Credit Card Chargebacks – A Merchant’s Guide

Consumers have had the right to dispute charges on their credit card bills since the passing of the Fair Credit Billing Act (FCBA) in 1974. While the passing of the FCBA has helped to protect consumers from fraudulent and erroneous charges, it has also opened new opportunities for fraudsters to exploit the chargeback process. With aggregate chargeback volume on the rise and costs expected to exceed $125 billion, it’s more important than ever for businesses to understand how chargebacks work and what they can do to prevent them.

A credit card chargeback is a transaction that is reversed due to a dispute between a customer and a merchant. Chargebacks can be triggered by a number of different things, including unauthorized transactions, merchandise that was never received, or disputes over the quality of goods or services. In some cases, these disputes are legitimate, however, there are also many instances of friendly fraud, where consumers file for a chargeback despite receiving the goods or services as described for a charge that was authorized by them.

It’s important to note that chargebacks are not the same as refunds. A refund is a voluntary return of funds by a merchant, while a chargeback is a forced return of funds by a card issuer. Customers correspond with merchants directly to request refunds, while chargebacks are initiated by the card issuer on behalf of the customer. While the end result for the customer is usually the same in both cases, chargebacks are more costly for merchants as they involve additional fees. Businesses that ignore chargebacks may also be placed on the MATCH list, which can make it difficult to obtain a merchant account in the future.

After noticing an unauthorized charge or a problem with a purchase, the cardholder contacts their credit card issuer to initiate a chargeback. The issuer then contacts the acquirer, who in turn contacts the merchant if supporting documentation is required. This may come in the form of a sales receipt, invoice, or other documentation that proves that the transaction was authorized and that the goods or services were received as described. If the merchant is unable to provide this documentation, the chargeback is resolved  in favor of the cardholder. In some cases, the issuing bank and the merchant’s bank may fail to reach an agreement, in which case the chargeback may proceed to arbitration. When this occurs, the credit card company will review the case and render a decision that is binding on both parties. This is how it works for Visa and Mastercard. The process is slightly different for American Express and Discover chargebacks due to their different business model. 

There are several direct costs that are associated with credit card chargebacks and others that are more difficult to quantify but still have an impact on a merchant’s bottom line. The most direct cost of a chargeback is the loss of the original transaction amount and the associated chargeback fee. Chargeback fees typically range between $15 and $100, depending on the merchant’s agreement with their acquirer. Businesses deemed as high-risk may also face higher transaction fees as card processing companies attempt to offset the increased risk of chargebacks.

In addition to the direct costs, there are also hidden costs that merchants should be aware of. These include the cost of goods or services that are lost by the merchant, as well as the labor costs associated with handling chargebacks. In some cases, it may be necessary to hire outside help to manage chargebacks or assist with representment. There is also the reputational damage that results in lost sales, as customers who have a bad experience are less likely to do business with a merchant again. All of these factors can have a significant impact on a merchant’s bottom line, which is why it’s important to take steps to prevent chargebacks from occurring in the first place.

There are a number of reasons why cardholders may file a chargeback, but the most common are listed below:

1. Unauthorized transactions: The cardholder claims they did not authorize the transaction. This can happen if the cardholder’s account information is stolen or if their card is used without their knowledge.
2. Product not received: The cardholder claims they never received the product they ordered. This can happen if the product is lost in shipping.
3. Quality issues: The cardholder is not happy with the quality of the product they received. This can happen if the product is defective if it doesn’t match the description, or if it’s not what the cardholder was expecting.
4. Canceled subscription: The cardholder wants to cancel a subscription but is having difficulty doing so. In some cases, the merchant may continue to bill the cardholder even after they’ve canceled their subscription.
5. Incorrect transaction amount: The cardholder is being charged more than they expected. This can happen if the merchant made a mistake when entering the transaction amount or if there are hidden fees that were not disclosed upfront.

There are also a number of invalid reasons that cardholders may attempt to file a chargeback. Some of the most common include:

1. Buyer’s remorse: The cardholder regrets making the purchase and wants to cancel it. This is not a valid reason for a chargeback, as the cardholder has received the product or service they purchased.
2. Perceived convenience of chargebacks: The cardholder wants to return the product but doesn’t want to go through the hassle of the returns process with the merchant. With the ubiquitousness of one-click ordering today, customers have come to expect convenience across all stages of the purchase process, including returns.
3. Forgetting a transaction was made: The cardholder doesn’t remember making the purchase. This is often the result of purchases being made online or over the phone coupled with credit card statements that don’t provide enough detail for cardholders to remember.
4. Purchases made by a family member: A family member or friend made a purchase using the cardholder’s credit card without their knowledge. The cardholder then attempts to file a chargeback to get their money back. In this case, merchants are not legally responsible for the unauthorized purchase.

Chargebacks represent a growing problem for merchants across all industries, with the total number of chargebacks expected to continue to grow in the coming years. For valid chargebacks, businesses should aim to glean as much information from the dispute as possible to improve their prevention strategy going forward. Illegitimate chargebacks should be met with a well-crafted representment strategy to improve the chances of winning the dispute. In either case, businesses should pay close attention to the effectiveness of their chargeback management systems to help them remain profitable in today’s increasingly competitive marketplace.