What are chargebacks?
When a customer disputes a purchase and their card issuer reverses it, this is called a chargeback (also called a reversal).
The chargeback process usually starts when the customer calls the bank that issued the card to question the legality of a transaction or to report fraud.
This can happen for many reasons, such as requests for refunds, mistakes in the billing process, or purchases that were not approved.
Chargebacks can come in many ways, such as:
- Card-not-present (CNP) deals that aren’t honest
- Attempts to authorize failed
- Problems with processing credit cards
- A customer is unhappy with a purchase
- Billing or customer bills that are sent twice
- Problems with delivery or service quality
- Charges made without permission by young children or family members
On the business side, managing chargebacks can be challenging. The merchant loses the money and then has to take steps to fight the chargeback and get their money back if they think the claim is false or fraudulent.
Synonyms
- Payment Disputes: Customers file chargeback requests when there is a perceived issue with the good or service they purchased.
- Retrieval Requests: A request by card issuers to provide additional information about a transaction before processing the payment.
- Reversal Requests: A request from the processor for reimbursement of funds already sent to the merchant due to an incorrect authorization decision, fraud, or technical issue.
- Reversed Credit Card Charges: When a customer’s card issuer requests or forces the reversal of a previously authorized charge.
What chargebacks mean for merchants
Chargebacks affect about 6 out of every 1,000 purchases in all fields.
At their best, chargebacks cause businesses trouble by making them do things by hand and waste time. In the worst situations, they can cost a lot of money and hurt the image of a business.
When a card issuer requires a chargeback, it makes it harder for merchants to track their sales and complicates their funds.
Payment processors are also very worried about chargebacks because they can hurt their “chargeback ratio,” a critical measure credit card networks use to determine how much merchants have to pay in fees. People think of businesses with many chargebacks as “unsafe,” which is not something any business wants to be known for.
People who send fake chargebacks (also known as “friendly fraud”) are becoming a bigger problem for businesses. These are chargebacks that customers start even though they have no good reason to dispute the transaction. They want their money back.
Friendly fraud is like online stealing in that it’s hard to prove and costs businesses a lot of money. It’s a lousy habit becoming more common as more businesses go online and credit card companies put customer satisfaction ahead of thorough investigations.
Chargebacks Happen for These Reasons
A customer might want to get their money back on a payment card for many reasons. These reasons range from minor pricing mistakes to dishonest and unfair business practices.
The seller usually has to pay the most for chargebacks, which is a shame.
Customers Are Not Happy
One of the main reasons for chargebacks is that the customer was unhappy with the service.
When customer happiness goes down, several things can happen, such as:
- Not happy with the refund procedure
- Items that were sent but not received
- Delays in shipping
- Poor communication
- Not seeing how the product or service works
Most credit card companies have chargeback claim forms on their websites and customer portals that are easy to find. This makes it easier for customers to start the dispute process and get their money back without contacting the seller.
Customers don’t think about what a chargeback should be, so when they try to get their money back, they often lie to their card company about what happened.
The Wrong Charges
Chargebacks can happen because of mistakes in processing, double billing, or customer receipts.
A processor or automated billing tool might bill a customer twice by accident, or the transaction data could be wrong.
When this happens, customers usually go straight to their card company to get their money back quickly.
Transactions Not Authorized
Customers say they didn’t allow a transaction, so they shouldn’t have to pay. This is called an “unauthorized transaction.”
This happens often when people buy things online because the customer might not know the store’s name or address.
It is familiar for card issuers to side with the customers in these cases and return the funds to them unless merchants provide substantial proof of authorization.
Having fraud
People who buy from a business or the business itself can be scammed. Any way you look at it, the customer’s card issuer will almost always reverse the purchase to help the customer.
Transactions that are scams include:
- Cards that have been stolen or copied
- Bank or card information that has been stolen
- Theft of identity
- Money back scams
- Theft of goods and services
- Taking over someone else’s account
When these things happen, companies should take chargebacks very seriously and do everything they can to help customers whose personal information or money has been stolen.
Some customers might try chargeback abuse or friendly scams to trick the system and get a refund.
Creating a solid fraud protection and dispute management program that can spot and stop fake purchases from happening in the first place is the only way to protect yourself from this type of chargeback.
Fraud in the Family
Family fraud is like an illegal transaction and a charge that wasn’t made.
It occurs when a family member (like a child) uses someone else’s (like a parent’s) credit card to buy something without permission.
This kind of refund is tough to fight because the two people involved know each other personally.
Family fraud is most likely to happen at companies that sell video games, streaming services, apps with in-app payments, and one-click e-commerce sites like Amazon.
How to Do a Chargeback
To successfully fight against chargebacks and manage the revenue lifecycle, you need to know how they work.
The chargeback method is different for each business, but it usually goes like this:
1. A customer calls their credit card company to challenge a purchase and ask for a chargeback.
2. The card issuer looks over the case and sends it to the acquiring bank of the seller for further review.
3. The merchant’s acquiring bank takes the amount of the contested transaction plus any fees from the merchant’s account.
4. The merchant is told about the chargeback and allowed to reply with proof that the transaction was actual.
5. If the store has a strong case, the return might be overturned in their favor.
6. The merchant has to accept the loss of the money if they can’t come to a deal or if the card issuer sides with the customer.
7. The store owner can take more civil action against the customer if they think it’s necessary.
How do I get a chargeback?
People can dispute a transaction with their credit card company and get their money back. This is how chargebacks work.
