Everything You Need to Know About Chargebacks

Merchants, particularly high-risk merchant accounts, are among the most affected by chargebacks. Chargebacks and refunds are not the same despite the fact that, in both instances, customers request their money back. Unfortunately, many customers don’t actually know the difference between chargebacks and refunds so they might file a chargeback when the issue could have been resolved with a refund instead.

Fortunately, with a few chargeback prevention tips, businesses can protect themselves and maintain a low rate. But what are chargebacks and how can you manage or recover from these situations?

What Are Chargebacks?

Chargebacks occur when a customer requests their money back from the issuing financial institution rather than the merchant they purchased from. When a customer is not satisfied with a purchase or is unable to recognize a transaction on their bank account statement, they request their money back.

The card-issuing bank will then review the customer’s claim and, if it’s deemed valid, transfer the disputed payment amount from the merchant account to the customer.

Reasons Why a Customer May File a Chargeback

• The owner is unaware that their card was used.
• The owner doesn’t recognize a transaction.
• The product was damaged or the quality of the product or service was inadequate.
• The customer did not receive the product/service that he or she has paid for.
• A subscription was canceled without disabling the recurring billing. 

The History of Chargebacks

Chargebacks were created to protect consumers from different fraudulent schemes while adopting modern electronic payment systems. In recent years, these have become a strong indicator of the company’s health.

The implementation of chargebacks began in 1978 with the Fair Credit Billing amendment to the Truth in Lending Act. This is a protective measure for consumers in response to widespread payment fraud by people who abuse stolen credit information without giving the cardholder a chance to do much about it.

With the chargeback, consumers will be able to get their refunds from the banks and allow banks to make the decision. This was not yet called chargeback then, but it has become the foundation for the dispute system known today.

How Chargebacks Work

The customers initiate the chargeback, which is then evaluated by the issuing bank. Those involved in the chargeback process include:

• Cardholder: initiates a dispute for the transactions
• Issuer: reviews the chargeback and submits a retrieval request to the acquirer
• Acquirer: receives the retrieval request for information and notifies the merchant
• Merchant: either accepts the chargeback and pays it out or disputes the chargeback by sending evidence to the acquirer

The acquirer will review the evidence sent by the merchant and ensure that it meets the requirements before sending it to the issuer. Then, the issuer will review the compelling evidence sent by the merchant and decide whether to favor the customer or the merchant.

Finally, the cardholder and merchant will be notified of the case decision. If either party disagrees with the decision, they can call for arbitration to settle the dispute.

Chargeback Dispute Time Frame

The chargeback process doesn’t go on indefinitely; it’s important to know how long a merchant has to dispute a chargeback. This time frame varies by credit card network and the reason code. Keep in mind that the deadline is based on the moment the chargeback was initiated, not when the merchant was notified. 

Prevent Chargebacks with Help from First Card Payments

As a reliable payment processing company, we offer chargeback prevention tips as well as a range of merchant services for businesses in numerous industries. Contact us to get started with your merchant account today.