What Is a Chargeback?
A chargeback is a refund to a payment card account after the true account holder successfully disputes a charge. Chargebacks occur for both credit cards and debit cards. Chargebacks are granted for fraudulent or other types of unauthorized charges.
Key points:
- Chargebacks regulate payment disputes with banks
- Chagebacks are initiated by card holders and processed by banks
- Chargebacks force merchants to refund money even if they already provided the good or service
- Merchants can dispute chargebacks
- Merchant chargeback insurance is available
- Too many chargebacks will result in a merchant being put in the high risk merchant pool and possibly losing the ability to process credit and debit card transactions
Why Do Cardholders File Chargebacks?
Chargebacks are filed by card holders for many reasons. Chargeback fraud is unauthorized use of the card by a third party. However, card holders also file chargebacks as a substitute for requesting a refund for order fulfillment problems such as lost shipments, or for the receipt of incorrect or damaged goods. Chargebacks also occur when the true card holder disputes a charge they legitimately made in an effort to steal the merchandise, a process called friendly fraud.
Chargeback Disputes
Chargeback disputes are a second request for file the card, along with proof the charge is legitimate. Chargeback representement is the process used to file a chargeback dispute. Successful chargeback disputes require merchants to provide compelling evidence that the purchase was legitimate. This information includes AVS codes, the terms and conditions of the sale, and proof of contacting the card holder about the issue. Chargeback disputes also require providing the correct information based on the chargeback code used to file the claim.
Chargeback Process
The chargeback process follows a set review system between all the involved stakeholders who attempt to locate the fraudulent activity and then assign who is responsible for the charges.
- Chargeback Request: The cardholder calls up their financial service when they notice an incorrect payment on their credit card statement. They usually have 45 – 180 days to make their chargeback claim.
- Chargeback Review: The issuing financial service performs a chargeback review. For example, they contact the merchant for proof of legitimacy (shipping confirmation, invoices, transaction receipts, etc).
- Deliberation: The card holder’s bank decides to uphold or dispute the chargeback request of the customer, passing the fees over to the merchant or customer depending on who is found at fault.
- Second Review: The party deemed responsible for the chargeback losses has another opportunity to fight their case and amass additional information as evidence of their claims.
- Arbitration: Final chargeback disagreements go to arbitration begins. Chargeback arbitration is governed by the credit card association and the decision is final. MasterCard, Discovery, and American Express allow for two cycles of pre-arbitration review, while Visa limits their review process to one.
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Prevent Chargebacks
Prevent chargebacks by using an eCommerce fraud prevention company that uses algorithmic technology to look for data-based patterns indicating chargeback fraud. These platforms instantly approve low-risk orders, decline high-risk ones, and automatically reroute edge cases to manual review.
You should also hire human fraud analysts. Trained human professionals can make a decision about edge case orders, look for new fraudster attack patterns, and review the data generated by fraud prevention technology.
Prevent chargebacks during high volume periods by reviewing policies beforehand. Ensure technology is tuned to your risk level and that human fraud analysts prepare to handle the volume. During holiday periods, set systems to flag not just chargebacks, but also accounts that have a history of multiple returns. This helps to identify friendly fraud.
To prevent chargebacks effectively, you also need to provide as much information as possible when you file a chargeback representment claim. The more information you provide, the likely you are to prove the charge was legitimate and get the chargeback reversed.