Table of Contents
What is Chargeback?
A chargeback is a consumer protection process that allows a cardholder to dispute a transaction they believe is fraudulent, unauthorized, or not as described. The cardholder requests their bank to reverse the transaction, and the funds are debited from the merchant’s account.
Chargebacks were designed to protect consumers from fraud or issues with purchased goods or services. If a cardholder notices an unauthorized charge or encounters a problem with a purchase, they can file a chargeback to recover their funds while the bank investigates the claim.
For businesses, understanding chargebacks, their causes, and how they work is essential to managing and preventing disputes. By adopting best practices and using tools like Razorpay’s Disputes and Chargeback Mitigation solutions, merchants can reduce chargeback risks and safeguard their revenue.
Types of Chargeback
1. Fraudulent Chargebacks
These occur when a transaction is made without the cardholder’s knowledge or consent, often due to stolen credit card details or identity theft. The cardholder disputes the charge as soon as they notice the unauthorized transaction.
2. Non-Receipt Chargebacks
This type arises when a customer claims they did not receive the goods or services they paid for. Common causes include shipping issues, delivery errors, or miscommunication between the merchant and the customer.
3. Quality-Related Chargebacks
These happen when a customer is dissatisfied with the quality of the product or service. It may occur if the item is damaged, defective, or significantly different from what was advertised.
By understanding these chargeback types, merchants can implement strategies to prevent and manage disputes. Partnering with a payment gateway like Razorpay, which offers Disputes and charge reversal Mitigation tools, can streamline charge back management and reduce financial risks.
Chargeback Example
Example 1: Non-Delivery of Goods
Sarah purchases a laptop online for ₹1,00,000 but does not receive it after two weeks. After failing to get a satisfactory response from the store’s customer service, she files a chargeback with her credit card issuer, claiming non-delivery.
The bank temporarily reverses the ₹1,00,000 transaction, returning the funds to Sarah. The store is notified of the charge back and can either provide proof of delivery or resolve the issue with Sarah to dispute the claim.
Example 2: Cancelled Service
John books a flight through an online travel agency for ₹50,000 but cancels it within 24 hours, as per the agency’s cancellation policy. When the agency refuses to issue a refund, John files a chargeback with his credit card issuer, claiming the service was not delivered as agreed.
The bank investigates the claim, and if it’s found valid, the ₹50,000 is permanently refunded to John’s account.
Example 3: Unauthorized Transaction
Anita notices a ₹15,000 charge on her credit card for a subscription she never authorized. When the service provider refuses to refund her, she disputes the charge with her bank, claiming it is fraudulent.
The bank investigates, and if Anita’s claim is verified, the ₹15,000 is returned to her account, and the service provider may face penalties for the unauthorized transaction.
How Does the Chargeback Process Work?
STEP 1: Customer Initiates a Chargeback
The cardholder contacts their issuing bank to dispute a transaction and requests a charge back.
STEP 2: Bank Reviews the Dispute
The issuing bank examines the cardholder’s claim and assesses its validity based on the information provided.
STEP 3: Merchant Notified of the Chargeback
If the dispute is deemed valid, the issuing bank initiates the charge back and notifies the merchant through their acquiring bank.
STEP 4: Merchant Responds with Evidence
The merchant can contest the charge back by submitting compelling evidence to prove the transaction’s legitimacy.
STEP 5: Bank Investigates the Dispute
The issuing bank reviews the merchant’s evidence and determines whether to uphold or reverse the chargeback.
STEP 6: Resolution
If the merchant’s evidence is sufficient, the chargeback is reversed, and funds are returned to the merchant.
If not, the cardholder retains the refunded amount.
STEP 7: Merchant’s Financial Impact
If the chargeback is upheld, the merchant loses the disputed funds and may incur additional fees.
STEP 8: Consumer’s Financial Impact
The cardholder receives a credit for the disputed amount but may face consequences if the chargeback is deemed fraudulent or abusive.
What Are the Common Causes or Reasons for Chargebacks?
There are several common reasons, including:
1. Unauthorized or Fraudulent Transactions
Transactions made without the cardholder’s consent, often due to stolen card information or identity theft, lead to chargebacks.
2. Product or Service Not Delivered to Customer
When customers don’t receive the goods or services they paid for due to delivery or shipping issues, they file chargebacks.
3. Being Charged More Than Once for the Same Transaction
Duplicate charges caused by merchant errors prompt customers to dispute the extra transactions via charge backs.
4. Dissatisfaction with Product or Service
Customers unhappy with the quality or experience of a product or service may file charge backs if their complaints are unresolved.
5. Delays in Delivery of Goods or Services
Late deliveries, especially those causing inconvenience, often result in customers requesting chargebacks.
6. Errors in Account Details Used During Payment
Incorrect or mismatched account details during transactions can lead to processing errors and eventual chargebacks.
7. Payment System or Technical Errors
Glitches in payment processing, such as website errors or duplicate charges caused by system malfunctions, can trigger chargebacks.
Tips to Prevent Chargebacks
1. Clearly Communicate Terms and Conditions
Provide easy-to-read and accessible information on your website about pricing, shipping, and return policies to ensure customers understand the terms.
