What Is A Chargeback? Everything You Need To Know About Payment Disputes
Maybe you noticed the term, along with the fee inevitably associated with it, when you signed up to process credit cards. Or maybe you didn’t notice. Now you’re seeing your first chargeback — wondering what it is, how to deal with it, and how to get it to go away.
The good news is that chargebacks happen to every merchant, so you’re not unique. In fact, you probably won’t be able to eliminate all chargebacks as long as you keep accepting credit cards. The best you can do is to contain them and reduce them to a small number. What is left is just a part of the cost of doing business.
To find out more about what chargebacks are and how to best deal with them, read on to find out.
Table of Contents
Chargeback Definition: What Is It Really?
To start, let’s define chargeback. A chargeback is a payment dispute initiated by the credit card holder by contacting the card-issuing bank, with the goal of getting the credit card charges reversed. It’s a process in which both the card-issuing bank and the merchant’s acquiring bank are involved. Although you, the merchant, do have the ability to speak for yourself to fight the dispute, the final decision on whether or not to reverse the charge is up to the issuing bank. (There are subsequent legal procedures a merchant can follow, but, considering the time and money involved, it’s probably not worth it.)
The issuing bank’s business relationship is with the credit card holder, so it’s natural that they’d want to please the card holder. Expect the bank to rule in favor of the card holder most of the time, even when the card holder is being unreasonable.
Compare chargeback with, for instance, the refund process. There, the customer deals with the merchant, and the merchant decides whether or not to accept a returned merchandise and refund the purchase. Note, though, that the chargeback process can be initiated after an unsuccessful refund request, so the customer gets two bites at the apple.
There can be many acceptable reasons behind the chargeback, and each card association has its own reason code for each of these reasons. In general, some of these reasons include:
- No authorization by cardholder
- Goods/services returned or refused
- Goods/services canceled
- Goods/services not received
- Goods/services not as described
- Goods/services damaged or defective
- Canceled recurring billing
- Incorrect charge amount
- Duplicate charge
ACH Disputes VS Credit Card Disputes
One reason a credit card holder requests a chargeback is that there was no authorization for continuing to charge a card in a subscription service. What they mean, usually, is that they forgot to cancel the service in time, and now they don’t want to pay. One way to solve this issue is to make ACH payments available to your customer for monthly subscriptions.
Both ACH payments and credit card charges can be vulnerable to chargeback claims. However, it’s easier for a consumer to be successful in a credit card chargeback claim than an ACH chargeback claim. Flip this around, and it means that, as a merchant, it’s easier for you to keep your money under ACH transfers than credit card charges.
We have a comprehensive article on accepting ACH payments, if you wish to know all the nitty-gritty details. But before going any further, here’s a brief explanation on what ACH payments are:
Compared with credit card charges, ACH payments work more like cash. An ACH payment is taken directly from the consumer’s bank account, and it costs less per transaction than credit card payments. While ACH can be used for one-time payments, it’s more often used for scheduled, recurring payments.
As listed in the previous section, there are numerous reasons for chargebacks, many of which involve authorization issues or goods/services issues. A credit card user has up to 120 days to initiate a chargeback claim.
The rules for chargebacks on ACH transactions are far stricter. In fact, there are only three reasons under which your customer can successfully reverse an ACH transaction:
- The transaction was never authorized or the authorization was revoked
- The transaction was processed on a date earlier than authorized
- The transaction is for an amount different than what was authorized
The customer will typically have only 90 days to initiate a chargeback (or 60 days after the charges show up in their monthly statement).
While paying by ACH is not always the most convenient thing for your customer, because of the differences above, it might be advantageous for you to steer your customers towards paying with ACH whenever possible.
The Chargeback Process: What Merchants Need To Know
If you’ve been taking credit cards for your business for a little while, you’ve probably had to deal with chargebacks already, but only from the merchant’s standpoint. Below is a quick overview. We hope that a better understanding of the entire process can help you orient yourself when you have to deal with chargebacks again.
The Chargeback Workflow
Briefly, the chargeback process is as follows:
- The credit card holder initiates the chargeback process by contacting the issuing bank and giving a reason for wanting a refund/refusing to pay for a specific charge.
- If the reason given fits within the allowed reasons for chargebacks, the issuing bank assigns a chargeback code to the incident, provisionally refunds the money to the card holder, and then contacts the acquiring bank to notify the bank of the chargeback claim and to pull back the money already paid to the merchant.
- Depending on whether the merchant has a direct or indirect relationship with the acquiring bank, either the acquiring bank or the merchant’s processor performs an investigation to see if they have evidence at hand to refute the chargeback claim. If they do not, then they contact the merchant about the chargeback.
- The merchant can elect to accept the chargeback or fight it. Either way, the merchant incurs a chargeback fee. If the merchant decides to fight the chargeback, then the merchant submits evidence to rebut the reason for the chargeback.
- The evidence is passed back to the issuing bank, which then makes a decision on whether the chargeback is justified. If it is justified, then the card holder gets to keep the provisionally returned money. If not justified, while the merchant gets to keep the bulk of the money, a chargeback fee is nevertheless assessed against the merchant.
- If either the merchant or the credit card customer is not satisfied with the decision, they can escalate. Typically this means some sort of arbitration, but, because a lot of time and money must be invested in the process, probably most people do not pursue this path.
Why Small Businesses Get Hit With A Chargeback Fee Per Incident
A chargeback fee is considered a markup fee. This means that the fee is charged by your processor, so, technically, it’s negotiable. However, smaller businesses have less leverage when negotiating with processors, so they might not always get the best deals.
Chargeback fees typically cost $25. We have seen more, and we have seen less. Often, the fee is assessed against you even when you win a chargeback dispute, on the theory that any chargeback, no matter the outcome, means extra work out of the typical credit card processing flow. Extra work typically means an extra charge.
If you’re worried about chargeback fees eating into your profit, the next time you think of changing processors, be sure to ask about the charge. It can’t hurt to ask if they will reduce the fee. After all, the worst they can say is “no.” You’ve got nothing to lose.
Chargebacks Aren’t The End Of The World, But You Still Need To Be Wary Of Them
If you take credit cards, you will have to deal with chargebacks. There is really no way around it, even if you have happy customers. It’s just a cost of doing business. Don’t sweat it too much if you get one once in a while.
But, if you have too many chargebacks, you do need to be wary. An excessive number of chargebacks could destroy your business. Your processor might force a reserve fund on you so that it takes you longer to get paid when a customer uses a credit card. If things don’t improve, your processor might terminate your contract altogether and put you on the MATCH list. Once you’re on the MATCH list, it would be very difficult for you to find another processor for five years.
So, whenever possible, get a dissatisfied customer to contact you directly for a refund, instead of calling their bank for a chargeback. Be friendly and accommodating. Hopefully, you can resolve the issue directly instead of pushing the customer to try a chargeback.
If you have questions or interesting stories about chargebacks, leave us a comment below. We’d love to hear from you.