What Is a Chargeback? Everything Merchants Need to Know

For merchants, the world of e-commerce is ripe with opportunity. But it also means mastering a new vocabulary, a complicated lexicon having to do with credit cards, payment processing, and fraud protection. One word you’ll frequently encounter (though hopefully, not too frequently) is chargeback.

Chargebacks may happen from time to time in e-commerce, but when they start to pile up, they can lead to significant direct and indirect costs for a merchant. So, it’s worth learning all you can about chargebacks, how to prevent them from occuring, but if they do happen, how to handle them.

What Is a Chargeback?

A chargeback occurs when a credit/debit card issuer charges a payment back to a merchant following a disputed transaction with a cardholder.

The chargeback process typically begins when a cardholder notices a transaction they don’t recognize on their statement. The cardholder will dispute the charge with their credit card issuer.

If the issuer determines the cardholder has a legitimate claim — if the card was stolen, for example, or the product was never delivered — the issuer will refund the cardholder’s payment. The merchant is debited the payment, usually with an additional fee.

Scroll down to learn exactly what happens when a card issuer receives a chargeback request.

How Much Do Chargebacks Cost Merchants?

Chargebacks can take six weeks to six months to be processed, so they may occur after you have shipped a product. In these cases, you lose the value of the product, plus shipping and handling. On top of that, card issuers charge fees for chargebacks, which can range from $50 to $100 or more per transaction.

If a card issuer decides you’re incurring too many chargebacks, they may charge you even higher fees or remove your ability to accept credit card payments altogether.

What Are the Different Types of Chargeback?

Chargebacks exist for a good reason. They protect credit card holders from having to pay for someone else’s fraudulent purchase. While excessive chargebacks can be pricey to merchants, they’re a necessary aspect of doing business online.

Unfortunately, the chargeback system itself may become a vehicle for fraud — or inadvertent misuse. As an e-commerce merchant, it’s important to understand the different scenarios that may trigger a chargeback. This will help you tell the difference between legitimate reversals and abuse.

The Four Chargeback Categories

Credit card issuers give every chargeback a numeric identifier that describes why the cardholder requested a chargeback. Each of the four major credit card companies — American Express, Discover, Mastercard, and Visa — has its own system of codes. But regardless of the coding system, the reason for the chargeback will fall into one of four categories:

1. Criminal fraud. This is what we think of most often when we think of chargebacks. Criminal fraud occurs when someone uses another person’s payment card information without authorization.
2. Consumer disputes. Buyers may dispute charges on their statements, even when the charges are genuine. As you’ll see below, sometimes consumer disputes are deliberate attempts at fraud. Other times, however, disputes arise from honest mistakes. We call this “friendly fraud.”
3. Authorization issues. Authorization problems happen when merchants fail to get the proper authorization for a transaction, don’t submit a valid authorization approval, or fail to provide a verifiable authorization.
4. Processing errors. When a consumer believes a merchant didn’t hold up their end of the deal, it’s considered a processing error. For example, a cardholder authorizes a transaction, but the promised goods never arrive. Or a cardholder cancels a recurring transaction, but the merchant fails to process the cancelation.  Or a merchant doesn’t issue a refund after a return. And the list goes on.

Two Types of Fraud

By some estimates, the global cost of fraud to e-commerce businesses is approaching $7 billion. Of that amount, nearly $5 billion is due to misuse of the chargeback system — deliberate or otherwise.

There are two main forms of fraud involving chargebacks. One may be more malicious than the other, but they can both harm your profits substantially.

Chargeback Fraud

Let’s say you purchase an item online. After receiving the product in good condition, you file for a chargeback with your credit card company, claiming the product was damaged on arrival. You have just committed chargeback fraud.

Chargeback fraud occurs when a buyer knowingly makes a false claim regarding a transaction, typically intending to receive a full refund and keep the product. The chargeback system tends to favor buyers over sellers, and fraudsters know it.

Chargeback fraud is more common than you may think. According to a 2015 survey, 7% of consumers have lied about the state of a product to get their money back. Disappointingly, 24% of survey participants said fraudulent chargeback claims don’t bother them.

Friendly Fraud

Think of friendly fraud as “accidental fraud.” We may not all keep as meticulous records of our credit card purchases as we should. Occasionally, there may be legitimate expenditures we don’t recognize.

Friendly fraud is the result of a misunderstanding:

• A customer forgets they made a purchase.
• The purchase was authorized by another family member, unbeknownst to the cardholder.
• A customer forgets they agreed to a recurring payment, such as a software or magazine subscription.
• A customer is confused about the merchant’s return policy.

