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Accepting credit and debit cards is typically a good idea for small businesses. It removes friction at points of sale, potentially increasing sales, and it can encourage customers to spend more. But while there are lots of positives to being able to process card payments, there are also some downsides — including chargebacks.
If you run a business that accepts credit or debit card payments, chargebacks are something you’ll inevitably encounter. Understanding what chargebacks are, why they happen, and how to handle them can save your business significant time and money.
Key Points
• A chargeback is the forced reversal of funds after a credit or debit card purchase, typically triggered when a customer disputes a charge.
• Customers generally have up to 120 days to file a dispute with their card issuer, depending on their reason for the dispute and their specific card company’s policies.
• Businesses have an opportunity to challenge chargebacks by submitting evidence that the original transaction was legitimate before the bank issues a final ruling.
• Payment processors with strong automated fraud protection can monitor and flag suspicious activity in real time, helping businesses reduce their exposure to fraudulent transactions.
• Clear billing descriptors and accessible refund policies help customers recognize purchases and resolve issues directly with merchants, rather than escalating disputes to card issuers.
Chargeback Meaning and Definition
What are chargebacks? A debit or credit card chargeback is the forced reversal of funds after a debit or credit card purchase. It typically occurs when a customer files a dispute with their credit or debit card company over a purchase they believe is fraudulent.
Common Reasons for Chargebacks
Chargebacks typically occur after one of the following common scenarios:
Fraudulent charges: It’s possible that someone unauthorized used a customer’s credit card information to make a fraudulent purchase. Chargebacks exist for exactly this reason – so they can be used to protect customers in this situation. In this case, the credit card company will reverse the charge, returning the stolen money to the customer.
Merchant issues: A customer might file a chargeback if there were an issue with the product or its delivery. For example, perhaps they never received the product that they ordered or they were double billed for something. In other instances, customers might have received a product that was broken or wasn’t as described. In any of these cases, the customer might request money back.
Customer error: In some cases, a customer may mistakenly request a chargeback for something that was legitimately purchased. It may be that they didn’t recognize the purchase on their card statement. Or it could be that someone else, such as a family member, used their card without their knowledge.
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How the Chargeback Process Works
The chargeback process begins when a customer files a dispute with their credit or debit card issuer. Generally, consumers have up to 120 days to dispute charges, depending in part on their reason and their card issuer. Once they do, the issuing bank will begin the chargeback process.
Next, the customer’s bank will reach out to the business’s bank and alert it that the chargeback is about to take place. The business now has a chance to dispute the claim, providing any evidence it has to support that the charge was, in fact, legitimate.
The customer’s bank will then weigh the evidence it has in hand and decide whether to proceed with the chargeback. If it rules in the business’s favor, it will not return the funds to the customer. However, if it rules that the chargeback is valid, it will remove funds from the business’s banking account and credit the funds back to the customer.
If the issuing bank decides in the business’s favor on a credit card chargeback and the customer isn’t happy with the decision, they can approach the credit card company and ask for arbitration. This bypasses the issuing bank and gives the credit card company final say over the decision.
Chargeback vs Refund
A chargeback is not the same thing as a refund. Refunds occur when you (the business owner) return money to your customers. A chargeback, on the other hand, is money credited back to the customer by their bank.
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How Chargebacks Affect Merchants
What is a chargeback’s impact on a business? Chargebacks can be relatively costly for merchants. Perhaps most obviously, they immediately interrupt business cash flow through lost revenue from the transaction. Businesses also typically lose merchandise. If someone buys something fraudulently and walks out of the store with it, you’re unlikely to get the item back when the chargeback occurs.
Your business may also incur additional fees and expenses, including chargeback fees, processing fees, and administrative costs. Fees can vary depending on which payment processors you use, but they may reach as high as $100.
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How To Prevent and Fight Chargebacks
Chargebacks are bound to happen from time to time, but there are steps you can take to prevent them and improve business cash flow. For instance, you could use payment processors that have strong automated fraud protection. These use technology to monitor and flag potentially suspicious activity in real time.
You may also want to use strong customer authentication processes at checkout. For example, you could send customers making purchases online a one-time authentication code.
Additionally, be sure to use clear billing descriptors that help customers recognize purchases on their credit card bills. And do what you can to make it easy for customers to ask for refunds from you, rather than disputing the charges with their card issuers. For instance, make sure your contact information is clear on customer receipts.
When you’re notified of a chargeback, take a look to see if it was prompted by fraud or a customer service issue. If the charge is truly fraudulent, you likely won’t need to dispute it. However, if it’s due to a mistake, you may want to. In this case, first reach out to the customer and see if you can work it out with them directly. Even giving them a refund is ultimately less costly than a chargeback.
If you can’t work it out with the customer, then provide any evidence to their card-issuing bank that supports your claim, such as receipts, confirmation numbers, and shipping information.
The Takeaway
Chargebacks are an unavoidable part of doing business, but they don’t have to be a major drain on your bottom line. By investing in fraud protection tools, making it easy for customers to resolve issues directly with you, and keeping thorough transaction records, you can minimize how often they occur and dispute them successfully when you need to.
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FAQ
How long does a consumer have to file a chargeback?
Customers typically have up to 120 days to file a chargeback on charges they believe were fraudulent or made in error.
What fees do merchants pay for chargebacks?
After a chargeback, meaning after a customer has successfully disputed a charge, merchants may be subject to processing and administration fees that can range as high as $100.
What is friendly fraud in the context of chargebacks?
Friendly fraud is the term used for chargebacks that result from scenarios that are not true fraud. For example, a customer may not recognize a purchase, there might have been delivery problems, or the customer may be avoiding the returns process.
Can a merchant win a chargeback dispute?
A merchant can absolutely win a chargeback dispute. It’s incumbent on the business to provide evidence that the chargeback was not legitimate, such as proof of delivery or a signed contract.
Do chargebacks affect a merchant’s ability to process payments?
Chargebacks can certainly affect a merchant’s ability to process payments. For instance, payment processors monitor chargeback rates. Typically, they look for the number of chargebacks to be less than 1% of transactions. Anything higher and your business could be flagged as high risk. You may be charged higher fees, or you could lose the ability to process payments completely.
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