Understanding chargebacks: a complete guide

Understanding chargebacks: a complete guide

Article updated on 17.05.2024

“Chargeback” is a word any business doesn’t want to hear. Of course, chargeback is a necessary mechanism of the banking industry, but a large number of chargebacks can lead to devastating revenue losses and operational disruptions. In today’s article, Genome’s team will explain how chargebacks occur and what the implications are for companies.

What is a chargeback?

So, what is a chargeback? The term is specific to the finance industry, particularly in terms of credit and debit card purchases from stores and using e-commerce card payments

A chargeback occurs when a cardholder (a customer who bought something from a business using a credit or a debit card) requests a return of funds via the bank to their credit or debit card. In other words, the cardholder disputes a bank account charge for different reasons. 

For instance, if the merchandise was defective or there was a billing error, a customer can contact their bank and make a chargeback claim. 

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Chargeback vs. refund

A refund is another way for a cardholder to get their money back. Although it sounds similar to a chargeback at first, a refund is a different process, resulting in the same outcome for a cardholder. 

This is how a refund usually occurs: a cardholder has paid for a product using a debit or credit card. Later, they realize they want their money back for this purchase. As a result, they contact the business they’ve made a purchase from directly to ask for a refund without involving their bank or a credit/debit card provider. To better understand both processes, let’s review the key differences between a refund and a chargeback.

Points of comparisonRefundChargeback
How the process startsA client contacts a merchant directly and asks to return funds without involving a credit/debit card provider.A client contacts their bank (issuing bank/card issuer) to request the money return for the purchase. This leads to them chargeback claims.
ReasonsUsually, a refund happens when a client isn’t satisfied with the product quality or made a mistake and ordered the wrong product or 2 products instead of one. Having a clear refund policy on the website can help to avoid chargebacks.Chargebacks often occur when a customer finds out that somebody stole and used their card at a store. However, some not-so-honest customers can also use a chargeback claim as part of a scheme to have both a product and their money returned (friendly fraud).
Revenue lossesA business just returns the customer’s money used during payment.A company returns funds via chargeback to the cardholder’s account and also pays chargeback fees.
The time the process takesUsually, a refund is quite fast, taking up to a week or a few weeks – much faster than handling a dispute.Because of the multiple processes taking place, a chargeback claim can take from a couple of weeks to several months.
What happens to a product?In some cases, customers can return the merchandise back to sellers.A business cannot ask to return the product when a dispute takes place.

Overall, a refund is preferable for companies than a chargeback. After all, excessive chargebacks can lead to financial losses, increased operational costs, and damage to their reputation with payment processors. 

Commonly, it is suitable to make a chargeback claim if a merchant doesn’t have a refund policy or if fraud is committed with the customer’s card. In other cases, both the customer and the business can benefit more from a refund. It is quicker and more agreeable to get your money back this way, and of course, cheaper for the company.  

How does a chargeback work?

A chargeback claim usually takes a while to be resolved. However, the full process can be divided into 4 clear stages:

  • A chargeback claim (chargeback initiation);
  • The investigation to determine if the chargeback is justified;
  • The decision, based on the investigation;
  • The notification of all parties about the investigation results.

Let’s dive deeper into how chargebacks work by using an example. Let’s say that there’s a customer named Bob who has a good reason for a chargeback claim after he paid for a purchase. This is how the process will go:

  1. Bob will contact his bank, the one that issued the credit card he used for the purchase, and ask the financial institution to check the transaction he wants to dispute.  
  2. The bank (issuing bank, a card provider for Bob) will contact the merchant’s bank with a request to prove that the transaction was performed legitimately or that Bob has received the product/service he paid for. (The proof can be an invoice, receipt, POD, etc.)
  3. After the issuing bank receives (or not, if it was a fraudulent transaction) the evidence from the company’s bank (aka acquiring bank, a debit or credit card provider), the cardholder’s bank will have to decide – whether the transaction was valid. 
  4. If both banks agree that the transaction was valid, the bank will contact and inform Bob about the evidence provided and the decision that was made, and he has to pay for the service/product. If Bob doesn’t agree with the proof, he can continue the dispute and begin the arbitration. If both banks agree that the transaction isn’t valid, Bob will receive his money back. If the banks don’t come to an agreement, they start the arbitration process. 
  5. Arbitration is the final stage, where the card issuing company (Visa, Mastercard, etc.) makes the ultimate decision on whether the transaction is valid. This process brings a definitive end to the dispute, providing closure to all parties involved. Note: Usually, the chargeback issues are solved by banks on their own. The arbitration process can cause banks to lose time, fees, and penalties. 

As for timeframes for filing a chargeback claim, they vary. For instance, Visa allows a chargeback claim to be made within 120 days after a customer buys a product or service from a business. As a rule, the deadline will be between 90 and 120 days, based on chargeback reasons. For example, here are the codes for Visa and Mastercard

Reasons for initiating a chargeback process

There is more than one reason for a chargeback claim. Let’s take a look at some of the most common examples when you, as a customer, may want to get your money back.

  1. Fraudulent transactions. This reason comes first, as fraud is still the number one danger in online payments. The cardholders contact their bank and claim that they didn’t buy/order anything from the merchant and didn’t make any transactions.  
  2. Failed subscription cancellation. As merchants are renewing subscriptions automatically after the expiration date, cardholders are likely to forget about this date to cancel the subscription. 
  3. A customer isn’t satisfied with the service (product). It can happen if a business does not have a clear description (explanation) about the service and what the customer will receive after the payment. The other reason is the discrepancy between the expected and real service or a faulty item.
  4. Problems with the transaction. During the payment, an error occurred, or a customer paid the wrong amount. 
  5. Currency exchange issues. This problem may occur if a customer paid in a different currency to their national and exchange rates differ from the ones shown on the company’s website.
  6. Authorization issues may occur when the website where the payments take place doesn’t have proper security procedures and protocols, and valid authorization is not performed. 
  7. Friendly fraud. It is a type of fraudulent activity that is opposite to the traditional one. In this case, the customer is trying to get the money back after receiving the service (product) and claims that the transaction was made fraudulently. In reality, they are lying and just want to have both the product and funds. 