As a merchant whose success depends on your reputation with buyers, you want to extend your customers the benefit of the doubt. But friendly fraud can cost just as much--if not more--than chargeback fraud.

You have the right to dispute a chargeback. But you may also be able to reduce friendly fraud by increasing communication with your customers. Here are a few tips:

• Make it easy for customers to get in touch with your business. Offer 24/7 communication by phone, email, social media, or chatbots. Keep customers informed with regular updates on their orders.
• Ensure your company name is evident on credit card statements. Make it easy to find return and exchange instructions on your website.
• Remind customers of recurring orders and explain cancelation procedures clearly.
• Require signatures for high-value deliveries.

What Happens in the Chargeback Process?

Let’s follow a chargeback through the cycle from request to reversal.

Step 1: A cardholder files a chargeback request with their credit card issuer.

Step 2: The credit card issuer assigns a code to the request. It then initiates an investigation to confirm the request is valid.

Step 3: The credit card issuer contacts the business’s merchant account provider. If the merchant believes the chargeback request is illegitimate, the merchant must submit documents that prove it.

Step 4: The credit card issuer makes a decision. If the issuer decides in favor of the cardholder, the funds will be transferred back from the merchant to the customer. The merchant must pay chargeback fees.

What Is the Time Limit on Chargebacks?

The second a customer makes a chargeback request, the clock starts ticking. All the major credit card networks impose strict deadlines and require specific documentation to refute suspected chargeback fraud. To avoid chargeback fees and to win disputed cases, you need to be prepared.

(Also, keep in mind that “chargeback lag” can obscure your business’s financial picture.)

Here’s a rundown of how much time you have to respond to chargebacks from the four major credit card companies:

Visa

With a few exceptions, Visa cardholders have up to 120 days after a transaction to file a chargeback request. If the request is coded as “Card Recover Bulletin or Exception File,” “Declined Authorization,” or “No Authorization,” cardholders have 75 days.

Merchants have 30 days to dispute Visa chargebacks. Card issuers and cardholders have 30 days to respond to rebuttals from merchants.

Mastercard

Mastercard users also have 120 days to file a chargeback, again with some exceptions. Requests related to authorization have a 90-day window. Installment billing disputes have a limit of 60 or 120 days, as do cardholder disputes in the United States that aren’t classified elsewhere.

Merchants generally have 45 days to respond in each step of the chargeback cycle.

(Be aware, however, that Mastercard is rolling out a major overhaul to how it handles chargebacks. The new program, called Mastercard Dispute Resolution Initiative, may impact chargeback timeframes.)

American Express and Discover

Neither American Express nor Discover has a time limit for disputing a transaction. Nevertheless, merchants have only 20 days to respond to chargeback claims in either network.

How Can Merchants Dispute Chargebacks?

Before you dispute a chargeback, you should determine whether the chargeback is worth disputing. While it’s true chargebacks have significant costs — well above the cost of an unpaid product or service — countering a claim may cost time and resources that are better spent on other things. The troubling reality is that only 21% of global chargebacks are decided in the merchant’s favor.

If you hope to beat a chargeback, you’ll have your work cut out for you. But that doesn’t mean it’s impossible; nor is it necessarily a waste of time. It may be smart to dispute a chargeback when:

• You have no doubt the transaction was legitimate, and you want to prevent the customer from filing another fraudulent claim. Nearly 50% of people who make fraudulent chargeback claims will make another within three months.
• You have compelling evidence that will refute the chargeback.
• The amount of the chargeback justifies the cost of protesting it.
• You already issued a refund for the disputed amount.

Tips for a Successful Chargeback Refutation

If you do choose to challenge a chargeback, here are some ways to increase the likelihood of your success:

Learn the Rules

Familiarize yourself with the procedures of each credit card company. They vary from network to network. Learning the reason codes for each company will help you spot trends and plan strategies that may prevent fraudulent activity in the future.

Gather Evidence

Credit card issuers won’t overturn a chargeback without extensive documentation. Keep your records in order and be prepared to turn over evidence such as:

• Emails between you and your customer.
• User names and IP addresses for your customer.
• Confirmations of orders, shipping, and delivery.
• Anything that confirms a customer accessed digital goods such as ebooks, games, or software.
• Your terms of services and return policies.
• Your customer’s signature authorizing payment.
• Proof that shows the customer received or used your product.
• A record of a positive match between the address verification service and the billing address of the credit card.
• Documentation of previous undisputed transactions.

Don’t Delay

The calendar is a fraudster’s best friend. They’re hoping the window closes before you have a chance to question a chargeback request. Learn the deadlines imposed by each credit card issuer and act with time to spare.

