What is a chargeback?

A chargeback is a reversal of payments made by credit/debit cards that are provided directly from a bank.


Chargebacks are a type of refund received when a customer who has a dispute with a certain merchant/business or service provider, requests their bank to forcibly reverse a payment made to the business instead of contacting the business for a refund.


How Does A Chargeback Occur?

If a customer is dissatisfied with a product or service, they can contact the bank and request them to initiate a chargeback. The bank then conducts a suitable investigation and determines if the request of the cardholder is valid.


It then removes funds from a merchant’s account and transfers the funds to the customer. Moreover, there is no obligation on the consumer/customer to return the purchased item or services.


The merchant/business is often not aware of the chargeback until it occurs and it's a means of protecting the cardholder’s interest.


How Do Chargebacks Protect The Customer?


Chargebacks allow the cardholder customer to feel secure, and the fear of reversal of funds ensures that merchants/businesses continue to provide adequate customer service.


It ensures transparency in the transaction and forces the merchants/businesses to comply with their commitments. This prevents the customer’s interests from being neglected by unscrupulous traders and service providers.


They also protect cardholders from fraud by criminals making fraudulent transactions as they can report any suspicious activity and recover the money.


How/Why Were Chargebacks Developed?

Chargebacks were initially developed to provide protection to cardholders who had disputes with a merchant/business.


In case of a stalemate, a merchant was in a position to dictate if and whether they refunded the amount, and how they dealt with the situation, as the bank had already cleared their payment.


This could lead to situations where merchants refused to refund payments despite their products being faulty or services not being up to par. They may not cooperate or provide a replacement either, and thus the customer would be at a loss.


Sometimes, customers also incur an extra loss if they have to send back a product and pay for the shipping from their own pockets.


Thus the chargeback effectively protects the customers’ interest by allowing them to obtain their refund from the bank, which is then able to deduct relevant charges from the merchant/business directly.


The bank then deals with the merchant/business, thus saving the customer the hassle of doing so.


A merchant is also less likely to risk going through a lengthy procedure of fighting with the bank in an attempt to recover their money. They would prefer to just provide the customer with what they paid for fairly.


Chargebacks And Credit Card Fraud

There are cases where customers may have to request chargebacks as their card or information may be stolen and used by unauthorized third parties.


In case of fraudulent purchases from their card, the customers/cardholders are expected to immediately contact their bank and inform them of the same, to prevent further misuse of their card.


However, in case of unsatisfactory quality of goods or services, the customer is expected to contact the merchant/business and inform them of their complaints.


How Do Chargebacks Affect Businesses?

On average, three out of a hundred transactions could result in a chargeback.


This may not sound like much, but the costs associated with chargebacks go beyond just the transaction costs.


Other consequences of chargebacks include:


  • Fees

  • Loss of product or service in case the customer does not or cannot return it

  • Increased processing costs

  • Loss of time and effort

  • Potential merchant account termination


These can have a significant impact on your business and finances.


Therefore, it’s always good to know how to protect yourself and your business from undergoing the hassle of frequent chargebacks.


How To Safeguard Yourself Against Chargebacks?

There are certain ways you can effectively safeguard yourself against unnecessary chargebacks:


  • Use a business name that is easily recognizable so your customer doesn’t think it’s a fraudulent transaction when going through their statements.

  • Make your refund or exchange policy easy by making it easier to contact your business. This will save you time and help you maintain a positive relationship with your customers.

  • Provide your customers with superior quality customer service and communication.

  • Practice good payment processing methods.

  • Track shipments and keep copies of signed receipts. Basically, gather proof to help you safeguard yourself from ‘fraud’ chargebacks and customers.


Conclusion

Chargebacks are a double-edged sword - they have their benefits and drawbacks, like all aspects of business transactions.


It is always good to be aware and informed to ensure that you do not incur avoidable losses - so make sure that you have a thorough discussion with your bank representatives and understand how their chargeback systems work.


To learn how our payment solutions can help you run your business more efficiently, schedule a free consultation with our merchant services team today

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