A chargeback, also known as reversal, is a customer protection mechanism through which a disputed transaction is reimbursed either to the cardholder or the merchant depending on the case.
How does it work?
The chargeback process begins when the cardholder reports a complaint to the issuing bank. The moment the complaint is received, the card issuer proceeds to investigate the dispute. If the bank finds evidence that demonstrates that the transaction was deceitful, it will reverse the payment.
In this process, the merchant has the burden of proof, which means that if he fails to demonstrate that the transaction is lawful, the cost of the good or service in dispute will be deducted from his account and transferred to the customer’s account. On top of that, a so-called ‘chargeback fee‘ is charged to cover the cost of processing a chargeback. However, if the merchant manages to prove that the disputed transaction is legitimate, no reimburse will be demanded. In spite of this, processing fees will still be charged.
In other words, proving there has been a breach of contract is the prerequisite to be refunded through the chargeback scheme. In addition, it is important to keep in mind that while chargebacks are usually requested by the customer, they can also be requested by the merchant.
Reasons for a chargeback
Every card brand has its own reason codes for charging chargebacks, but some of the most common reasons include:
- Not responding in time to a retrieval request
- Proven Fraud
- Terminated services
- An unrecognized transaction
- A declined transaction
- Transaction duplication (i.e. the customer was charged more than once)
- Technical problems during the transaction process
- Returned merchandise
- The services have not been provided
- The goods have not been received, are damaged or are not as described
Merchants have to be very careful in dealing with chargebacks since usually the banks establish a specific ratio they should not surpass. In most cases, it is 1% (or less) of total sales. Processing a disproportionate number of chargebacks could have serious consequences for a business; merchants could be subject to a heavy fine or have their merchant account terminated.
Time limit to file a claim
The time limit starts running from the date when the good or service was purchased or from the date in which the defect was first noticed. Both in the United States and the United Kingdom the time limit to file a claim is 120 days for national disputes and approximately 180 days for international ones. Yet, the time interval might vary depending on the specific reason. Therefore, it is important that card users corroborate the terms and conditions of their chargeback agreement with their card provider.
Getting notified about processed charges
Usually merchants are given notice through a notification letter when chargebacks have been processed. However, for the reason that they are instigated by the customer’s bank, the merchant’s bank does not come into knowledge of the situation until they have been processed.
The notification letter is normally sent on the day the disputed amount has been deducted from the merchant’s account. It informs the recipient about the reasons behind the dispute and the documentation needed in order to defend its case. But since sending a notification letter is not an obligation, it can be that the only way to become aware of a processed dispute is by checking your monthly account statement.
Responding to chargebacks
While a costumer has a lengthy deadline to dispute a charge, merchants have usually between 10 to 25 days to respond. Failing to meet the deadline to respond will result in the loss of what could have been a potential chargeback in the merchant’s favor.
The main disadvantages of the chargebacks scheme are:
- The cost: The system can end up causing a significant loss for the merchant depending on the merchandise’s value since its total cost consists of the transaction reimbursement, the supplementary fees and the lost product (if there is any).
- No guarantee policy: It is important to consider that although disputes might turn out successful, there is no guarantee that the bank is going to be able to recover the money.
The best way of prevention is trying to work out a dispute directly with the customer; this will save the merchant time and above all money since it will keep him away from the fees that are implicated in processing a reversal.
If the merchant is not contacted by the costumer, the best to do is responding quickly to chargebacks and providing evidence that might help win the case. Every step in the process has a deadline which might change depending on the credit card provider; therefore having a quick reaction against a dispute will always be beneficial.
Finally, to diminish the incidence of chargebacks, merchants can always implement the fraud prevention tools recommended and offered by the card associations (e.g. AVS, CSC, etc.).