What is a Chargeback?
A chargeback is a dispute initiated by a credit card holder (the cardholder) against a merchant, asserting that a purchase or service was not fulfilled as expected. This mechanism is a fundamental aspect of consumer protection in credit card transactions, providing cardholders a way to dispute fraudulent charges or issues with goods and services.
Reasons for Initiating a Chargeback
Chargebacks can be filed for various reasons, including:
- Unauthorized transactions
- Non-receipt of goods or services
- Goods or services not as described
- Billing errors
Merchant's Response to a Chargeback
Upon receiving a chargeback, a merchant has the opportunity to contest it by providing evidence. This evidence can include:
- Receipts or invoices
- Signed agreements
- Recorded conversations
- Proof of delivery or service fulfillment
This documentation is critical in demonstrating that the product or service was delivered as agreed.
Time Frame for Filing a Chargeback
The time frame for filing a chargeback typically ranges from 45 to 180 days from the date of the transaction. This period varies depending on the credit card company's policies and the nature of the dispute.
The Mediation Process
The chargeback process involves two key financial institutions:
- Issuing Bank: The bank that issued the cardholder’s credit card.
- Acquiring Bank: The merchant’s bank.
When a chargeback is filed, the funds are temporarily debited from the merchant's account and credited to the cardholder's account, pending resolution of the dispute. This process is governed by the rules and regulations set forth by credit card networks like Visa and MasterCard.
Resolution and Arbitration
If the Issuing and Acquiring Banks cannot resolve the chargeback, it may escalate to arbitration under the respective credit card network. The decision made in arbitration is final, determining the validity of the chargeback. If upheld, the consumer retains the funds. If not, the funds are returned to the merchant.
Impact on Merchants
Chargebacks can significantly impact merchants, including:
- Lost revenue from reversed transactions
- Fees associated with processing chargebacks
- Potential penalties for high chargeback ratios
Tips for Avoiding Chargebacks
The best way to resolve a chargeback is to prevent it from happening in the first place. Below are some simple measures that can help mitigate chargebacks from occurring:
1. Often, disputes are due to 'friendly fraud' or the customer simply has buyer's remorse. The best way to avoid this type of chargeback is to work closely with the customer to establish a mutually satisfactory solution. A partial refund is optimal, but even a full refund is better than a chargeback (unless you genuinely feel the customer is being dishonest).
2. Have your return/refund and cancellation policy clearly stated at your retail checkout and on your Website. For ecommerce sales, the customer should confirm that they have read the policy before their order can be processed. Have your return policy pre-printed on the credit card receipt.
3. Use a clear descriptor that customers will recognize. This is typically the Doing Business As name. (A descriptor is the name customers will see on their credit card statement to represent the purchase). For e-commerce, always include your phone number in the descriptor. If the customer does not recognize your descriptor, they can call the number to clarify the purchase.
4. If the service to be provided to the customer will be delayed, notify them by phone and in writing. Communication is the key.
5. If the product ordered is out of stock or the item is no longer available, advise the cardholder verbally and in writing and offer the cardholder the option of purchasing a similar item or canceling the transaction. Giving the customer the option to cancel should help avoid a dispute.
6. If it is a custom order or there will be a delay in delivery, wait to process your customer's credit card until the time the product is shipped.
7. Utilize the Address Verification Service (AVS) and or the CVV2 security code on the back of the card. This requires the customer to confirm their zip code or security code and is a simple way to deter the acceptance of stolen credit cards. If necessary, you can even call the Voice Authorization Center to verify the customer's name, address and phone number.
8. Call and confirm large or suspicious 'card-not-present' orders. If you are unable to reach the customer you should void this transaction prior to settling your batch.
9. Always get signature for proof of delivery. Be able to provide a shipping tracer log that shows that the customer received the shipped goods.
10. If a customer requests cancellation of a recurring transaction that is billed periodically, always respond to the request and cancel the transaction immediately.
11. Always obtain an authorization for the exact amount of the transaction processed to the card.
12. Do not complete a transaction if the authorization request was declined.
13. If you receive a "Call" message in response to an authorization request, call your authorization center. This is often due to misuse of a card. If the authorization is approved, write the authorization code on the receipt.
14. Be suspicious of high-ticket sales requested to be sent next-day air or if a runner will be in to pick up the purchase at a later time.
15. Be very guarded against foreign orders. Typically, orders from Asia, the Middle East and Africa are fraudulent. Closely review orders with domestic billing addresses and foreign shipping addresses.
16. Never accept an expired credit card.
17. Settle your authorizations daily. Failure to deposit in a timely manner can result in chargebacks for "late presentment."
18. Settle your credits or refunds daily. Failure to process credits in a timely manner can result in chargebacks for "credit not issued."
Always respond quickly to a chargeback. There is a limited amount of time to respond and if you miss the deadline, you forfeit your ability to fight the chargeback.
Chargebacks are a crucial component of consumer rights in credit card usage, offering a recourse for disputing fraudulent charges or dissatisfaction with purchases. While beneficial for consumers, they pose challenges for merchants, emphasizing the importance of clear communication, accurate transaction processing, and excellent customer service.
Article ID: 36000106354