Credit card chargeback

In many countries, national legislation provides better consumer protection when the consumer pays with a credit card. The reason is to prevent a double loss both to the client and a credit owner – the bank.

For example, the American Fair Credit Billing Act (FCBA) grants consumers the right to dispute unauthorized charges and errors on their credit card account statement in case of a credit card chargeback. Additionally, a credit card provider/credit card company can often offer supplementary protections, such as zero-liability policies for fraudulent transactions. 

Chargeback on debit cards

Debit card chargeback processes may fall under regulations and laws compared to credit card chargebacks. Liability for unauthorized transactions on a debit card may vary, potentially exposing consumers to greater financial risk. For instance, under the EU’s PSD2 regulation, if strong customer authentication (SCA) is properly applied, the liability may shift away from the merchant to the issuer or the card network. 

Timelines for disputing transactions and initiating a debit card chargeback may differ between credit and debit card transactions, with debit card owners having less time to file a chargeback claim after clients paid for a product. Additionally, with debit card transactions, funds may be immediately debited from the consumer’s account, potentially causing financial strain until the dispute is resolved.

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Implications of chargebacks for merchants and consumers

A chargeback process is necessary in the financial industry to ensure fair treatment of customers. However, too many chargeback disputes can lead to severe issues for businesses. 

So, how many chargebacks are allowed? Card association companies set specific chargeback thresholds that companies must not cross. Usually, a low-risk business cannot have more than 100 chargebacks per month. If the chargeback threshold is crossed, there are negative consequences for the company: 

  • First and foremost, a business can fall under the risk of its account being terminated and encountering reputational losses in case of a dispute.
  • If the company’s monthly level of chargebacks exceeds the threshold, the business will have to pay excessive fines.
  • In some cases, when the merchant’s account is terminated, the acquiring bank may place the business on the Member Alert To Control High-risk merchants list (a.k.a MATCH list). This can have serious implications for the business’s reputation, as it will be unable to open a new merchant account until it is removed from this list. 
  • If the acquiring bank decides not to terminate the account, they will probably force the merchant to get a high-risk account, which implies higher service fees. 

Preventing chargebacks

Chargebacks are inevitable, but there are ways for companies to reduce them. Here’s a couple of tips:

  1. Ensure your website is fully compliant with all security requirements, providing a safe and secure environment for all transactions. 
  2. Provide the availability of multi-currency payments on your website.
  3. Provide comprehensive customer support to your customers so that they can contact you 24/7. Answer quickly when your consumers have requests about transactions and any related issues.
  4. Provide clear information about your company and the services/products provided on your website. 
  5. Show the prices on your website with all the fees that may occur (delivery, etc).
  6. Make sure your refund policy is shown on your website, and customers can find it easily instead of dealing with a dispute. 
  7. Subscription: notify your customers in advance about the expiring subscription date and that you will extend it. Your clients need to be notified and have time to cancel it if they want to. 

Maintaining a low level of chargebacks and fraud activity is crucial for merchants not only to keep a good relationship with their customers but also to correspond to the rules set by banks and card associations. 

As for customers, they can avoid chargeback claims caused by fraud if they follow security measures, especially those related to card-not-present fraud.

Handling a chargeback claim

The best course scenario for companies and consumers that become a part of a chargeback process is to resolve the issue on good terms. They need to keep on the negotiation and direct communication so the chargeback claim does not last too long. If negotiation fails, the arbitration process will commence, where a neutral third party will help find a resolution.

To keep the level of chargebacks low, businesses need to partner with payment service providers that offer additional security solutions at a reasonable cost. For instance, Genome electronic money institution complies with all major regulations for the protection of clients’ money and data and follows international security standards. We offer anti-fraud security tools for businesses that want to accept payments from clients across Europe. 

Chargebacks: key takeaways

While chargeback processes serve to protect consumers, exceeding specified thresholds can severely impact businesses. The risk of high charges, account termination, and reputational damage looms large for companies that sell products online. Thus, it’s crucial for them to actively manage chargebacks, addressing underlying issues to maintain financial stability and a positive reputation within the industry.

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Can a chargeback be reversed?

Yes, a chargeback can be reversed if a business can provide evidence that confirms that the client paid and received their product (using a tracking number), its quality, and the validity of debit/credit card transactions. However, it depends on various factors, such as the reason for the chargeback, evidence provided by both parties, and the policies of a card provider or payment processor involved. 

What are the time limits for filing a chargeback?

The time limit for filing a chargeback claim depends on the card brand. Generally, the deadline will be between 90 and 120 days, depending on the country and the code used for the chargeback reasons. More information on chargeback/dispute timeframes can also be dislocated on the card provider’s website. 

Are there any charges for initiating a chargeback?

In most cases, customers don’t have to face any fees to initiate a payment dispute. Meanwhile, the cost of a dispute is higher for merchants. Companies usually have to pay fees associated with chargebacks, such as chargeback processing fees and potential fines if chargeback thresholds are exceeded. 

Can chargebacks be issued for international transactions?

Yes, and the process will go the same way as when a customer disputes a domestic purchase.