Chargebacks Explained

No other word can cause that much stress to a merchant as a “chargeback request”. Besides all the time devoted to managing disputes, you will face high chargeback rates and penalties, which can end in loss of revenues, and it can also damage your reputation, which might result in freezing your merchant account, or in some cases even a termination of your merchant account.

A processing history with a lot of chargebacks can also mean a big obstacle when looking for a new processor. They will immediately put you in the high-risk merchant box and some processors with a strict working policy won’t accept your application for a merchant account.

What is a chargeback?

It is the cardholder’s right to dispute a transaction and request a reversal of funds which were previously transferred to the merchant’s account.

When the cardholder initiates the chargeback, the issuing bank withdraws the funds from the merchant’s account to the cardholder’s. It’s for the banks to determine whether the funds should be returned to the customer’s account. At this point the burden of proof lies with the merchant, who needs to prove that the service was provided correctly.

The most typical reasons for a Chargeback

The cardholder’s right to dispute a transaction is meant to protect them from fraudsters who stole the customer’s card information and make a purchase without the customer’s consent.

The other possible reasons why do customers request a chargeback are:

  • the ordered goods were no delivered or the ordered services were not provided,
  • the delivery was delayed,
  • the delivered goods were not the one ordered by the customer,
  • the ordered goods didn’t have the expected features described on the merchant’s website, or the description did not provide sufficient information about the goods or services,
  • the customer is simply not satisfied with the product’s quality,
  • the customer returned the ordered goods, but did not receive money refund from the merchant,

The reasons for a chargeback can be also technical or clerical:

  • an expired authorization,
  • a simple bank error,
  • the customer was accidently billed twice,
  • charged amount was incorrect.
The Chargeback Process
  1. The card holder contacts their issuing bank and requests a chargeback
  2. The issuing bank contacts the acquiring bank
  3. The acquiring bank informs the merchant about the chargeback and gives them an opportunity to respond in a specific time period (e.g.7 days)
  4. Merchant either accepts the chargeback or objects it. If the merchant objects the chargeback, he needs to provide the acquiring bank with the best documentation which can prove that the products were correctly delivered or the service was correctly provided. On the other hand, if the merchant accepts the chargeback request, or cannot provide the acquiring bank with a certain documentation that proves them right, the merchant need to return the funds and pay a chargeback fee.
  5. The acquiring bank informs the issuing bank about the merchant’s position
  6. The issuing bank informs the card holder about the result. If the card holder was right, funds are returned.