Chargebacks are an essential part of the banking environment. They guarantee the safety of transactions and the client’s trust in the payment system. Thanks to chargebacks, customers are protected from unauthorised or fraudulent charges. They are often used when there are problems with product delivery. Another reason for chargebacks occurring is dissatisfaction with product quality. This issue is the most controversial and disputable, as there’s more space for abuse and shady schemes.

It’s essential, though, to distinguish chargebacks from void transactions and refunds. The merchant or payment processor initiates voided charges on the customer’s request, and usually, no fees are applied if they consider a payment before it’s fully processed. For refunds, clients appeal to merchants for return payment. It’s a fee-free option as well. Chargebacks occur because of the customer’s request to his issuing bank and cause penalties for merchants.

Most Important Points about Chargebacks

Both merchants and customers should comprehend what chargebacks are. It’s especially crucial for the vendors, as chargebacks are a factor that can seriously impact their profits. Here are some key facts about them: 

• Money is returned from a merchant to a client after the latter disputes a payment.
• A seller or customer’s issuing bank may also start the chargeback process.
• The main burden of paying penalties because of chargebacks lies on merchants.
• According to the law, card issuers have 60 days from the billing date to request chargebacks.
• It’s more straightforward for customers to raise concerns directly with a seller to receive the desired quality or replacement goods. If there are any fraudulent attempts during the transaction, though, a client should request a chargeback from his bank.

Reasons of Chargebacks

Let’s see the reasons which may lead to the occurrence of chargebacks:

• Fraudulent attacks. Customers can activate chargebacks when they detect any suspicious operations during their transactions.
• Dissatisfaction of clients with a product, service, or delivery. Chargebacks can be initiated due to low product or service quality or not receiving purchased goods. Or it may seem so for customers.
• Processing errors. Different transaction mistakes may lead to chargebacks. Among them are wrong amounts, duplicating transactions, failing to void an incorrect transaction, etc.
• Failure to solve refund issues. If a customer requests a refund with no result, it may become a chargeback.
• Policy Violations. Suppose merchants break card network rules.

The Chargeback Process

Requesting chargebacks has its protocol and quite complex structure. So, these steps include:

1. Initiation. Cardholders identify issues with their account statement for whatever reason. Then, they contact their bank to dispute the charge. The issuing bank considers the issue and assigns a proper chargeback reason code.
2. Temporary refund. Money returns to an acquirer before a merchant fights for a chargeback.
3. Merchant’s actions. A seller is informed about a chargeback and its reason code. After receiving it, a merchant considers whether a chargeback is worth fighting or whether it’s more beneficial reputationally and financially to accept. When fighting a chargeback, a seller collects the information to authenticate the payment, such as receipts, tracking information, proof of delivery, or signed agreements.
4. An issuing bank’s judgment. Reviewing the merchant’s evidence, an issuer takes the side of a seller or buyer.
5. Outcome. Depending on the case’s outcome, a merchant loses his funds, or they get back to the merchant’s account, and the chargeback is cancelled. If any party disagrees with the decision, it may go into arbitration through the payment network (Visa, Mastercard, etc.). Their verdict can’t be appealed and considering the case entails additional fees.

Chargebacks play a significant role in the transaction environment. Only in the USA do 78% of Americans initiate chargebacks at least once. So, businesses, especially e-commerce businesses, should constantly improve their client communication and fraud prevention strategies to reduce their frequency and impact.