In this article, we’re answering “What is a chargeback?” This is a critical aspect of payments for any business owner to understand, especially those business owners with limited ways to accept credit cards, including offshore, high-risk, and high-ticket merchants.
This will include a detailed discussion about what is a chargeback, how to initiate a chargeback, how to dispute a chargeback, and answers to common questions we receive on the topic. This article is part of our free series on payment processing, ranging from accepting payments in person to managing high-risk merchant accounts.
Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- What Is a Chargeback?
- Types of Chargebacks
- How Can I Do a Chargeback?
- Frequently Asked Questions
- Do You Want Help Opening Bank Accounts?
What Is a Chargeback?
A chargeback is a reversal of a payment from a merchant to a customer following a disputed transaction. During the chargeback process, both the customer and the merchant will present proof supporting their position, which will then be reviewed and decided on by the financial institution.
Types of Chargebacks
There are several types of chargebacks, including fraud, non-receipt of goods, payment processor errors, and products not as described. In the following sections, we will look at two of the most common chargeback claims, which are payment processor error and two types of fraud.
Payment Processor Error
Payment processor error refers to mistakes that take place during the billing process. These mistakes can include billing errors, duplicate payments, overcharges, unauthorized charges, and more.
Criminal Fraud
When a customer initiates a transaction on the basis of fraud, it means that they are claiming a payment was unauthorized. This may be related to identity theft or unauthorized use of payment information.
Friendly Fraud
Unlike a claim of criminal fraud to initiate a chargeback, friendly fraud refers to a situation where a customer uses the chargeback process to try and receive a refund that they do not deserve.
How Can I Do a ChargeBack?
You can do a chargeback by contacting your bank and initiating a dispute. However, a chargeback is not the easiest or the fastest way to have your dispute resolved. Instead, it is strongly recommended that consumers first contact the merchant and request a refund for a disputed transaction.
Of course, if a merchant is unresponsive or unwilling to help you resolve the dispute, then you should initiate a dispute with your bank. This will require you to explain the situation, describe why a chargeback is warranted, and provide supporting documentation.
The bank will then engage in an investigation, which typically lasts between 30 and 90 days depending on the bank. During this time the merchant will have an opportunity to present information to show that the dispute was legitimate and that the chargeback request should not be honored.
How Can a Card Issuer Dispute a Transaction?
Card issuers dispute a transaction through the payment processor used by the merchant. In fact, after a chargeback request is filed, the original payment for the disputed transaction is returned to the customer provisionally. Following the investigation, the funds will either remain with the customer or be returned to the merchant.
Do I Need Proof for a Chargeback?
Yes, you need proof for a chargeback. Generally speaking, when initiating a chargeback, the consumer needs to present clear information, details, and supporting evidence to the financial institution in order to show that the disputed transaction was incorrect.
Of course, after the customer submits proof for a chargeback, the financial institution will ask the merchant to submit proof in their defense. This can include invoices, payment confirmations, email communications, and more, to demonstrate that the charge was legitimate and approved by the customer.
Can Banks Refuse Chargebacks?
Yes banks can refuse chargebacks. However, in order to refuse a chargeback the bank will conduct an initial investigation into the transaction. During this investigation, the company (or merchant) being disputed will submit payment information, invoices, emails, and other supporting documents to show that the charge is legitimate. At the end of the investigation, the bank will review all of the provided information and decide whether they will refuse the chargeback or not.
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Frequently Asked Questions
Below are a few of the most common questions we receive from people looking into what a chargeback is. If you have further questions you would like to ask our team, don’t hesitate to get in touch.
How Does a Chargeback Work?
The way that chargebacks work is through a series of steps that are initiated when a customer disputes a transaction. The financial institution where the transaction is being disputed then investigates the transaction to confirm whether the dispute is legitimate or not. If the dispute is deemed to be legitimate, the customer keeps the refund. If the transaction is not legitimate, the funds are returned to the merchant.
What Happens When a Customer Does a Chargeback?
When a customer does a chargeback, they are submitting a request for their bank or credit card provider to investigate a charge that they would like to dispute. This starts with the financial institution issuing a provisional credit to the customer. The merchant is then notified, usually through the payment processor, and is given an opportunity to present evidence against the customer’s claim. After the investigation, the financial institution decides whether to uphold the customer’s claim or not. This then results in the provisional refund becoming permanent or being returned.
Is a Chargeback the Same as a Refund?
No, a chargeback is not the same as a refund. Instead, a chargeback is a dispute that the customer initiates directly with their bank or credit card provider. However, we strongly suggest that the customer requests a refund prior to issuing a chargeback request. Refunds are much faster to process and are less disruptive for the customer, the merchant, the payment processor, and the bank. In other words, this should be the second step. The first step involves contacting the merchant to request a refund via a legitimate refund request.
What Happens When a Chargeback Is Issued?
When a chargeback is issued the bank or credit card issuer notifies the processor. The company that is incurring the chargeback usually has an opportunity to respond to the chargeback claim, showing evidence that it did meet the requirements of the purchase. After the investigation period, the bank or credit card company will make a determination if the chargeback should stand or if the merchant’s evidence was sufficient to prove they upheld their responsibilities.
What Is an Example of a Chargeback?
An example of a situation where a chargeback legitimately occurs is when an individual purchases a product or service online, but after completing the purchase they never receive the product or purchase that they ordered. This individual could then contact their credit card company and dispute the transaction.
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