factors.
What do chargebacks mean for merchants?
Chargebacks could leave businesses that accept cards to lose money in three main ways:
- The goods have already been shipped or the service has already been provided
- Payment is not received if the chargeback is successful
- Administrative costs are incurred when choosing to challenge the decision via the chargeback representment process
If a business receives too many chargebacks, it could be forced to work with high-risk processors charging higher fees, which adds to the cost of card acceptance. Or, in a worst-case scenario, business could lose card acceptance, if they persistently appear on card scheme chargeback compliance programs.
Learn more: how to prevent chargebacks
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