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.Â
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:
There are also a number of invalid reasons that cardholders may attempt to file a chargeback. Some of the most common include:
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.
Chargebacks are issued for various acceptable reasons, including unauthorized use or fraud. It can also result from product quality issues, incorrect transaction amounts, or products not received.
Unfortunately, there’s no one-size-fits-all reply to this since merchant chargeback dispute success rates vary greatly from industry to industry and even business to business. However, research shows that on average merchants who dispute chargebacks have a 32 percent win rate.
If a merchant doesn’t respond to a chargeback by the stipulated deadline, they accept the chargeback by default.
The issuing bank will refuse to open a dispute if the cardholder doesn’t present compelling evidence or reason to do so. Also, if the merchant submits compelling evidence against the case, the chargeback may be reversed.
Merchants have the right to take customers to court over false chargebacks, and the charges may result in fines, court fees, and imprisonment. However, this almost never occurs in practice.
The average chargeback to transaction ratio is 0.60 percent across every industry. However, the ratio may vary significantly from industry to industry.
You must submit compelling evidence to the issuing bank to win a chargeback dispute. Depending on the reason code, the evidence submitted should prove that you accurately presented the product, verified the cardholder’s identity, correctly processed the transaction, and delivered the product in a timely fashion.
When a merchant loses a chargeback, the customer keeps the transaction amount. However, if you still feel the chargeback decision is wrong, you can submit new evidence for pre-arbitration.
