What is a chargeback: all you need to know about this mechanism

If you accept card payments, you will probably encounter chargeback requests. Below you will find basic information on chargebacks: what they are, how to deal with them, and how to prevent them.

What is a chargeback?

Chargeback is a return of funds initiated by the issuing bank on card holder's behalf (the consumer triggers the chargeback by contacting their issuing bank). It's also a mechanism meant for customer protection - whenever the cardholder considers the purchased product or service inconsistent with the contract or finds that their card was charged without their knowledge, they may request a chargeback.

It's for the banks to determine whether the funds should be returned to the consumer (a merchant may "defend" the chargeback, e.g. proving that service was provided properly and there is no reason for money return). However, every case is very individual, which is why chargebacks cannot be automated and require charging additional fees.

Possible chargeback reasons

Chargebacks are mostly requested when consumers do not recognize specific transactions on their card statements, did not receive the purchased goods, or experienced any kind of fraud attempt. Fortunately there are many ways that help to minimize the risk of chargebacks.

Possible and typical chargeback reasons:

  • consumer was not satisfied with the received goods or services:
    • the ordered goods were not delivered or the service was not provided to the consumer
    • the received goods were not the ones the consumer ordered, differed from the description, or the description did not provide significant information
    • consumer returned the goods but did not receive a money refund from the merchant
  • clerical mistake:
    • consumer was accidentally billed twice (duplicated transaction)
    • the card was charged for a different amount
  • fraudulent transaction:
    • transactions were performed by an unauthorized person (e.g. the card data was stolen)
    • the cardholder does not recognize a specific transaction on their card statement

Chargeback process

  1. The card holder contacts their issuing bank and requests a chargeback.
  2. The issuing bank begins the chargeback procedure and contacts the acquiring bank.
  3. The acquiring bank informs the merchant about the chargeback request and asks them to take a stand in a specific time period (e.g. 7 days).
  4. The merchant either accepts the chargeback or objects it and provides documentations that proves them right.
    If the merchant accepts the chargeback, doesn't respond in the said time period or objects the chargeback, but cannot provide proper documentation, they have to return the funds and pay the appropriate fees.
  5. The acquiring bank informs the issuing bank about the merchant position and provides approriate documentation (that, for example, proves the merchant is in the right).
  6. The issuing bank informs the card holder about the result. If the merchant was in the right, the funds are not returned.

How to minimize the risk of chargebacks?

Before requesting a chargeback, consumers should always try to contact the merchant and clarify any issues. In most cases this allows to avoid chargeback requests and helps to find a solution.

However, it's in the merchant's best interest to work on minimizing the risk of chargebacks. There is a number of simple yet effective good practices that help to do so.

  • Good product/service description - describe your goods in such a way that consumers will not have any doubts about their characteristics or features (e.g. size, color, voltage, offered functions in case of services).
  • Terms of service, information about shipments - state clearly all the important information about ways of purchasing, payments, shipments (time and costs) etc. - don't leave any room for doubts.
  • Return and refund policy - state clearly how to return goods and how to request a refund -if your customers know how to get their money back, they won't call banks.
  • Be informative - provide full contact information on your website, do not cause any doubts during the purchase/checkout process, send confirmation emails to customers after they make a purchase etc.
  • Good transaction descriptor - make your transactions recognizable; use your e-store's name instead of a product's name or transaction ID number; use your product's name (the thing your customer is actually buying) instead of your company's name (which they may not even know) - this way your customers will recognize your transactions on their statements.
  • Put an email/phone number in the transaction descriptor - if it happens that a customer does not recognize your transactions on their card statement, it's more likely that they will not call the bank immediately, but will try to contact you via the email/phone provided in the descriptor.

You can find even more detailed information on PayLane's blog, for example:

Dealing with chargeback requests

If a merchant receives a chargeback request, they can either admit that the claim is valid or reject it.

Accepting a chargeback

When a merchant accepts a chargeback, they can inform the acquirer about it or leave it without response until the time for their reaction passes. However, when a merchant accepts a chargeback, they have to return the funds and pay a chargeback fee, which is usually a significant sum of money. Instead of that, a merchant may quickly contact the card holder and convince them to withdraw the chargeback request. The merchant will return the funds to the consumer but will not have to pay a chargeback fee.

Objecting a chargeback

If a merchant does not agree with the consumer requesting a chargeback, they can prove that the return of funds is groundless. To do that, the merchant should:

  • react as quickly as possible - they will most likely have a very limited time to response,
  • provide the best documentation they can - there should be no place for any doubts.

It's best if a merchant ensures that such documentation is accessible in case of chargeback requests. They may, for example:

  • require consumers to accept terms of services and refund policy when making a purchase,
  • send confirmation emails,
  • log relevant activity - date and time of purchases, payments, shipping etc.

What is required to dispute a chargeback?

Documentation required to dispute a chargeback varies depending on the chargeback reason. Below you can find some of the most common cases and documents that should help you dispute chargebacks.

The goods were not delivered

  • information whether the card holder contacted the merchant in that matter and a description how the complaint was resolved
  • confirmation that the product was delivered to the consumer, or confirmation that the service was provided
  • a copy of the information accessible for the consumer, which includes the product/service description and shipping method

The goods were damaged, differed from the description etc.

  • information whether the card holder has contacted the merchant in that matter and a description how the complaint was resolved
  • confirmation that the product was delivered to the consumer or confirmation that the service was provided
  • a copy of the information accessible for the consumer which includes the product/service description and shipping method
  • a written merchant's statement saying that:
    • the goods were not returned by the consumer, or
    • the goods were fixed or any shortages were solved

The goods were returned but a refund was not executed

  • a confirmation that such refund was executed
  • a written statement (and confirming documents, if possible) saying that:
    • the goods were not returned by the consumer, or
    • the merchant did not accept the return or cancellation
  • a statement that the merchant provided terms of service and refund policy before the consumer made the purchase

Clerical mistake - consumer was billed twice

  • documents stating that the payments referred to different kinds of products or services (if such was the case)

Card was charged without the card holder's knowledge/approval

  • any kinds of documents that describe the transaction and contain such data as: card holder's information, shipping address, detailed product/service description etc.
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