A chargeback is the forceful reversal of transaction funds by the cardholder’s bank from merchant 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 single chargeback process 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 or credit card company 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 provisional credit card network (Visa, Mastercard, American Express 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 eventually increases their chargeback ratio that itself is a bigger problem.
That said, below are the reasons why chargebacks happen.
Why do chargeback disputes occur?
For legitimate cases and consumer protection, cardholders file a chargeback process when someone makes an unauthorized transaction or fraudulent purchase with their payment card. However, some cardholders also file a claim after receiving their purchased order. That technique is called “friendly fraud chargeback,” and industry estimates show that friendly fraud and credit card fraud accounts for ~86% of all chargebacks. Another resource for chargeback request is fraudulent transactions used by scams to penalize you with unauthorized charges.
With that thought in the note, there are variety of reasons why a chargeback can occur.
- Fraud: As intimated above, fraudulent chargeback is the most common reason for a dispute. Here, the cardholder credit card statement claims that someone made an unauthorized transaction with their payment processor.
- Product not received: The customer claims they did not receive purchased products or services.
- Credit not processed:
- Also known as debit card chargeback, in which 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. This is not a fraudulent activity from merchant side its just a processing error or human error.
- General: This is an uncategorized payment dispute; as such, you need to search for previous conversations with the customer to understand why they disputed the payment to comprehend the detailed chargeback. It could also be that the cardholder does not have funds in their wallet to cover the administrative cost or due to a bank error.
Each of these reasons result ina particular type of chargeback that can affect your credit score.
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 within the platform time limit. We then you can reduce illegitimate chargebacks and lessen business cost breakup by responding within the platform chargeback time limit.
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 types of chargebacks with valid proof of delivery. Also, if chargeback threshold is exceeded than the bank will stop their services for that merchant. We advise you have a proper return and refund policy to avoid certain breaches and stop any merchant error that can initiate a chargeback code.
In this article, we shared extensive details to help you avoid disputes and chargeback claims from happening in the first place and safeguard yourself from fraudulent charges on various payment gateway.
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 after confirming credit card transaction, indicating why the cardholder seeks a payment reversal. The bank investigates the case and charge a chargeback fee against it. If all things check out on their end, they’ll initiate the chargeback mechanism and send a notification of the deduction to the merchant’s bank with chargeback views.
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 from credit card issuers.
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.
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 process with refund 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 unauthorized transactions and chargeback claims. Make sure you have a chargeback rebuttal letter in which you address the customer to resolve the dispute in person. Also, to ensure the success of your store avoid merchant error chargebacks.
Does Shopify charge a chargeback fee?
Yes, Shopify charges a chargeback fee of $15 for U.S. vendors as a dispute process fee. 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.
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 to dispute a chargeback?
To dispute a chargeback, gather all relevant evidence and documentation to support your case, review the chargeback reason code and details provided by the card issuer, and prepare a clear and concise representment response that addresses the card issuer's concerns. It's important to act quickly, as there is typically a limited timeframe for submitting a representment response, and to provide as much information as possible to strengthen your case.