Partner Up

Building an e-commerce business is challenging enough without having to be an expert in chargeback processes. Sometimes it helps to have an expert in your corner that knows not only how to dispute chargebacks, but how to prevent them in the first place.

Do Merchants Have Rights Concerning Chargebacks?

The modern chargeback process was born in 1974 with the Fair Credit Billing Act, which sought to protect consumers and encourage credit card usage by reversing unauthorized charges. Merchants gained some rights, too, under the act.

For example, the reason codes card issuers use to categorize chargebacks have brought some clarity to the process. Another rule automatically invalidates chargebacks from customers that file too often.

Here are eight other chargeback-related rights you have as a merchant:

1. Chargebacks cannot exceed the original transaction amount, plus the cost of fees such as shipping and handling and surcharges.
2. Customers must attempt to resolve their disputes before resorting to chargebacks. Many credit card issuers require cardholders to make good-faith efforts to settle their issues with you, the merchant, before requesting chargebacks.
3. Customers can’t request chargebacks for returned items.
4. Cardholders must file chargebacks promptly. As discussed above, most credit card issuers provide a timeframe between 60 and 120 days.
5. You are not required to accept credit cards. If you want to avoid the chargeback process entirely, you can accept alternative forms of payment, such as Zelle, ACH or e-checks.
6. You can demand a product return when a customer asks for a chargeback.
7. You can contest a chargeback. The process is called “representment.”
8. Robust fraud prevention solutions are available that can prevent chargebacks from occurring in the first place.

What Merchants Are at Risk for Chargebacks?

Is your e-commerce business a chargeback magnet? Those who would commit chargeback fraud are continually refining their methods, improving their technological tools, and looking for weaknesses to exploit. Some sales practices and product categories make certain online businesses attractive targets for fraudsters.

Fortunately, most of these vulnerabilities can be shored up. Here are some of the most common chargeback risks.

You Accept PayPal Payments

PayPal is an immensely popular payment platform, but it also tends to side with buyers in the vast majority of disputed purchases — even when the merchant has strong evidence to offer.

Fix: If your business is in certain high-risk verticals, consider not accepting PayPal. Otherwise, review and follow the requirements of PayPal’s Seller Protection Program.

You Have Frequent Customer Service Problems

If customers can’t reach you quickly to settle an issue, they may find it’s more convenient to simply click “dispute charge” on their online credit card account.

Fix: Give customers multiple ways to get in touch with your customer service team and respond to messages quickly. Remember, it may be cheaper to refund a purchase than to face chargeback fees.

You Have Unclear Return or Exchange Policies

Some customers see chargebacks as “self-service” refunds when they can’t figure out how to return an item or exchange it with a merchant.

Fix: Your return and exchange policies should be front and center on your online storefront. Include it with transaction confirmations and email communication, as well. A fair-and-flexible return policy may retain more customers than a rigid one.

Your Software Is Outdated

Fraudsters know how to exploit every loophole and bug in out-of-date software. E-commerce platforms, browsers, and plugins try to keep pace with a steady stream of updates and patches.

Fix: Make it a priority to install all software updates and patches. Require your third-party vendors to do the same.

Your Product Descriptions Are Incomplete or Misleading

Customers are not happy when they receive products that don’t live up to their online billing. If their items don’t match their expectations, customers may request chargebacks.

Fix: When it comes to product descriptions, sometimes more is more. The more details you can provide — color, size, specifications — the better. Customers will feel like you’re helping them to make informed decisions. Include ample imagery from multiple angles and be honest about defects.

You Don’t Use Anti-Fraud Tools

Tools such as CVV verification, AVS, 3-D secure, or two-factor authentication may make it longer for customers to check out, but they also add a layer of security that protects merchants.

Fix: Don’t be afraid of fraud protection. Most customers will appreciate knowing their personal payment information is in good hands.

(For more practical tips, read our post, “10 Things Online Retailers Can Do Today to Reduce Chargebacks.”)

Our Chargeback Guarantee

If you’ve made it through this entire post (or even just skimmed to the bottom), you’ve learned that, while chargebacks plague most e-commerce businesses, they can be reduced. A robust fraud protection solution will thwart would-be scam artists and slash your chargeback rate to a manageable level.

When you work with ClearSale, you won’t have to pay for chargeback fraud at all. Our single card-not-present fraud solution uses expert staff and artificial intelligence to evaluate transactions and stymie fraud before it cuts into your revenue. If a case of chargeback fraud does make it past our system, we’ll pay the entire amount of the chargeback.

Click here to learn about Guaranteed Chargeback Insurance from ClearSale.