If a customer is unhappy with some aspect of a purchase made with a credit or debit card, they can seek recourse in several ways.

One way is for the customer to contact the seller and go through the sellers usual returns procedures. The seller may issue a refund, replace goods, issue store credit, or whatever is appropriate under the circumstances.  

Another way is for the customer to contact their bank and ask for the credit or debit card transaction to be reversed, and for the funds to be returned to them. This is known as a chargeback. 

There are several roleplayers in a chargeback situation:

  • The consumer or cardholder
  • The issuing bank – the bank with whom the consumer has the account that the transaction was made from
  • The merchant, or seller
  • The acquiring bank – the bank with whom the merchant has the account that received the funds for the transaction 
  • The credit card network

There may also be additional companies and organizations involved in the process, such as online payment gateways, and payment processors and facilitators.   

A chargeback follows a certain process:

  • The consumer contacts their issuing bank, citing a dispute and asking for the charges to be reversed
  • If the issuing bank deems that the claim is not warranted the dispute will end there
  • If the issuing bank determines that the claim may be valid, the issuing bank will give the consumer a provisional credit equivalent to the transaction amount
  • The issuing bank will then contact the acquiring bank, who will notify the merchant of the dispute
  • Funds to the value of the transaction will be removed from the merchants account and sent to the issuing bank
  • The merchant may choose to accept the chargeback, in which case the funds remain removed from the merchants account, and penalty fees paid
  • The merchant may choose to fight the chargeback and submit relevant documentation 
  • There will then be an investigation and evaluation process at the issuing bank
  • If the outcome is in the favor of the merchant, the funds will be returned from the consumers account to the merchants, but any penalty or administrative charges will not be refunded
  • If the outcome is in the favor of the consumer, the merchant can choose between accepting the outcome, or fighting further through an arbitration process
  • Arbitration is usually handled by the card network. It is a lengthy and expensive process and the decision is final 

Chargebacks are designed to protect the consumer from legitimate problems such as card fraud and unscrupulous merchants, and the process is heavily skewed in favor of the consumer. 

Consumers may ask for chargebacks for faulty or damaged items, non delivery of items, incorrect items shipped, incorrect charges, and even in some cases simply buyer’s remorse.

There are legitimate reasons why a customer may ask for a chargeback:

  • There was a fraudulent charge on their account
  • There was a duplicate charge for the same transaction
  • They had ended a subscription correctly but were still charged
  • They could not resolve the dispute amicably with the merchant directly 

There are cases where the consumer may misunderstand or be in error, and then ask for a chargeback:

  • The consumer did not recognise the name of the merchant, or reference on the statement, even though they did make the purchase
  • The consumer may not realize a payment is for a subscription that they signed up for
  • The consumer may have completely forgotten that they made the purchase – this can happen with long delivery times
  • The consumer did not realize what they actually purchased, such as wrong sizes chosen, and think that it is the fault of the seller
  • The consumer did not realize they could try and resolve the matter directly with the merchant, using the merchants returns policy and procedures

Then there are cases known as ‘friendly fraud’, where the consumer basically wants to get something for free. With most chargebacks there is no requirement for the consumer to return the goods purchased and then subsequently disputed. Therefore if the consumer is successful in their chargeback application they get to keep the goods and have their money returned.  

Chargebacks are unavoidable in any business. No business runs smoothly 100% of the time, and mistakes are made. Consumers also make mistakes. That is why it is vital to have good returns policies in place, so that it is easier for the consumer to deal with the merchant directly. Good, friendly and efficient customer service can go a long way towards reducing chargebacks. Businesses should also keep excellent records of transactions, use shipping partners with tracking and clearly define what customers are purchasing. 

Chargebacks are a real problem, especially for smaller businesses. In essence the merchant is assumed guilty until proven otherwise. The drawbacks for merchants can include:

  • Penalty fees – these are not returned even if the outcome is in the merchants favor
  • Loss of income on product as well as shipping and other logistics costs, as the goods are not returned
  • Too many chargebacks can result in being classified as a higher risk, which can result in even higher penalties and even bank accounts being closed

As a small business, it is very difficult to deal with chargebacks. It is a convoluted and lengthy process, and most small businesses simply don’t know what to do. That is why it is important to have a payment partner who will deal with these matters on your behalf, or advise you on what to do at any step of the process. That does not mean that you do not need to keep good records – if you want someone to represent you in contesting chargebacks you need to give them good ammunition if you want to win.  

At Baer’s Crest we know just what a nightmare chargebacks can be. We can advise on operational mitigation methods, as well as offering payment solutions that can help ease the pain of chargebacks. Talk to us about how we can help you.