What is Chargeback?

In the world of credit card processing, there’s one word that strikes fear in the hearts of merchants: chargeback. Okay, so maybe “fear” is a little strong, but certainly confusion surrounds the issue of credit card chargebacks.

Whether you’re doing business in a physical location, or you sell your merchandise or services on-line, there are plenty of stumbling blocks to deal with between the manufacturing of your product and the anticipated end result — a smiling customer. There are too many things that can go wrong with your timeline or your product that can have your customer saying, “I want a refund.”

But a refund is not to be confused with a chargeback. It is a simple transaction handled directly between the merchant and the customer. A chargeback, on the other hand, is a complicated process that can become very costly for the merchant.

What Is A Chargeback?

A chargeback is issued when a customer contacts his credit card issuing bank to dispute a charge on his credit card bill. There are a total of approximately 87 chargeback reason codes across all credit card associations, but the most common ones are:

  • Service Not Provided or Merchandise Not Received
  • Not As Described or Defective
  • Fraudulent Multiple Transactions
  • Cancelled Recurring Transactions
  • Fraud: Card Present Environment
  • Fraud: Card Absent Environment
  • Transaction Not Recognized
  • Credit Not Processed

But the most common reason is because the customer is not happy with the product or service he has paid for and he’s not getting anywhere dealing directly with the merchant.

Know Your Chargeback Process Rights and Responsibilities

Though each bank has its own procedures for dealing with chargebacks, the process is essentially the same.

When a customer initiates a complaint, the issuing bank begins a review of the claim. The issuing bank will either make a retrieval request for a copy of the original sale or automatically start the chargeback process, depending on their customer’s inquiry.

Basically, a retrieval request asks for information about a transaction. It usually comes after a cardholder calls their issuing bank about a charge they don’t recognize or other discrepancy on their bill. Once you produce authorization of the transaction, such as a signed credit card slip, this dispute can usually be settled in your favor. However, if the customer contacts their issuing bank with a direct request for a return of their money, say because they didn’t receive their merchandise or if the card was used without the cardholder’s authorization, the issuing bank issues a chargeback and begins the process of returning their cardholder’s funds.

In either situation, the merchant is responsible for defending the sale. But remember, the issuing bank works for your customer, not for you. The credit card holder is their customer, and the bank will do everything to keep their customer happy, and that means refunding the cardholder’s money while contacting your bank for a refund of the amount in question.

Once the chargeback process has begun, you’ll have the chance to accept or dispute the claim. The bank that issued the card is associated with a certain credit card association or brand, and each card brand has its own set of “Chargeback Reason Codes.” Mastercard, Visa and Discover have similar code titles, while American Express has 3 full pages of chargeback reason codes to wade through. The issuing bank will send you a chargeback reason code and once you have this code, it’s your responsibility to collect all the material necessary to disprove the claim.

Once this information is presented to the issuing bank, it’s up to them to determine the outcome of the chargeback. If they find for the merchant, the bank charges the cardholder again for the original amount and the merchant receives payment. If, however, the issuing bank finds for the customer, as the merchant you have three choices: you can accept the loss of your products or services along with the cost of those items, you can re-present the chargeback, or take your claim to arbitration. Believe it or not, the chargeback process is pretty fair, and if you provide the requested information, you can often win a dispute and the sale’s amount will be posted back to your account.

The arbitration process involves time and money to take your case directly to Visa or Mastercard or any of the other credit card brands, and there is no guarantee that the outcome of the chargeback will be any different than the first ruling. It is also important to know that regardless of the decision, whether you win or lose, you will be charged a chargeback fee from your merchant processor.

Know Your Chargeback Timeline

Each credit card issuer has its own timeline for dealing with disputes. And of course, the rules are continually updated, so it’s important to familiarize yourself with your credit card processing company’s policy.

Here are some basics:

1. The cardholder’s issuing bank can file a chargeback up to 6 months from the time of the sale, so it’s important that you keep sales receipts or on-line sales records stored for at least that period of time. If the transaction is a subscription, then a chargeback can be filed from the last day of the subscription period. For example, if you offered an annual membership, the cardholder has the ability to dispute the charge for up to 18 months.

You will have up to 10 days to respond to this request and approximately 30 days to comply.

2. The issuing bank must present a chargeback within approximately 120 days of a retrieval request.

You may have up to 10 days to respond to the chargeback and approximately 45 days to present any paperwork that backs up your claim. This includes proof of shipping and receipt, proof of service performed, or other documentation to defend the charges against you in the Chargeback Reason Code.

3. If the issuing bank is not satisfied with your documentation, they have 45 days to initiate a contact for more information.

Again you have up to 10 days to respond and approximately 45 days to comply.

Add it up. You’re already at two years and counting and you haven’t resolved the issue — or regained the amount of the sale. And if the issuing bank rules against you and you choose to start arbitration, the timeline gets even longer.

Then There’s The Really Bad News

Not only have you lost the income from the sale while the chargeback is being disputed, you’ve also racked up some chargeback fees that you can’t reclaim. These fees can run up to $100.00 or more, and they get even higher if you decide to go to arbitration.

And chargebacks can cost you more than just money. The industry standard for an acceptable number of chargebacks is 1% of your total charges. Too many chargebacks and your credit card processing company places you in the category of a high risk business. They can raise your rates, ask you to set up a reserve account, or even terminate your merchant account. All of that adds up to costs your business doesn’t need to incur.

So What Can You Do To Prevent Chargebacks?

In my perfect business world, my suppliers are never late; my sales people never make mistakes; my delivery service always delivers my packages on time with no damage; and my customers are always satisfied with their purchase. Ahhh, it’s a wonderful world I’d like to live in, isn’t it? But it’s not realistic.

As a business owner or operator there is one practice you can put in place that can go a long way towards helping to reduce chargebacks: training. That’s right. Put practices and procedures in place and train your employees in how to handle credit card purchases, how to spot credit card fraud, and especially how to handle returns and refunds efficiently. That will go a long way to save you the headaches, heartaches and financial loses resulting from credit card chargebacks.