Chargebacks explained

What is a chargeback?

Simply put, a chargeback is an action that may occur after an online customer successfully disputes a specific transaction that has already been charged by an online merchant. It is carried out by the customer’s debit or credit card issuer bank by taking the money back from the merchant and returning it to the customer. It is one form of refund but shouldn’t be mixed up with the traditional refund which is paid directly by the merchant, moreover, a chargeback may result in fines for the merchant.

There are several reasons why a customer would request a chargeback. One of the most common reasons is when a given online purchase was not permitted by the customer, in other words, one’s card information has been compromised. Other reasons may include products or goods not delivered within a predefined time frame, damaged or wrong items, the client simply returns an item, or the merchant duplicated a charge unintentionally. A chargeback can also be initiated if the online customer could not work out an agreement with the merchant for a refund. The chargeback process can be requested by the merchant or the cardholder’s bank.

The process of a chargeback

Chargeback exists purely for customer protection. When a customer decides to initiate a chargeback, the process starts with one contacting their card issuer bank. After the process has started, the merchant has to provide sufficient evidence, such as a signed receipt, to the card holder’s bank that the sale went down properly. If the provided evidence proved to be inadequate, the bank debits the given amount from the merchant’s account and transfers it to the customer’s account. Additionally, a penalty will also be charged which may vary from banks and different cases.

How to avoid chargebacks as a merchant?

Chargebacks may cause an interruption in your business’ steady cash flow, not to even mention your company’s reputation. Follow these simple tips to avoid chargebacks.

• Direct and constant communication: Make sure to keep your customers happy by regularly updating them on the status of their orders. It is not only a great way to make your customers feel looked after, but it will also help you to avoid chargebacks.
• Straightforward return policy: Make sure that your return policy is transparent and can be easily understood by your customers. It is also important to provide easy access to your return policy on your website, so customers don’t have to go through several pages to access it.
• Provide superb customer service: Have enough resources to look after your customers and respond to their complaints promptly. In many cases, customer complaints can be solved with little effort, while overlooking their importance may result in a chargeback.
• Transparent descriptions: Provide accurate and transparent descriptions of your goods or services. This will help your customers make purchasing decisions easier.

Chargeback fraud

Although chargebacks came to life to protect online customers from false charges and unreliable merchants, sometimes it happens that the customers are the ones to be blamed when they make false chargeback claims. This is called friendly fraud.

Friendly frauds happen when a customer initiates a chargeback from their card issuer without asking the merchant for a refund first. There are several reasons why customers would skip the obvious step and turn to their bank including buyer’s remorse, they forgot about the purchase, the refund policy has expired, they don’t recall the merchant name on their bank statement, would like to get the goods or services for free, or goods are no longer required.

In most cases, friendly fraud claims involve no malicious or criminal intent but customers think that this is the only way to get their money back as they are unfamiliar with other options.

Refunds vs. Void Transactions

Refunding a transaction is returning money to a customer’s debit or credit card, a process made directly by the merchant. In case of a refund, a charge has already been settled on the merchant’s account.

In contrast, void transactions are cancelled payments by the merchant before the money settles on their account. When a transaction is voided, it will show up as a pending transaction on the customer’s account until it is completed. Voids can only be made when a transaction has not been settled.

There are two phases in credit card transactions. The “authorization and charge” step authorizes the transfer to the customer’s credit card but the money has not been transferred yet. At this stage, an approval code is sent to the merchant and stays on hold. The “capture and settle” phase is the final step when the merchant confirms that the funds can be transferred from the customer’s credit card to the merchant’s account. Refunds usually take between 2 to 30 days to be completed, while void transactions are usually cleared between 1 to 3 days.