Whether you’re an online merchant or you accept payments via point of sale (POS) card terminals, chargebacks are a matter that requires your attention and can impact your business.
Undoubtedly, the more transactions you process, the higher the rewards and the stakes for customers to initiate a dispute a card charge with their issuer for a product or service they purchased from you for reasons we’ll explore in this article. This process is known as a chargeback. Let us walk you through what chargebacks are, how they work, why they occur, and how to efficiently manage them so you can continue to expand and grow your business.
If you’re looking for in-depth insights into chargebacks, search no further. Watch our video and find out more.
What is a chargeback?
Chargebacks describe the process of reclaiming funds that have been paid to a merchant in instances of a dispute or an improper card transaction. The chargeback is initiated by the cardholder’s issuer against the merchant for the transaction amount plus any applicable chargeback fees (more on fees below).
Chargeback vs refund – what is the difference?
Even though the chargeback process seems similar to a refund, it differs in various ways and consumers should not treat it as an alternative refund mechanism. During a refund, the cardholder returns their bought goods and/or services to the merchant for numerous reasons, expecting to be credited for the value of the items. It should be noted that each merchant gets to determine their refund policies.
For a chargeback to take place, the cardholder needs to get in touch with their card issuer directly and instruct them to file a dispute of the transaction. Depending on the cardholder’s card scheme, the issuer will take all the steps necessary to reverse the payment to the cardholder.
One of the main differences between a refund and a chargeback is that the merchant isn’t aware that the cardholder requested their funds back through their issuer in the form of a chargeback until they receive the relevant notification.
Why do merchants need to keep track of their chargebacks?
There are various ways that chargebacks can risk the financial and reputational state of a business. In effect, merchants incur several fees when disputes happen, including fees set by the card schemes, the chargeback management fees that acquirers impose and other administrative fees.
Moreover, the business can be fined if chargebacks occur too often and exceed their agreed-upon chargeback threshold per month over a long period. Even more so, the acquiring bank may decide to terminate a merchant account and bar a business from accepting card payments when its chargeback ratio is consistently high.
The above factors necessitate investing time and effort in understanding how chargebacks work and how businesses can manage them effectively.
How do chargebacks work?
When a cardholder disputes a charge made on their bank card, there’s a set of steps involved in handling it, with each major card scheme setting its own rules and procedure for doing so. These procedures protect cardholders from fraudulent charges, preventing them from being financially responsible for any unapproved withdrawal of funds. At the same time, the procedures give merchants the opportunity to overturn the chargeback through their acquirer, so long as they can provide evidence that proves the chargeback was wrongly raised by the cardholder.
When a chargeback is initiated by the issuer, the payment amount in question is automatically moved from the acquirer to the issuer. Then, the acquirer receives the chargeback and provides the chargeback details to the merchant to decide whether they want to dispute it and recoup their lost revenue.
In the meantime, the issuer keeps the received amount on hold, until the merchant’s timeframe for dispute expires prior to returning the sales amount to the cardholder.
Common chargeback reasons
Card schemes have their own reason codes to categorise and explain what caused the chargeback. Issuers classify chargebacks according to the cardholder’s payment card network.
Below we explore some of the most typical reasons for filing a chargeback:
- The customer didn’t receive the ordered merchandise
- Merchandise not as described at the time of sales or is delivered faulty
- Credit card fraud
- Friendly fraud (This involves any activity where a consumer makes a purchase and then disputes the charge with their bank without having a legitimate reason to do so. If you want to find out more about friendly fraud, read our article).
In addition to the above, there are other reasons that a cardholder disputes a transaction. These may include authorisation errors where transactions are processed without valid bank authorisation or without a valid authorisation response from the bank (i.e., no “approval” message was received) to name a few. This may also happens for payments made with an expired or declined card.
Another reason that a cardholder disputes a transaction may involve processing errors. These can come in the form of subscription errors where the customer cancels their subscription, but the merchant still charged them for it. Other examples can be the merchant applying the incorrect currency or payment amount, or the merchant processed the same transaction twice.
In general, while chargebacks are designed to mitigate deliberate attempts of fraud, they can also come from a simple miscommunication or confusion which can, ultimately, lead to a complaint or escalate into a chargeback. Being aware of the reason behind chargeback claims is paramount for merchants and their acquirer to successfully dispute it if possible.
How long after the transaction should customers wait until they request a chargeback?
The standard chargeback timeframe for both Visa and Mastercard is 120 days from the date when the payment was processed. The maximum timeframe is up to 540 days following the transaction date (for certain chargeback reason codes).
It’s important to note that time limits may vary depending on several factors, such as the transaction type (whether online or POS) and/or the transaction where the chargeback timeframe is calculated on a different basis, therefore time limits may vary.
Ways to safeguard your business from chargebacks
Card not present transactions
Card not present eCommerce payments inherently hold a bigger chargeback risk than a card present, in-store transaction. This is primarily because the merchant is not always able to identify if their customer is the owner of the card details they entered on the payment page.
Luckily, there are various tools to help merchants reduce the risk of chargebacks. Businesses operating in the online world have the option of applying 3D Secure 2 (3DS2) – an authentication protocol used by the card schemes which follows the PSD2 regulation. In principle, 3DS2 authenticated transactions are protected against “fraud reason” chargebacks.
However, there’s no guarantee when it comes to fraud and risk management. For this reason, 3DS2 should go hand in hand with fraud prevention tools, real-time fraud monitoring and expert advisory from an experienced payment service provider.
Card present transactions
While payments processed through a POS terminal are considered as lower risk because the cardholder is present during the transaction flow, there may be occasions when cardholders file chargeback requests. Entering the PIN into the terminal keypad is the safest way to accept card present payments. If you process a PIN-enabled card without the cardholder entering the PIN (such as a contactless payment), there is a risk of a chargeback.
Mobile-enabled payments such as eWallets like Apple Pay and Google Pay™, for example, provide additional layers of security via their tokenisation and biometric authentication, which can, ultimately, mitigate the risk of fraud for merchants and customers alike.
How emerchantpay can help
Chargebacks ensure the card payment ecosystem runs smoothly and securely for customers and merchants alike. However, when merchants feel they’ve been wronged by a cardholder, they have the right to dispute the chargeback and protect their revenue. This is where a trusted payment service provider can help merchants manage disputes efficiently.
At emerchantpay, we’re dedicated to safeguarding your business against fraud through data-driven insights tailored to your unique business needs, including advanced fraud monitoring and prevention tools. Coupled with our wide array of payment services, we can help you manage chargebacks while keep growing and expanding your business.
Want to know how to can protect your business against chargebacks? Speak with our team of payment specialists today.
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