What is chargeback?
Chargeback is a procedure for debiting the amount of an authorised payment from a merchant upon the request of the issuing bank. Usually, a chargeback is initiated by customers who, for some reason, want to get their money back after the payment has been made.
When a cardholder disputes an order and files a chargeback, a review process involving the issuer, acquirer, and card network begins. If the chargeback is approved, the full amount of the disputed transaction will be returned to the customer’s debit or credit card.
Why does a chargeback happen?
An incorrect charge can happen for a variety of reasons. By and large, all chargebacks can be divided into two types:
Chargebacks resulting from fraud
A cardholder often initiates a chargeback if some fraudster took possession of their card data and made a purchase without notifying the real cardholder. Sometimes it also happens that the customers themselves act as fraudsters. When a cardholder finds a way to abuse company policies, they may declare that they never ordered an item or that it was never delivered.
It should be noted that chargeback is mandatory for merchants if the fact of fraud is established.
Chargebacks resulting from the customer's dissatisfaction
The other common situation is when a buyer receives a product that didn't meet their expectations or they misunderstand the merchant’s shipping or return policies.
Customers can also apply for a chargeback in other cases:
- Received product or service does not match the description on the site;
- Merchant provided the product or service partially;
- Purchase price was debited by the online store several times, etc.
Who can initiate chargeback?
Typically, chargebacks are initiated by cardholders who want to get their money back for a number of reasons described above. However, the merchant can try to stop the chargeback by proving the dispute is unwarranted.
In any scenario, three parties are involved in the chargeback process:
- Issuing bank on the cardholder’s part
- Card network
- Acquiring bank on the merchant’s part
How long does it take to process chargeback
The rules and terms of the chargeback procedure are established by card networks (Visa, Mastercard, etc.). Thus, cardholders have 120 days to file a chargeback after the transaction is made. The maximum time limit for a response from the issuer is 30 calendar days. If approved, a chargeback has to be processed within 15 days.
Chargeback and refund difference
Both chargebacks and refunds involve returning funds to a customer, but there are essential differences between the two.
With refunds, the customer contacts the merchant directly, bypassing the bank, to resolve the issue and get their money back. This scenario is more beneficial for both parties because the buyer gets their money faster, and the seller gets their item back, avoiding high chargeback fees and maintaining their reputation in the payment processor.
With chargebacks, the cardholder doesn’t contact the merchant directly, preferring instead to deal with the bank. In this case, funds are withdrawn from the merchant’s account without warning. In addition to high chargeback fees, the merchant bears shipping costs and risks their reputation with payment intermediaries.
As such, businesses are at a greater risk of losing money from customers who opt to file a chargeback with their bank instead of contacting merchants directly to resolve the issue and receive a refund.
How to request a chargeback?
If you are determined to get your money back by resorting to a chargeback, here is a step-by-step instruction:
- Write an application to your issuing bank. Attach to it all the evidence you have — collected checks, card statements, screenshots of correspondence with the merchant. In the application, provide as much detail as possible. Don’t forget to mention the reason you’re filing a chargeback.
- Your issuer will contact the card network through which the payment was made. After that, your request goes to the merchant’s acquiring bank.
- If the acquirer finds grounds for a chargeback, the money will be debited from the merchant’s account and transferred to the customer.
- If the merchant can convince the bank that all the conditions were met correctly on their part, the chargeback will be disputed.
Is it possible to avoid chargebacks?
Chargebacks create losses for online businesses. The average industry cost per chargeback is expected to be $191 by 2023. It’s quite difficult for e-commerce companies to avoid chargebacks completely, but there are proven ways to minimise them significantly. Here they are:
- Create clear and detailed descriptions of products or services on your site. Your customers should clearly understand what they’re buying.
- Develop a comprehensive return policy, which will be visible to the client when placing an order.
- Ensure each purchase receipt you issue contains the correct store name, order time and amount, a clear description of the product or service, etc.
- Provide the possibility for quick communication with the store. Customers should be able to contact you easily and need to be sure they will get a response.
- To avoid claims and refusals, place detailed information on methods, terms, and delivery costs.
- Automate your communication channels to inform customers about the expected time of your response.
- Analyse the existing cases of chargebacks. Take time to review all the incidents and inform your employees about payment protocols. Beware of suspicious purchases made with bank cards.
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