Credit Card Chargebacks Explained

Chargebacks are a type of consumer protection for credit card holders. A chargeback invalidates a credit card transaction and funds that were previously paid into a merchant’s bank account are withdrawn, while a credit is applied to the customer’s credit card statement.

If you are a merchant that accepts credit cards as a payment method, you should have a process to manage chargeback prevention. This will help you retain revenue and reduce risk.

Any cardholders who is targeted by fraudsters, including dishonest merchants who take advantage of the customer and criminals who execute unauthorized transactions against a credit card, a chargeback is the customer’s safety net. No matter what happens, the cardholder can be sure that their money is safe.

Customers may use chargebacks to dispute a credit card transaction and obtain a refund for their purchase.

Chargebacks are different from other refunds in a fundamental way. The customer does not contact the merchant for a refund, but rather approaches the bank and asks that the funds be removed forcibly from the business’s account. The bank will investigate each case on its own merits and if they find that the cardholder presented a valid case, the funds will be removed from the business’ account and returned to the customer.

Friendly Fraud

Although chargebacks were originally meant as a type of consumer protection, they are increasingly being used as a deadly weapon that customers use against businesses. In short, consumers use chargebacks to steal from merchants.

Consumers use chargebacks for a number of wrong reasons:

  • The customer experiences “buyer’s remorse.”
  • The customer does not want to pay the credit card handling fee.
  • The customer didn’t understand, or didn’t want to wait for the delivery schedule.
  • The customer finds the return process too complicated.
  • Someone else with authorized access to the card made the purchase, but the cardholder refuses to pay the bill.
  • The customer waited too long and the return time limit for the product has expired.
  • The cardholder wants to make extra money.
  • The cardholder doesn’t recognize, or forgot about the transaction.

Credit card fraud exceeded $100 billion in 2013. It is estimated that at least $40 billion of that was caused by friendly fraud, but the real costs are probably much higher.

Merchants’ Responsibilities

Merchants must take steps to minimize the risk of chargebacks, both illegitimate and legitimate. If a merchant offers attentive and prompt customer service, provides high quality services or products and attends to transaction details, customers won’t have valid reasons to file a chargeback against the business, resulting in a decrease in friendly fraud.

Merchants should take the required steps to detect fraud, enabling them to identify purchases that may lead to chargebacks. Preventing fraudsters from making transactions in the first place will reduce the risk of a chargeback.

Merchants have a major responsibility to fight chargebacks. When merchants regularly dispute these claims, banks tend to file fewer chargebacks against them. Not only does reducing or eliminating chargebacks ensure that the business retains more profits, it also serves to educate customers about what chargebacks are and when it can be used safely.

It is critical for merchants to understand what chargebacks are and how they affect the business’s profit. Answering the question, “How can I prevent chargebacks and credit card fraud?” is the first step that should be taken before an effective management solution can be implemented.

Many business owners don’t understand that chargebacks can be disputed. They often don’t even know what a chargeback is and certainly don’t know that banks can keep their money and charge fees on top of it. Don’t let your customers steal from you through friendly fraud. Make sure your financial controls include processes to prevent chargebacks and dispute them vigorously whenever they appear.

Real Time Analytics