A chargeback is a reversed transaction that returns money to a customer after they have completed payment, usually by credit card. However, chargebacks are becoming more common for debit cards and payment services like PayPal.
Unlike regular refunds where the customer takes up a dispute with the business, which then refunds the payment, chargebacks are forced refunds. The credit card company reverses the payment, takes it back from the retailer, and gives it back to the consumer. In the event of a chargeback, the card issuer may refund this payment even if the customer doesn’t return the item.
Chargebacks are designed to protect consumers from retailers. If a customer is overcharged, never receives goods, or receives the wrong item or a damaged item and is unable to resolve the issue with customer services, they may file a dispute with their card issuer to get their money back.
However, chargebacks are also used as a form of fraud. Customers can claim they never received an item even if they did. They can then file a chargeback to get their money back and keep the item for free.
The Chargeback Process
Consumers have between 60 and 120 days to file a chargeback after making a purchase.
If a customer files a chargeback, the merchant usually has around 45 days to respond, depending on the rules of the card that was used.
Retailers can choose to accept or appeal chargebacks. If they appeal, the card issuer will examine the evidence and decide who is at fault. If they decide the dispute is not valid, the chargeback will be refused.
But card issuers are often on the side of their customer and will tend to deny appeals unless you can produce compelling evidence to prove that the customer received the item.
Why Chargebacks are Bad for eCommerce Businesses
Chargebacks are bad news for business because you not only lose the value of the item you shipped, the value of the transaction, and the card processing fee, but you’ll also be charged a chargeback fee on top. Fees for chargebacks can range from $20 to $100 per transaction.
While retailers can dispute chargebacks, cards tend to be on the side of the consumer. Only 18% of merchants report an average dispute win rate of above 60%.
Additionally, if you get a lot of chargebacks you’ll be tagged as a “high risk” merchant and you may be fined, have to pay higher processing fees, or lose your merchant account entirely.
If your merchant account is closed, you won’t be able to open an account with a different processor for at least five years.
How to Avoid Chargebacks
You can reduce your risk of chargebacks by providing clear and transparent information about your shipping process and return and refund policies to customers.
It’s also vital to provide great customer service so that customers come to you if they have an issue, rather than going straight to their bank. Many customers request a chargeback after unsatisfactory customer service experiences.
Make sure you keep good records and proof of fulfilling orders and use tracked shipping services wherever possible. You can use this documentation as evidence to dispute the chargeback.
If you’re selling subscription products or services, send a reminder email out at least a few days before the recurring payment is due so the subscriber has a chance to cancel before they are charged again.
Make sure the business name that appears on your customers’ credit card statements matches the brand name that they’re familiar with. If a consumer sees a charge on their statement that they don’t recognize, there’s a high possibility they’ll panic it’s a fraudulent transaction and contact their credit card company. You can also print your phone number on card statements so that customers can contact you directly if they don’t recognize the charge
Put measures in place to avoid the risk of fraudulent card use. Using verification services at checkout can help to reduce credit card fraud on your site. Avoid suspicious transactions such as a new customer placing an unusually high-value order.
A fraud-prevention service can also help to flag and block orders that have a high risk of chargeback fraud.