Chargebacks 101: What They Are and How to Prevent Them

As a person involved in business, you’ve probably heard of chargebacks. These operations are rather common yet extremely disadvantageous for merchants.

Read ahead to take a closer look at chargebacks, understand how they work, and figure out how to avoid them in the future.

What Is a Chargeback?

A chargeback is a procedure during which a payment is reversed after a client files a dispute due to an unwanted charge from their bank account.

The card issuing bank contacts the merchant and investigates the claim. If the appeal is approved, the consumer receives the sum back in full. However, if the seller doesn’t agree with the chargeback claim, they can request the case’s revision.

Common Reasons for Chargebacks

Some of the most frequent cases when chargebacks occur include:

• The card being charged without the owner’s knowledge or consent
• Unidentified transactions
• Non-receipt of a product or service the consumer paid for
• Accidental order placed multiple times
• Recurring billing that wasn’t disabled after a subscription cancellation
• Poor quality of the purchased product or service

All cardholders can initiate the chargeback procedure. For its successful outcome, the consumer must have evidence of the issue and comply with the deadlines for submitting the request set by the issuing bank. Otherwise, the payer's claims will not be satisfied.

Chargeback Process

There are three sides involved in the chargeback process:

• Consumer and issuing bank
• Merchant and acquiring bank
• Card scheme

The chargeback procedure may vary depending on the payment provider who handled the transaction.

Typically, it consists of the following steps:

1. The consumer files a chargeback claim through their issuing bank. The deadline is usually up to 120 days after the purchase.
2. The issuer then goes over the case, assigns a reason code, and releases the chargeback.
3. The chargeback request reaches the card scheme that then forwards it to the acquiring bank.
4. When the acquirer receives the chargeback, it debits the funds from the merchant’s account and charges the merchant a fee of $5 to $100.
5. The merchant can decide to satisfy the claim or challenge the chargeback request upon reviewing it. If they choose the latter, they have approximately 14-40 days to do so.
6. When the merchant makes the decision, the acquiring bank forwards it to the issuer via the card scheme.
7. After that, the issuing bank reviews the defense document and makes a decision regarding it.
8. If the issuer accepts the merchant’s defense, the acquirer will return the funds.

In the event of the defense being declined, the merchant can still appeal the decision. Such a situation is called a second chargeback and rarely has a positive outcome for the seller.

If the merchant is still dissatisfied with the outcome, they can launch a third round of chargeback, which is called arbitration. Yet, in the majority of cases, it is not advisable since significant fees apply and no successful result is guaranteed.

The Difference Between Chargebacks and Refunds

It is easy to confuse chargebacks with refunds since both procedures involve reimbursement of funds. Yet, these two types of operations have notable differences.

When it comes to requesting a refund, a consumer can do it by reaching out to the merchant directly. In this case, the process will follow the seller’s refund policy.

However, if the merchant doesn’t agree to return the payment amount for some reason, the client can apply for a chargeback and deal with the card issuing bank instead of the product or service provider.

Why Are Chargebacks Bad for Your Business?

Now that you know what chargebacks are and how they work, you might be wondering what exactly their consequences are for a business.

Here are the main downsides that follow chargebacks:

• Revenue loss. A short-term negative effect of chargebacks is that a merchant loses revenue from selling a product or service.
• Costly fees. If a chargeback occurs, apart from having to reimburse a payment, you will also face additional fees. This charge can’t be recovered even if you win a dispute.
• Long-term penalties. The more claims are filed against you, the higher your chargeback ratio. As it reaches certain thresholds, you'll be dealing with more severe chargeback fees and can even lose your merchant account.
• Long processing. The procedure is time-consuming, especially if you have to go through several rounds of chargebacks. Besides, it can result in a waste of effort which could be used for dealing with more important business matters.

As you can see, chargebacks impose plenty of disadvantages for merchants. Below, you’ll find the most effective ways of avoiding them.

How to Prevent Chargebacks

While there is no recipe that can guarantee you the absence of chargebacks, there are steps you can take to minimize their risk:

1. Provide Clients with Clear Information

Ensure that the product descriptions and images are accurate and don’t appear ambiguous. This way, your clients will have realistic expectations about the goods.

Besides, it is extremely important that your shipping, return, and refund conditions are visible and clear to the consumers.

Another critical factor in preventing chargebacks entails checking that the billing descriptor that appears on your customers’ bank statements is easily recognizable.

2. Ensure Great Customer Service

The more communication channels you have with your clients, the more likely they are to reach out with their claims directly to you rather than to the issuing bank.

Include customer service contact information on your website, social media, and receipts.

3. Track Shipments

Package tracking is beneficial to all parties involved in the business transaction. It prevents the clients from assuming the package is lost while not letting fraudsters wrongfully claim the shipment hasn’t arrived.

4. Conduct Regular Fraud Screening

Watch out for suspicious signs, such as:

• A mismatch in the shipping and billing addresses
• Multiple small purchases from the same IP address within a tight timeframe
• Orders placed from locations with a high fraud rate
• Extra-large orders from new clients

The screening for such red flags can be performed by an outsourced fraud-prevention organization, in-house professionals, or your payment processor.

5. Keep Detailed Transaction Records

It’s also essential to store as much information about every order as possible. For instance, apart from fundamental data, such as the cardholder’s full name, purchase date, and amount paid, try to keep delivery signatures, client IP addresses, customer service emails, and so on.

What to Do If You Received a Chargeback Notice?

If, regardless of the prevention steps you’ve taken, you still receive a chargeback notice, it’s of utmost importance that you deal with it wisely.

Here’s what to do:

1. Evaluate the chargeback. No matter if the chargeback was approved or denied, it is a chance for you to analyze the situation and think of ways to avoid similar claims in the future.
2. Submit compelling evidence shortly. Ensure that you collect enough proof of your legitimate actions and forward the supporting information to your acquirer before the deadline.

Following the above-mentioned recommendations will enable you not only to resolve chargeback claims but also to avoid them effectively.