Chargebacks can occur when selling online as a small business. Learn more about chargebacks and how to avoid them.
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.
A chargeback occurs when customers report or dispute a charge with their debit or credit card issuer, causing them to issue a refund.
Chargebacks are typically initiated by the original buyer. Although 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 between 60 and 120 days after the transaction date.
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 shattered. The customer then decides to file a chargeback request with the bank that completed the transaction — in this case, the credit card issuer.
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.
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:
So what does it mean to dispute a transaction? Though chargebacks and refunds both involve the return of funds for a transaction, there are some major differences.
Refunds are always led by the merchant and are considered voluntary. By issuing a refund, both the customer and merchant 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 agreed, the buyer would receive the refund to their form of payment some days later.
However, if the buyer had trouble reaching the merchant or the merchant disagreed with the damage claim, the buyer could then escalate the dispute into a chargeback with their credit card issuer.
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.
What happens during a chargeback? 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.
While there is no clear data on how often merchants win chargeback disputes, rates depend on the following:
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 cheque.
Even if you win a chargeback dispute, your chargeback ratio can be impacted. That’s why it’s crucial to try and prevent chargebacks in the first place by:
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