What is a chargeback? Complete guide

A chargeback is a forced reversal of a payment transaction that happens when a customer disputes a charge on their credit or debit card. The bank then pulls the money back from the merchant and returns it to the customer.

Originally designed to protect consumers from unauthorised or fraudulent charges, this process has become vital to consumer rights. But for businesses, chargebacks are a double-edged sword – while they’re necessary to maintain trust, they can also be costly and disruptive.

In this article, we’ll break down the main causes of chargebacks and how your business can minimise them, saving money and protecting your reputation.

How does a chargeback work?

Let’s break down the chargeback process step-by-step:

Customer files a dispute: The customer spots a charge they don’t recognise or aren’t happy with on their statement. They contact their bank and demand their money back.
Issuing bank reviews the dispute: The customer’s bank determines whether the claim is valid.
Provisional refund: The issuing bank temporarily refunds the payment amount to the customer while investigating the situation.
Request to the card network: The issuing bank forwards the chargeback request to the card network (Visa, MasterCard, etc.). The card network acts as an intermediary between the issuing and the acquiring bank.
Merchant’s bank notified: The acquiring bank is alerted, and the merchant is asked to provide evidence to show the transaction was legitimate. This could include receipts, shipping confirmations, or communication between the customer and the business.
Investigation: The acquiring bank reviews the evidence and gives the result and recommendations to the issuing bank.
Decision: The customers’ bank then makes the final decision. If it approves the complaint, the customer keeps the temporary refund. Otherwise, the bank takes that money back.

Сommon reasons for chargebacks

There are several reasons why a chargeback might occur. Understanding these can help you prevent future disputes.

Fraudulent transactions: The customer claims they didn’t authorise the transaction, often because their card was stolen or compromised.
Defective or misrepresented goods: The customer disputes the transaction because the product or service they received didn’t match its description or arrived defective.
Duplicate or incorrect charges: A charge was applied multiple times or in the wrong amount.
Subscription issues:
- The customer claims they cancelled a recurring payment or subscription, but the charge still went through.
- The client was not informed about the trial period when paying for a subscription.
Friendly fraud occurs when customers dispute legitimate charges, either by mistake or intentionally, to get a refund while keeping the product.
Merchant fraud is rare but happens when a fake product is issued as the original or merchant didn’t deliver the paid goods or services.

The impact of chargebacks on businesses

For merchants, chargebacks aren’t just an inconvenience but a potential e-commerce business killer. While protecting customers is essential, frequent chargebacks can impact profit and damage reputation. Here is the list of direct consequences:

Loss of revenue: The business not only loses the money from the original transaction but also faces a chargeback fee from its payment processor—typically ranging from $20 to $100 per dispute.
Operational load: When chargebacks happen, the business must gather evidence to prove the charge wasn’t legitimate. This can be a major drain on resources, especially for small businesses.
Damaged reputation: Too many chargebacks can flag a business as “high-risk,” leading to higher processing fees and, in extreme cases, the loss of the ability to accept credit cards altogether.

How to prevent chargebacks

Although chargebacks can’t be eliminated, businesses can take proactive steps to minimise their occurrence:

Set clear expectations: Misunderstandings are a leading cause of chargebacks. Make sure your product descriptions, pricing, and shipping times are crystal clear. Avoid over-promising and under-delivering.
Fast, responsive customer service: Customers often try to resolve an issue with the merchant before initiating a chargeback. Offer quick and friendly support to address issues quickly, potentially avoiding a formal dispute.
Keep detailed records: Maintain records of every transaction, including receipts, shipping confirmations, and customer interactions. This information can make all the difference when fighting a chargeback.
Subscription management: For subscription-based businesses, make it easy for customers to cancel their service and ensure they know how to do it. Hidden cancellation policies are a sure way to trigger disputes.
Accurate billing descriptors: Make sure the business name on customer statements matches your store name. Customers who don’t recognise a charge may assume it’s fraud and file a dispute.
Partner with a secure payment processor: Make sure your provider uses address and card verification tools, as well as 3D Secure, to flag potentially fraudulent transactions before they’re completed.

Chargeback vs. Refund: What’s the difference?

It’s easy to confuse chargebacks with refunds, but they’re different. Refunds are initiated by the merchant, usually when a customer requests to return a product or cancel a service. It’s a voluntary process where the merchant agrees to reverse the transaction and issue a refund.

On the other hand, a chargeback is an involuntary process that happens when the customer bypasses the merchant and goes straight to their bank to dispute a charge. The bank takes the customer’s side initially, and it’s up to the merchant to prove otherwise. Chargebacks are often seen as a last resort when customers feel they can’t resolve an issue directly with the business.

Conclusion

The best way to prevent online fraud and reduce chargebacks is to have a reliable and secure payment gateway in place. Payop offers more than smooth payment processing; our platform provides advanced fraud prevention and chargeback management tools designed to safeguard your business. In addition, our dedicated support team will handle any chargeback cases that arise, saving you time and effort.