Chargebacks can occur when you’re selling online as a small business, but that’s not the only time they can happen.
As a merchant, you’re likely familiar with chargebacks. They’re a normal and often unavoidable part of running a business. However, by understanding why they happen, you may be able to reduce and sort them effectively.
Think of a chargeback as a transaction reversal, occurring when a customer contacts their debit or credit issuer and requests a refund after a completed transaction.
In this article, we’ll dive into the definition of a chargeback, how they work, the different types of chargebacks, and how to work to prevent them.
So what is a chargeback? A chargeback occurs when customers report or dispute a charge with their debit or credit card issuer, asking them to issue a refund.
Chargebacks are typically initiated by the original buyer. While they do not have to pay a chargeback fee to start the chargeback process, they must file the dispute within a specific time frame — usually up to 120 days after the transaction date.1 The customer should always contact the seller first to try and resolve the issue.
Here’s a quick example of how a chargeback works: Say a buyer purchases a large, six-foot standing mirror on their credit card. A week later, the mirror arrives chipped or shattered. The merchant insists that the mirror was packed safely. The customer then decides to file a chargeback request with the bank that completed the transaction — in this case, the credit card issuer.
In this instance, other reasons for a chargeback request could include:
If the claim gets approved, the customer receives the amount back in full to their original form of payment. However, if the merchant disagrees with what is stated in the claim, they can defend it and the customer’s credit card issuer will have to determine who is responsible.
What is a chargeback dispute? Before we discuss the specifics of chargebacks, it’s helpful to first understand some common terms you may encounter in the process:
Though chargebacks and refunds both involve the return of funds for a transaction, there are some major differences.
A refund is the return of funds to the customer from the seller. Refunds are always driven by the merchant and are considered voluntary. For the seller to issue a refund, they come to an agreement with the customer so they can bypass the need to get the debit or credit card issuer involved.
In the case of the standing mirror, the buyer could have contacted the merchant directly, requesting a refund for the damaged item. If the merchant agrees, the buyer would happily receive the refund to their form of payment some days later. This leads to a better relationship between the merchant and the customer, and it works to benefit the seller as well.
However, if the buyer has trouble reaching the merchant or the merchant refuses to honor the damage claim, the buyer could escalate the dispute into a chargeback with their credit card issuer. In contrast to the refund, a chargeback is always initiated by the customer.
There are numerous reasons for chargebacks, such as if a customer:
To help avoid and prevent potential cases of chargebacks, find out more about disputes.
Though the chargeback process can vary depending on the debit or credit card issuer handling the case, the chargeback process generally follows these steps:
Chargebacks not only hurt your bottom line, but they can also hurt your business by:
There are ways to win chargeback disputes. Learn how to manage chargebacks.
Factors that could affect your likelihood of winning a chargeback dispute include:
Chargeback protection for merchants can help minimise the financial impact of chargebacks by leveraging tools to help detect fraud, reduce customer friction, and contest cardholder queries.
Learn more about risk management solutions.
Also known as friendly fraud, chargeback fraud happens when a customer purchases items with a card online and then disputes the charge with their bank — even when they don’t have a legitimate reason.
Here’s an example: After purchasing a mirror online, the buyer receives the item but later claims that the mirror was never delivered, initiating a fraudulent chargeback to obtain a refund while keeping the mirror.
Sometimes cases of friendly fraud can be accidental or unintentional. For instance, perhaps the customer didn’t recognise the company name on the bill and then disputed the transaction as fraud.
Understanding the legitimacy of cases like this can be critical in how you respond to a chargeback claim — and help prevent chargebacks as a merchant.
A credit card chargeback refers to the chargeback dispute process initiated by a cardholder through their issuing bank or credit card company. Once the dispute is investigated, the transaction may be reversed.
Despite its name, a return item chargeback isn’t a chargeback. Instead, customers receive notification of a return item chargeback if they lack the funds in their account to cover a withdrawal or the amount issued in a check.
Even if you win a chargeback dispute, your chargeback ratio can be impacted. That’s why it’s crucial to prevent chargebacks in the first place by:
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