2. Offer Exceptional Customer Service
Resolve issues promptly and professionally to prevent customers from resorting to chargebacks.
3. Keep Detailed Transaction Records
Maintain accurate and detailed records to facilitate dispute resolution and provide evidence if necessary.
4. Use Secure Payment Gateways and Fraud Detection Tools
Implement tools like 3D Secure and other fraud prevention technologies to reduce the risk of unauthorized transactions.
5. Monitor and Review High-Risk Transactions
Be cautious with potentially fraudulent transactions and use manual review processes when needed.
6. Clearly Define Return and Refund Policies
Communicate your return and refund policies upfront to set clear expectations for customers.
7. Track and Analyze Chargeback Data
Regularly monitor chargeback patterns to identify recurring issues and adjust policies or processes to minimize future risks.
Merchants can also leverage Chargeback Mitigation services, like Razorpay Disputes, to streamline their chargeback management processes and reduce the risk of Online Payment Fraud.
How to File a Chargeback: A Step-by-Step Guide
STEP 1: Review Your Credit Card Statement
Carefully examine your statement and identify the transaction you believe is unauthorized, fraudulent, or problematic.
STEP 2: Contact the Merchant
Reach out to the merchant to try resolving the issue directly. Many disputes can be resolved without involving the bank.
STEP 3: Notify Your Card-Issuing Bank
If the merchant is unresponsive or unwilling to resolve the issue, contact your bank to initiate the chargeback process.
STEP 4: Provide Transaction Details to Your Bank
Share all relevant information with your bank, including the transaction amount, date, and your reason for disputing the charge.
STEP 5: Bank Reviews Your Claim
Your bank will evaluate the details of your claim and determine whether it qualifies for a charge back.
STEP 6: Submit Additional Documentation if Required
Be prepared to provide supporting evidence, such as receipts, emails, or any other documents that strengthen your case.
STEP 7: Wait for Resolution
Allow time for the bank to process the chargeback. Resolution may take several weeks, depending on the complexity of the dispute.
How Much Do Chargebacks Cost Businesses?
1. Chargeback Fees
Merchants are charged fees by payment processors and banks for each chargeback incident. These fees are typically imposed to cover the administrative costs of handling the dispute.
2. Reputational Damage
Frequent chargebacks can undermine customer trust and lead to negative reviews, harming the business’s reputation and brand image.
3. Loss of Revenue
When a chargeback occurs, the business not only loses the disputed transaction amount but may also face additional costs related to the refund and processing.
4. Long-Term Consequences
Persistently high chargeback rates can lead to increased processing fees, penalties, or even the termination of merchant accounts, making it difficult for the business to accept future card payments.
How to Dispute a Chargeback: A Step-by-Step Guide for Merchants
If a merchant believes a chargeback is unjustified or fraudulent, they can challenge it through a process known as representment. Here’s how to do it:
STEP 1: Notify Your Acquiring Bank
Inform your acquiring bank about the disputed chargeback and your intent to contest it. This is the first step in initiating the representment process.
STEP 2: Complete a Chargeback Form
Provide all necessary details, including transaction information and the reasons for disputing the chargeback. Ensure the form is accurate and complete.
STEP 3: Gather and Submit Evidence
Compile strong evidence to back your case. This could include proof of delivery, customer communication, signed contracts, or transaction records.
STEP 4: Write a Rebuttal Letter
Draft a clear and concise rebuttal letter explaining why the chargeback is invalid. Highlight how the submitted evidence supports your position.
STEP 5: Submit Within the Timeframe
Ensure your response is submitted within the strict deadlines set by card networks. Missing the deadline can result in automatic loss of the dispute.
STEP 6: Await the Outcome
If your representment is successful, the chargeback will be reversed, and funds will be returned to your account. However, if the cardholder provides additional evidence, the dispute may continue, and you may need to submit further evidence or engage in additional rounds of representment.
Conclusion
Chargebacks offer consumer protection but can be costly for merchants. By understanding their causes and implementing effective prevention and dispute strategies, businesses can reduce their financial impact. Partnering with services like Razorpay Disputes and staying proactive in charge back management helps merchants protect their revenue and maintain financial stability.
Frequently Asked Questions
Why do chargebacks occur?
Charge backs can result from fraudulent transactions, unauthorized purchases, merchant errors, or customer dissatisfaction.
What is the difference between a chargeback and a refund?
A refund is a voluntary return of funds by the merchant, while a charge back is a forced reversal initiated by the customer’s bank.
Can businesses prevent chargebacks?
While charge backs can’t be fully eliminated, businesses can reduce them by offering clear communication, excellent service, and fraud prevention tools.
How can businesses reduce fraud-related chargebacks?
Businesses can reduce fraud risk by using AVS, CVV checks, 3D Secure, and monitoring high-risk transactions.
Is there a time limit for initiating a chargeback?
Charge back time limits vary, but cardholders generally have 120 days, with exceptions up to 540 days.
Are there fees for chargebacks?
Yes, businesses incur charge back fees, typically ranging from £10 to £100, plus potential penalties for high charge back rates.
