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Credit Card Chargeback: A Guide for Merchants

What are credit card chargebacks?

A transaction disputed by a customer is known as a credit card chargeback. Unauthorized transactions, goods never delivered, and disagreements on the delivery of goods or services are just a few of the many varied circumstances that can result in chargebacks. There are many examples of friendly fraud, wherein consumers request chargebacks despite obtaining the goods or services advertised for a charge they authorized, even though these disputes are occasionally valid. A transaction disputed by a customer is known as a chargeback.

How does chargeback work?

The customer purchases: This can be done in person, online, or through an app.

The client calls the bank to request a chargeback: The customer disputes the charge with the issuing bank. The bank will launch an inquiry, beginning with transactional information, such as timestamps, IP addresses, and the location of the transaction from the merchant.

Bank contacts the retailer: The issuing bank will contact the Processor requesting transaction information and proof to support the transaction is valid and authorized by the cardholder. These documents can be delivery tracking information, automatic invoicing, confirmation or follow-up emails, or documentation that will support and verify the transaction was authorized and accepted by the cardholder.

The merchant rejects the chargeback or accepts it: You have the option to accept or reject. Accepting implies that you will pay the money back. If you contest it, the bank will investigate and decide within a given time period.

Decision: The bank will subsequently decide whether to approve or deny the chargeback.

Types of Chargeback

Criminal fraud uses stolens card to make a purchase.

Friendly fraud occurs when a consumer inadvertently or knowingly utilizes the chargeback procedure to obtain a refund.

Merchant error is a clerical error, such as charging twice or billing for the wrong amount.

Chargebacks that result from merchant errors, such as shipping the incorrect item, a flawed or broken item, or failing to deliver the item, are known as merchant error chargebacks. Although this kind of issue can occasionally be adequately stated, locating and eliminating the error's primary cause is always advised.

Chargebacks that result from merchant errors, such as shipping the incorrect item, a flawed or broken item, or failing to deliver the item, are known as merchant error chargebacks. Although this kind of issue can occasionally be adequately stated, locating and eliminating the error’s primary cause is always advised.

We'll provide you with practical advice in this post on how to avoid in-person and online chargebacks of every kind.

Who Takes Part In The Chargeback Procedure?

Three parties are involved in credit card chargebacks, each having a distinct function in the chargeback procedure.

1) The Cardholder/Customer

These might pertain to the same person, though not usually. The person using the credit card to make the disputed purchase is its rightful owner or the cardholder. The person who made the purchase is the customer.

The cardholder and the customer in a conventional transaction or a benign fraud chargeback are the same people. A consumer who used a stolen card to make a purchase, and a cardholder who later disputes, are not the same individual in a true fraud scenario.

2) The Merchant

The merchant must choose whether to accept or challenge the chargeback. If the merchant challenges the chargeback, the must provide documentation the cardholder authorized the transaction.

3) Card Issuer (The Bank)

A bank or other financial institution that provides the cardholder with a branded payment card.

4) Acquirer

The Merchant’s bank which holds their merchant account and enables them to accept credit card payments.

5) Credit card brands

Credit card brands Visa, Master, Amex, and Discover make up the credit card network, which sets the rules for their chargeback procedures.

6) A designated team

A designated team at Merchantech, known as the Risk Analyst, handles chargeback discussions between the merchant and the acquirer. The Risk Analyst will work with the merchant and issuing bank to resolve to chargeback.

How can businesses combat chargebacks?

Chargeback representation refers to the act of providing documentation in response to a chargeback in order to dispute its validity. The merchant must provide representation along with evidence disputing the cardholder's claim.

In addition to credit card fraud, there are a few methods you may take to fight friendly fraud chargebacks and, ideally, win your case if your company receives chargebacks from legal transactions. In fact, companies shouldn't just assume that every chargeback is legitimate. Customers who make chargeback requests for reasons other than actual fraud, including not receiving a product, are committing friendly fraud. Here are some pointers on how to handle a chargeback dispute.

Payment Reversals: Merchant Rights

Although chargebacks were created as a method for customer protection, retailers do have some options for appeal. The following are a few privileges granted to businesses:

Returns for late deliveries: Before beginning a chargeback, customers who dispute transactions because of late deliveries must make an effort to return the item.

Representation: The procedure by which businesses provide evidence that a chargeback is fraudulent.

Arbitration: Usually the last resort in any dispute, and rarely favors the merchant. When a merchant's representation is effective, arbitration happens. But, this route can be time-consuming and It’s used if you do not agree with the bank's decision.

Credit Card Chargeback Time Constraints

Customers can often file a chargeback within 6 months of the purchase date. Merchants typically have 30 days from the day of the dispute to respond and provide documentation. Depending on the card issuer and card type, these guidelines could change.

However, if the customer is outside the window specified above, the merchant can contest chargebacks. Your bank will investigate after you submit a response or dispute and determine the best course of action. Arbitration could result in a longer overall process with a longer resolution time.

Chargeback v/s Refund

A chargeback and a refund are the same in customers’ eyes because they both result in them receiving their money back. But there are several crucial distinctions from the viewpoint of a business owner. A retailer starts a refund. If a customer returns a product or is dissatisfied with the service, you as the merchant can start the refund process. Customers can launch chargebacks without communicating their dissatisfaction with you.
For refunds, customers deal directly with the retailer. Before giving a consumer a refund when they have a complaint, you have the opportunity to repair a defective product, repeat a service, or offer other incentives to make things right. Since the bank acts as the middleman in a chargeback, you typically have little opportunity to make amends with the customer. Refunds are cheaper. You will lose out on the sale's revenue if you issue a refund, but you won't be subject to any further charges or penalties, and your merchant account won't be jeopardized.

Merchant rights for chargebacks on credit cards,

Unfortunately, retailers do not have many safeguards available to help them combat chargebacks. Even if your business has a "no return" policy, chargebacks are still permitted per the Fair Credit Billing Act. Despite this, it's a good idea to make buyers aware of your sales regulations and clearly state your return policy. This normally aids in battling chargebacks and may become relevant if a chargeback ever goes through an arbitration process.

In most chargeback disputes, banks reportedly tend to side with the cardholder rather than the business owner. Because of this, retailers must use every effort to ensure that all purchases and transactions are thoroughly recorded and strictly adhere to the guidelines established by the card networks.

How much are credit card chargeback fees?

Banks impose chargeback fees as non-refundable costs for each credit card payment that is reversed. Chargeback fees are charged to offset the acquiring bank's administrative expenses.

Depending on the kind of product or service being disputed and whether the merchant has a history of chargebacks, the size of chargeback costs might vary dramatically. Chargeback fees often range from $20 to $100. However, it's critical to recognise that chargebacks have true costs that go beyond money, particularly for small firms.

    Chargebacks can also cost a company financially in other ways, such as:

  • Transaction fees imposed by the firm handling your payments (usually 3-4 percent of the transaction value).
  • Damage to your credit rating.
  • Possibility costs (i.e. lost sales and customer relationships).
  • Costs of fulfillment and logistics (i.e. packing, shipping, and storage).
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