What is a chargeback?

When a consumer does not agree with a transaction on their credit/debit account they can contact their bank to dispute the transaction. If the bank agrees with the consumers claims, they have the option to chargeback the transaction to the merchant. A chargeback essentially reverses the transaction by debiting the merchant for the disputed funds and provides the consumer with a conditional credit that may become permanent depending on the final outcome of the chargeback process.

Why do consumers chargeback?

Consumers chargeback transactions for a variety of legitimate and illegitimate reasons. These reasons can include: the wrong item was shipped; the billed amount was incorrect; the customer had buyer’s remorse; the merchant’s return process seemed difficult or any number of other reasons.

One of the most common pain points merchants experience is a customer going directly to their bank for a resolution, rather than starting with the merchant. Most banks make the dispute process very easy for their customers which often feels like an easier fix for consumers than getting into a dispute with the merchant. This simple fact means that a merchant’s best line of defense against chargebacks it to do everything it can to prevent one in the first place.

Issuing banks find chargebacks as painful as merchants do. It is important to remember that the chargeback process is a safety net, intentionally built in to gain consumers’ trust in using their card. Credit card issuers are tasked with making the difficult assessment of identifying customers with real disputes from customers engaging in chargeback fraud. One of the ways this occurs is when a customer requests their funds be returned to them – claiming no delivery – when in fact they are in possession of their goods/services.

What are some measures I can take to prevent a chargeback?

Despite a rising occurrence of chargebacks, there are a number of things a merchant can do to mitigate them. These include:

1. Clearly describe your product or service
2. Make sure your terms and conditions of the sale are clear to the customer at the time of the purchase
   • Clearly define the following:
     • Delivery date
3. Product description and price
   • Product price
   • Refund policy
   • Billed date
4. Clear credit card descriptors
   • Name of business that is identifiable to the customer
   • Customer service contact information
     • URL
     • Phone number
5. Customer service
   • Merchant contact information should be easy to locate
   • Short wait times on phone
   • Email or online chat option
   • Quickly respond to inquiries with an easy path to resolution
6. Follow credit card processing protocols
   • Always properly authorize a transaction
   • Settle transactions promptly
   • Utilize AVS and CVV for card not present transactions
7. Monitor chargeback rates and quickly investigate when an uptick is noticed

Card Associations rules and regulations

All card associations have a maximum chargeback threshold, and all monitor the volume of chargebacks a merchant receives each month. This is a merchant’s ‘chargeback ratio’ and if a merchant exceeds this ratio, they can be charged excessive fees, be put on a warning list or have their merchant processing account shut down entirely. Therefore, it’s crucial to monitor chargebacks and to have visibility into the volume of chargebacks you are receiving each month.​