What is a Chargeback? Chargeback Definition

A chargeback is the forceful reversal of transaction funds by the cardholder’s bank.

When consumers are dissatisfied with a purchased product or service, a Federal law enables them to dispute that specific transaction with their bank for payment reversal without involving the merchant.

Each chargeback involves the following entities:

• Cardholder: The owner of the card used in a transaction.
• Merchant: The individual that sold merchandise or services under dispute.
• Issuer: The financial institution that supplied the card to the cardholder.
• Acquirer: The financial institution whose job is to acquire payment on the merchant’s behalf.
• Card Association: The network (Visa, Mastercard, etc.) that oversee the entire procedure.

Chargeback fraud affects the entire eCommerce chain, not just individual retailers. However, businesses bear the brunt more as chargebacks reduce a merchant’s income and attract hefty penalties if the company gets many chargebacks.

That said, below are the reasons why chargebacks happen.

Why do chargeback disputes occur?

For legitimate cases, cardholders file a chargeback when someone makes an unauthorized transaction with their card. However, some cardholders also file a claim after receiving their purchased order. That technique is called “friendly fraud,” and industry estimates show that friendly fraud accounts for ~86% of all chargebacks.

With that thought in the note, the following are the main reasons why a chargeback can occur.

• Fraud: As intimated above, this class of chargeback is the most common reason for a dispute. Here, the cardholder claims that someone made an unauthorized transaction.
• Product not received: The customer claims they did not receive purchased products or services.
• Credit not processed: The buyer claims they returned a purchased product or canceled a transaction, but you have not provided a refund or credit.
• Subscription canceled: The customer claims that you continued to charge them after they canceled a subscription.

• Clerical Error: Merchant billed the buyer more than once for the same item, or a return was made, and a refund is due.‍
• General: This is an uncategorized dispute; as such, you need to search for previous conversations with the customer to nderstand why they disputed the payment. It could also be that the cardholder does not have funds in their wallet to cover the cost or due to a bank error.

Can you dispute a chargeback as a merchant?

The fact that a customer filed a chargeback against you is not a full-stop revenue loss. If you believe the buyer misrepresented the situation, you can fight back and recover your money with Chargeflow’s automated chargebacks system.

Chargeback representment is time-consuming and requires that you have accurate knowledge of the system. Leveling up with tools crafted with specialized knowledge of the process and insight from intelligent technologies is the right move any day.

The rule of thumb is this: Chargebacks are not a cost of doing business. You must respond to ALL chargebacks.

In this article, we shared extensive details to help you avoid disputes from happening in the first place.

Important FAQs:

• How do I avoid chargebacks on Shopify?

Generally speaking, you can avoid chargebacks on Shopify by automating your checkout process, having a well-crafted return policy, being responsive when customers need you, shipping your orders with the tracking system, and gathering as much data about the customer as possible to avoid authorized transactions.

• Does Shopify charge a chargeback fee?

Yes, Shopify charges a chargeback fee of $15 for U.S. vendors. But if the merchant wins the chargeback dispute, Shopify will refund that fee. A chargeback fee is the penalty banks impose on merchants to recoup incurred costs while handling consumer chargebacks and disputes associated with your account.

• What happens when a customer does a chargeback?

When the consumer files a chargeback with their bank, the bank/card issuer reviews the case and assigns a chargeback reason code, indicating why the cardholder seeks a payment reversal. The bank investigates the case. If all things check out on their end, they’ll grant the chargeback and send a notification of the deduction to the merchant’s bank.

The merchant decides whether or not the deduction has merit. If they conclude the chargeback is meritless, they’ll have to provide sufficient evidence to counter the payment reversal and reclaim the funds.

If the merchant proceeds to fight the chargeback, this fifth step comes into play: Their carrier will receive compelling evidence and evaluate it against the case. The acquirer will dispute the chargeback to the bank if the evidence is clear enough. The merchant acquirer re-presents the chargeback.

The bank reviews the documentation and reaches a final decision. They’ll bill the transaction to the consumer if the merchant presents compelling evidence and remit the original transaction fund back to the merchant. The process can go on if the customer or their bank files a second chargeback.

• Is a chargeback a refund?

No, a chargeback is not a refund. Unlike traditional payment refunds where the customer contacts the merchant, the customer goes over the merchant's head to seek payment reversal from their bank. And as we noted earlier, chargebacks attract penalties.

• What happens if you lose a chargeback?

If you lose the chargeback, the customer will retain the money. That means you not only lose the transaction fee but also bear other charges, including chargeback fees, excessive chargeback penalties, high cost of operation, and brand damage, in extreme cases.

• How do you win a chargeback on Shopify?

To win a chargeback on Shopify, you must:

1. Work with the issuer’s reason code
2. Have sufficient compelling evidence
3. Respond within the required chargeback response time limit
4. Follow through until the case is resolved