For most chargebacks, the buyer contacts their payment provider through an easy-to-find online form on the provider’s website.
The card provider will review the case and decide whether to proceed with the chargeback based on the information given.
Who starts a chargeback?
Customers file a chargeback when they think a transaction was not approved or was fraudulent.
If the billing department did something similar, it would be a refund.
Why do people charge back?
Businesses will always have chargebacks and disagreements because they are part of the order-to-cash cycle.
As long as the customer gets their money and the payment provider makes money, the merchant usually doesn’t have to pay for it.
The merchant bank may still have to pay a chargeback fee for filing a claim, even if the merchant successfully fights the chargeback by showing proof of delivery. If you take legal action against the customer, you may or may not be able to get the legal fees paid.
Because of this, businesses need to protect customers and stop chargebacks in the first place.
Codes for Reason
Chargeback reason codes are unique, two- to four-character letters and numbers that the bank gives out to show why a disagreement was raised.
For this reason, Visa, Mastercard, and other major card companies have their own codes.
These reason codes help merchants determine why a disagreement happened in the first place and devise ways to stop future chargebacks.
Suppose a customer challenges a credit or debit card transaction with code 4837 (Mastercard’s code for “Fraudulent Multiple Transactions”), for example. In that case, the business should look at its fraud prevention policies and procedures to see what it can do better.
Searching the database of chargeback reason codes can help businesses handle chargebacks as they happen, figure out what they mean, and move accordingly.
Making a deal
The store owner can go to arbitration if they disagree with the chargeback ruling.
In arbitration, a neutral third party looks over the disagreement and makes a final decision that both sides must follow.
The arbitrator usually gets paid for their work and given to the person who started the disagreement.
Chargebacks: How to Avoid Them
A big part of revenue assurance is stopping chargebacks. Revenue assurance is the process of making sure that all transactions are genuine and all revenue is safe.
To do this, businesses should follow these best practices:
Having clear rules for conversation and customer service
It’s important to put customer satisfaction and growth first to stop chargebacks.
To do this, merchants should provide customer service through various channels and stay in touch with customers throughout their journey.
Among these are:
- Giving clear information upfront about prices, billing, and packages
- Providing customer service through all channels (phone, email, live chat)
- Emailing to check orders and let customers know when they will be shipped
- Getting in touch with customers if there might be a problem with their order
To keep credit card companies from getting too many claims, sellers should also have a part on their website that clarifies how to cancel an order and their return/refund policy.
The company needs to handle all sales as quickly as possible for these rules to work. Emails and chatbots that work on their own can help with this.
Creating a solid plan to stop theft, which should include a chargeback policy,
Every business needs a plan to stop theft. The following should be in it:
- Putting in place anti-fraud steps like 3D secure authentication, geo-IP verification, and address verification
- Making a detailed chargeback policy that spells out the steps to take when there are problems or theft claims
- Collaborating with payment providers to use their data and analytics to find fraudulent activities right away
- Teaching people how to use the payment method safely
Companies should also have other ways to deal with fraudulent chargebacks, like setting up an automatic dispute process or getting insurance coverage.
Making sure that payment information is correct and up-to-date
Ensuring up-to-date customer information is the easiest way to avoid a lower refund rate. Merchant mistakes are usually within the company’s power but are often forgotten.
For companies to keep good records, they should:
- Make sure your payment information is correct by checking your contact information often.
- Keep an eye on changes to customers’ accounts and respond quickly to them
- Give users who don’t want to use credit cards a variety of ways to pay, such as ACH transfers.
Up-to-date information also means that orders are filled faster, customer service responds faster, and there are fewer customer complaints.
Giving new customers thorough information about a product or service
Giving customers enough information about a product or service is an essential but often forgotten part of the customer journey.
Businesses should ensure that new customers know exactly what they’re getting into and have all the knowledge they need to make an intelligent choice.
During the training process, businesses should ensure that customers know what to expect from the product, spell out the terms of service, and give an idea of any fees that might come with the purchase.
This can make it less likely for customers to file chargebacks because they don’t understand, are confused, or feel like they “lack value.”
Giving safe ways to handle payments and protecting against fraud
Most payment companies have ways to protect against fraud that can help keep chargebacks from happening.
Some of these are:
- System for verifying an address
- Check the security code on the card (CVV2)
- Fraud scoring to find deals that look fishy right away
It is also essential for merchants to follow industry rules like PCI, DSS, and GDPR to lower the risk of scams. It depends on the industry whether or not extra-legal steps are needed.
Technology to handle chargebacks
Without the right business tools, handling and processing chargebacks would be tough.
Businesses can use two significant types of software to handle chargebacks and other payment issues.
Platform for billing
A billing tool can help businesses find revenue leaks (which could be caused by chargebacks or refunds), keep customer information up-to-date, and make the billing cycle and accounting process easier if chargebacks happen.
You can get billing platforms as separate software or as part of CPQ software, ERP systems, or e-commerce platforms.
Most automated billing systems also have tools built in to stop fraud. This way, customers and businesses can be sure that their payments are safe and that the purchase is real.
Software for managing disputes or chargebacks
Chargeback management software handles the whole process of chargebacks and protects businesses from them. It gives businesses a single place to track and settle disagreements.
It lets you see the state of each chargeback and information about the customer and transaction from start to finish.
It also gives companies information about how customers act and what trends they follow, which helps them figure out where chargebacks usually come from and where fraud might happen.
Chargeback management tools let you file, track, and get alerts about disputes automatically.
