A chargeback is a refund requested by a cardholder from their issuing bank, and processed by the merchant’s acquiring bank. It happens when a customer feels that they have been wronged in some way by a transaction – for example, if they didn’t receive the goods or services they paid for, or if they believe the transaction was fraudulent.
Chargebacks can be a costly and time-consuming process for merchants, so it’s important to understand how they work and what you can do to reduce the risk of them happening.
What are the steps in a chargeback process?
There are four main steps in the chargeback process:
1. The cardholder contacts their issuing bank to dispute a transaction.
2. The issuing bank reviews the case and decides whether to lodge a formal complaint with the merchant’s acquirer (the bank that processes card payments for the merchant).
3. If the complaint is lodged, the acquirer contacts the merchant to request a refund.
4. The merchant has the option to accept or deny the refund request. If they accept, the funds are reversed and the customer receives a refund. If they deny the request, the case is escalated to the card scheme (Visa, Mastercard etc) for further investigation.
What are the main reasons for chargebacks?
There are many different reasons why a cardholder might request a chargeback, but the most common include:
1. Fraudulent transactions: If a cardholder believes they have been the victim of fraud, they can request a chargeback. This could be because they didn’t authorise the transaction, or because they believe the goods or services were not as described.
2. Non-receipt of goods or services: If a cardholder pays for goods or services but doesn’t receive them, they can ask for a chargeback.
3. Cancelled subscriptions: If a cardholder cancels a subscription but continues to be charged, they can request a chargeback.
4. Unauthorised transactions: If a cardholder believes a transaction was made without their knowledge or consent, they can ask for a chargeback.
5. Duplicate transactions: If a cardholder is charged more than once for the same transaction, they can request a chargeback.
What are the consequences of a chargeback?
There are a few different consequences of a chargeback that merchants should be aware of:
1. Financial: If a chargeback is successful, the merchant will lose the value of the transaction, plus any associated fees. This can be a significant cost, particularly for high-value transactions.
2. Reputational: Chargebacks can damage a merchant’s reputation, particularly if they are frequent or occur for large amounts of money.
3. Operational: Chargebacks can be time-consuming and resource-intensive to deal with, diverting staff away from other tasks.
How can I reduce the risk of chargebacks?
There are a few things you can do to reduce the risk of chargebacks happening:
1. Make sure your terms and conditions are clear: Your terms and conditions should be clear and easy to understand, so that customers know what they’re signing up for.
2. Use clear and concise marketing: Your marketing should be clear and concise, so that customers know exactly what they’re buying.
3. Provide excellent customer service: If a customer is unhappy with their purchase, it’s important to resolve the issue quickly and efficiently. This could help to avoid a chargeback.
4. Keep your chargeback ratio low: If you have a high chargeback ratio, this could be a red flag for acquirers and card schemes. Keeping your chargeback ratio low will help to reduce the risk of future chargebacks.
5. Respond to chargebacks quickly: If you receive a chargeback notification, it’s important to respond quickly. The sooner you respond, the better your chances of winning the case.
What should I do if I receive a chargeback?
If you receive a chargeback notification, the first thing you should do is check that the transaction in question is legitimate. If you’re confident that it is, you should gather any evidence that you have to support your case. This could include copies of correspondence with the customer, screenshots of your terms and conditions, or tracking information for the delivery of goods.
Once you have your evidence, you should contact your acquirer or card scheme to start the chargeback process. They will provide you with a chargeback form, which you will need to complete and return. Once the form has been received, your case will be assigned to a chargeback analyst, who will review the evidence and make a decision.
If the chargeback analyst decides in your favour, the funds will be returned to your account. If they decide against you, the funds will be forfeited and you will be liable for any associated fees.
If you’re not happy with the decision, you can appeal the chargeback. However, it’s important to note that appeals are often unsuccessful, so you should make sure you have strong evidence to support your case before proceeding.
Chargebacks can be costly and time-consuming, so it’s important to do everything you can to reduce the risk of them happening. By following the tips above, you can help to minimise the chances of chargebacks occurring and improve your chances of success if a chargeback is raised.
The above is just a brief overview of chargebacks, if you would like more information we suggest you speak to your acquirer or card scheme. You can also find more detailed information in our article on How to Respond to a Chargeback.
