Chargebacks: What are they and why do they occur?

What are chargebacks, why do chargebacks occur, and what can you do to minimize them?

What is a chargeback?

The chargeback process is designed to help cardholders recover their money in the event of fraud, or when goods and services aren’t received or are deficient in some way. So, if a cardholder finds a transaction on their card statement that they didn’t authorize or buys something that doesn’t get delivered or doesn’t live up to expectations, they can contact their issuer (the bank that issued the card they paid with) and ask for their money back. If the issuer feels the cardholder’s claim has merit, they will initiate the chargeback process and investigate the claim. If the issuer upholds the claim, they will retrieve the payment from the merchant’s account and refund the cardholder.

4 common reasons for chargebacks

There are a number of reasons for chargebacks. Here we look at four of the most common.

1. Customer disputes A customer may dispute a transaction for a number of reasons, such as:

• The goods they ordered didn’t arrive (or weren’t available for pickup)
• The goods received were defective or damaged or didn’t meet the specification
• A service they ordered wasn’t performed as expected
• They didn’t receive a credit they were expecting

2. Fraud A customer may report a transaction to their issuer as fraud when they believe it to have been made by someone using their payment details illegitimately. Sometimes a transaction reported as fraud may in fact be genuine. For example, the cardholder may not recognize the transaction because the merchant name on the statement is unclear or confusing. Or it may be a case of friendly fraud (or first-party fraud). Chargeback examples that could be categorized as friendly fraud include:

• A customer choosing the chargeback process over the merchant’s own return or refund policy
• Buyer’s remorse—a customer receives the goods but regrets the purchase, so pursues a chargeback claiming non-delivery
• The customer forgot to cancel a subscription with recurring payments, so pursues a chargeback to get their money back

3. Processing errors A merchant may make a mistake in processing a payment transaction. For example, they may accept an expired payment card or fail to get a card imprint (electronic or manual).

4. Authorization issues Authorization issues typically occur when a merchant attempts to circumvent or override a declined authorization. Effectively, the issuer receives a transaction for which authorization either wasn’t obtained, or was obtained using invalid or incorrect transaction data.

Best-practice recommendations to minimize chargebacks

Gathering evidence to counter a chargeback can be complex and time consuming for merchants, who also have to pay a fee for every chargeback issued—even those that are later canceled. In addition, merchants with high chargeback rates could be fined or may even have their merchant accounts closed. It’s probably not realistic to think you can avoid chargebacks completely, but you’ll want to minimize them to reduce the associated cost and effort and protect your business. Our key best-practice recommendations are as follows.

1. Avoid mistakes Many chargebacks result from avoidable mistakes. To cut down on mistakes, follow card acceptance guidelines closely and ensure employees who process transactions are properly trained.

2. Choose reliable systems For in-person (card-present) transactions, use a trustworthy point of sale system. For eCommerce (card-not-present) transactions, use a reliable payment gateway.

3. Have robust refund and return policies If your refund and return policies are fair, robust and easy to understand, customers are less likely to get frustrated and go the chargeback route. If a customer with a valid dispute contacts you directly, it’s generally better to act promptly and resolve the situation by issuing a credit, to prevent an unnecessary chargeback.

4. Protect against fraud Your fraud management strategy should incorporate a range of tools and filters, including CVV verification, address verification (AVS) and order velocity among the basics. Consider choosing a POS or payment gateway provider that includes fraud prevention and detection tools as part of the service. If you take card payments taken over the phone, have customers provide all the card details—including expiration date and CVV code.