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What are Credit Card and Bank Chargebacks? Why do They Happen? | Learn to Fight Back

The definition of a chargeback is the act of reversing a payment and returning funds to a customer. At first, it may seem as if a credit card chargeback is a traditional refund, but there is a big difference. Instead of going to the business to process a refund, the customer goes to the issuing bank which then directly takes money from the merchant’s account. Once the investigation shows that the customer’s request is true, the funds are then taken from the business account, and put back into the customer’s bank account. The customer does not need to return the purchased item.

How do Chargebacks Work?

For a consumer, chargebacks are a safety net. Protecting consumers from dishonest merchants. Long ago, bank credit cards weren’t fully accepted by consumers in the U.S. because there was a fear of unauthorized transactions and fraudulent charges. Thanks to the Fair Credit Billing Act, this ensures that:

  • Customers feel safe and secure
  • Prevents merchants from being able to make money out of sub-par products or services
  • Encourages merchants to be honest and transparent, including advertising
  • Protects consumers from criminals defrauding them

Every time a consumer issues a chargeback, they must select a reason. This is represented in a numeric code. There are many reasons why customers dispute charges, but for the most part, they will fall into four categories:

  • Technical, for example, insufficient funds
  • Clerical, for example, duplicate billing or incorrect
  • Quality, for example, late or undelivered goods
  • Fraud, for example, unauthorized purchased due to identity theft

These codes help merchants find errors, solve the issues and in the future, deliver better products or services. Chargebacks are designed to improve customer satisfaction.

If you’re a merchant, chargebacks can be timely, costly, and a frustrating threat to your business. High chargeback rates can cause your merchant account to be frozen or shut down. In addition, if your company is known to have excessive chargebacks, it can be classified as high risk, this means you will need to find a high-risk payment processor before you will be able to accept other forms of payment.

Chargebacks are unfortunate and inevitable with any kind of business. However, there are ways to lower a chargeback rate. The first step is to understand the specifics of the chargeback process. Credit card chargebacks usually occur when a consumer is not able to get a refund directly from the merchant. Policies could differ, due to them being set by the credit card company of the consumer, whether its Visa, Mastercard, American Express, or Discover.

For the most part, consumers should file the chargeback within 60 to 120 days from the date of the original purchase. If merchants would like to dispute a reversal, they will have typically 45 days to do so, and 12 days to submit documentation for proof, such as:

  • A sales receipt
  • Proof of delivery such as a tracking number or shipping receipt
  • The matching of bill-to and ship-to addresses
  • A positive AVS response
  • A Conversation with the consumer
  • Or any other evidence that shows and proves that the merchant has fulfilled the transaction

If the merchant is not able to provide enough evidence, then the credit card company will reverse the transaction, taking from the merchant’s account and putting the credit into the customer’s account. There will also be a chargeback fee, as a penalty.

How does credit card chargeback processing work?

  • The consumer must first contact their credit card company to submit a complaint.
  • The issuing bank will then verify the validity of the dispute.
  • If the dispute is invalid and the customer is at fault, the process is terminated.
  • If the dispute is valid, the consumer will immediately be refunded the transaction amount.
  • The consumer’s bank reaches out to the merchant’s bank.
  • The merchant’s bank will verify the chargeback request and investigate the evidence, and notify the merchant if need be.
  • If the chargeback is found to be invalid by the merchant bank or the acquiring bank, the processor will then contact the consumer’s bank to show the findings.
  • If the chargeback is found to be valid by the acquiring bank, the merchant will then have to provide documentation, such as tracking information or sales receipt, to prove that they correctly delivered the product or service involved and start the chargeback dispute process.
  • The merchant is able to file a chargeback dispute where evidence is submitted to show that they’re not at fault.
  • If the merchant provides enough evidence, the issuing bank will take the refunded credit from the consumer’s account and put it back into the merchants.
  • If the merchant isn’t able to provide enough evidence, the chargeback will stay, and a penalty fee is charged.

For a high-risk merchant, your high risk payment processor could be more flexible with chargebacks, as high rates will happen in the high risk industry. Not only is the chargeback process time-consuming, but it is also expensive; the penalty fees range from $20 to $100, depending on your payment service provider. This is why reducing consumer chargebacks is important for your business to be successful.

A bank chargeback occurs when the issuing bank finds processing errors in the transaction. It is used to prevent and avoid further issues. Because this is an involuntary chargeback, or is not initiated by the consumer, both the consumer and the merchant are usually unaware of a bank chargeback being processed. Imagine how upset a customer will be when they find out that their purchase has been canceled. Not only will you have to try and keep the customer, but you will also need to spend time and money necessary to investigate and file the chargeback dispute.

Different types of errors which can result in a bank initiating a chargeback are as follows:

  • Information that is required is incomplete or illegible
  • The authorization request is declined
  • Invalidated or no authorization
  • An expired card
  • A blocked, invalid, or non-matching account number
  • A domestic transaction processing violation
  • An incorrect code for currency or transaction
  • An incorrect transaction amount
  • A duplicate processing
  • A late presentment or transaction was only received after a determined time frame
  • Merchant being fraudulent

Fortunately, similarly to credit cards, bank chargebacks also have numeric reason codes, which can be used to find the error and to best address the chargeback. Providing services and products on time with fully completed records can help during a chargeback dispute process. Bank chargeback fees are evaluated by your acquiring bank. It is important to keep in mind that for every dollar lost to chargeback fraud, it can cost you an additional $2.40. It can add up, your business can lose a large amount of money.

How can you Prevent Chargebacks?

A chargeback dispute can be very time costly and are rarely won, so it is important to try and prevent them from happening in the first place. Remember, the more chargebacks you have, the greater the fees, and the more unlikely it is to maintain good standing with your card issuers. Here are some tips to trim down your chargeback ratio for the better of your business:

  • It is key to know the primary reason

Know the numeric reason codes, and identify which codes are the majority of your chargebacks. Being able to know the cause of the chargeback can help you make the needed changes to prevent you from getting future chargebacks. An example could be, if most of your customers file chargebacks for undelivered products, you may need to change your courier or offer tracked shipping.

  • Be sure to make customer service and technical support accessible

Customers will turn to their banks for chargebacks when they can’t get a refund from you. It is crucial that your customers are able to contact your customer support at any time. It’s also important to have different channels, such as live chat, phone, and email, so customers can reach you in the way they prefer.

  • Address the issues immediately

When problems arrive, you need not only be able to help your customers; you also need to solve the issues effectively and as soon as possible. An issue from a customer who is unsatisfied with your product or service doesn’t always have to end up in a chargeback when you can properly solve their concerns.

  • Use correct descriptions for your products and services

Have you ever seen a delicious-looking menu item and ordering it, then once it has arrived you discover that it doesn’t look at all like it did in the menu? If that has, then you know how it feels being misled.

Don’t ever lead your customers into thinking that your products or services can do more than they can. Real and honest advertisements detailed, and precise descriptions, realistic photos, and product videos are all important in giving your customers’ the right expectations before they order your goods.

  • Be clear about your policies in regard to returns, refunds, and cancellations

Be sure that your customers understand your return, refund, and cancellation process, including products that are non-returnable. Be sure your policies are where your customers will see them. This needs to be smooth and clear.

Do you find your business to have a higher chargeback rate than normal? At EMB, we can provide the right payment solutions for your high-risk business to thrive and excel in the competitive world. For help, concerns with a current or future chargeback dispute, or to find out how to prevent them, contact our team.