As manual transactions are slowly being replaced by card-not-present transactions, chargebacks are becoming an inevitable part of personal transactions. Therefore, the need to resolve disputes between merchants and customers is more important than ever.
Follow along to learn about chargebacks and why they are the primary tool banks are using to resolve payment disputes.
What is a Chargeback?
According to Investopedia.com, a chargeback, also called a payment dispute, is a payment amount that is returned to a debit or credit card after a customer successfully disputes a charge on their account statement or transactions report.
Chargebacks occur when customers choose to file a dispute with their bank instead of working directly with merchants to resolve the issue or receive a refund.
Equally important, chargebacks are possible in part due to the Fair Credit Billing Act. The act states that a consumer has the right to dispute certain charges as long as certain requirements are met.
How it works
Chargebacks are naturally aimed to protect the customer; they serve as a safeguard. Therefore, the chargeback process is usually initiated by the cardholder/customer.
In spite of the fact that each chargeback case looks different from the next, the general process works like this:
Step 1: A purchase occurs
First, all payment disputes begin when a customer makes a purchase – either online or in-person
Step 2: Customers files a chargeback
If at the end of the month, the customer notices a charge they didn’t authorize, the customer should contact their credit card company/issuing bank, to investigate the charge.
Please refer to Reasons to Initiate a Chargeback, for examples on when to initiate a chargeback.
Step 3: The Customer and Merchants Bank Investigate the Claim
In this step, the customer’s bank contacts the merchant’s bank to request evidence to refute the claim. Evidence can include items such as invoices, receipts, proof of delivery, or anything else that the merchant can use to prove that the purchase was valid.
Step 4: Decision Time
After the customer’s bank reviews the evidence received from the merchant’s bank, they must decide whether or not the purchase was valid.
If the dispute is ruled in the customer’s favor, the funds will be removed from the merchant’s bank account and provisional credit will be placed in the cardholder’s account. However, if the bank rules in the merchant’s favor, the customer must either pay for the goods or continue to dispute the purchase and begin a process called arbitration.
Note: If the dispute is ruled in the customer’s favor, it will cost the merchant money. Some payment processors will charge a merchant for chargebacks to cover administrative costs.
Step 5: Arbitration
If the customer’s bank and the merchant’s bank fail to come to an agreement, they enter the arbitration process. This process is governed by the customer’s credit card company (Visa, Mastercard, American Express, etc.) and their decision is considered final. The credit card company reviews the evidence provided by both parties to determine who is responsible for the charges.
Reasons to Initiate Chargebacks
There are a variety of reasons for which a payment dispute may be granted. Here are a few:
1) If a cardholder simply chooses to return an item
2) Orders that were never delivered
3) An unauthorized or fraudulent charge
4) Merchandise that arrived damaged or defective
5) A duplicated or incorrect charge
6) A cardholder’s card information was compromised
How long can the chargeback process take?
Each credit card company and issuing bank determines its own time restraints for filing a chargeback. In fact, the legal minimum time for filing a chargeback in the United States is 60 days with a grace period of 120 days to dispute a charge.
Chargeback Gurus provides a comprehensive time limit explanation for each credit card company.
Disputing a Charge on a Debit Card
Each card brand has varying policies when dealing with debit transactions vs credit transactions. If a debit transaction was approved with a PIN, cardholders are granted a smaller window to dispute fraudulent charges.
Chargebacks vs. Refund
If you are wondering whether a chargeback is synonymous to a refund, the short answer is no! Although both involve the returning of funds to a customer, the are important differences between the two.
| Reason | Chargeback | Refund |
| Who Initiates the Process | Customers initiate chargebacks through their issuing bank | The business owner |
| Who the Customer Deals with | The issuing bank facilitates the chargeback process on the customer’s behalf. | The customer works directly with the merchant to resolve the problem and collect their payment. |
| What Happens to the Funds | The issuing bank collects the disputed funds from your merchant account and holds them until a decision is made. | The merchant initiates the process and asks their payment processor to take the funds and return them to the customer. |
| Processing Time | Some cases can be resolved fairly quickly, but can take up to 120 days. | Usually, three to seven business days |
Chargeback Fraud
Even though chargebacks are meant to protect consumers from faulty charges and dishonest businesses, there are consumers that exploit the true purpose of chargeback claims. This is commonly known as “friendly fraud.”
Friendly fraud occurs when a consumer contacts their credit card issuer or bank directly for a chargeback rather than going to the merchant for a refund.
There are various reasons as to why a consumer may do this:
- Intending to get the purchase for free
- The cardholder experiences “buyer’s remorse”
- An expired refund policy
- The purchased item is no longer needed
- They don’t recognize the merchant name on their credit card statement
In friendly fraud cases, chargebacks can pose a serious threat to revenue and business sustainability. In 2021, a study revealed that payment disputes resulting from criminal activity cost merchants an estimated $20 billion. However, is is important to mention that credit card fraud is illegal!
Consequences
Chargebacks have both short and long-term ramifications for merchants and consumers.
Merchants
- Each time a customer files a chargeback, the merchant is hit with a fee that ranges from $20 to $100 per transaction. If the chargeback is canceled at a later time, the merchant will still have to pay fees and administrative costs.
- If the consumer files a chargeback and keeps the merchandise, the merchant loses the revenue on the product and any potential profit it carries
- If a merchant’s account is terminated, the business will be placed on the MATCH list, which is a blocklist for credit card processing, for five years.
Consumers
- Time consuming: a chargeback will typically take several week to months
- If the consumer’s chargeback is found to be friendly fraud, the cardholder may be penalized, or have their account suspended.
- A bank account that is closed due to chargeback abuse may negatively impact the cardholder’s credit score.
- To compensate for a chargeback fraud, the merchant can raise their prices, which in turn, hurts all consumers.
Tips if You Find Yourself in a Chargeback Situation
- Keep your receipts
- Review monthly statements
- Trust the process
How Payline Handles Payment Disputes
Payline has a full chargeback team on staff. If you have an account with Payline and you are experiencing issues with chargeback, we will work with you to get in front of those issues and implement fraud protection tools.
