A Beginner’s Guide to Credit Card Chargebacks

Published on August 16, 2016

If you’ve been making online purchases in the last 15-20 years, at some point you’ve probably disputed a credit card charge. The scenarios vary: you may have made a purchase and attempted to resolve a dispute with the merchant, only to have to follow-up with your credit card’s issuing bank.

Or you might have received your credit card statement and had no idea what a given charge was based on the information provided, and thus disputed the charge.

Whatever the case, as the customer it was probably an easy process with little risk to you. You contact your credit card company, file a complaint, and after a brief investigation your account is credited the disputed amount. Customers receive a fair amount of protection in these types of situations.

As a business owner, you’re now on the flip side of this transaction. Enabling credit card transactions for customers provides added convenience, increased sales and purchase amounts – and higher risks.

Whether you are selling your products or services in person, over the phone or online, it is pretty likely that at some point a customer will dispute a charge and you’ll incur a chargeback. The best thing you can is educate yourself and create solid business practices to reduce the incidence of chargebacks.

What is a chargeback?

Investopedia, a financial education website, says a chargeback is “the charge a credit card merchant pays to a customer after the customer successfully disputes an item on his or her credit card statement.”

Prior to the advent and popularity of credit cards, customers paid merchants via cash or check and handled any disputes directly. Customers were really at the mercy of merchants. If a customer disputed a fee paid to a merchant and the merchant declined, there was not much recourse.

Today the tables have turned to favor the customer. Credit card companies act as the intermediary between merchants and customers, and they have a great deal of power.

Not only can the credit card company issue a chargeback, they can also charge the merchant fees on top of the chargeback. Repeated chargebacks by customers can tarnish your reputation with the credit card issuer – even resulting in the termination of your merchant account.

Why do chargebacks happen?

There are numerous reasons why a merchant may receive a chargeback. Here are the most common ones.

  • The customer is unfamiliar with the merchant’s name. The most likely scenario here is the name on the merchant account does not match the business name. Businesses that use Square, Stripe or Paypal sometimes have standard naming conventions that don’t match the business name. So you might have gotten a massage from Jessica Miller, and the charge shows up on your card as “SQUARE**JC”.

  • The customer doesn’t remember making the purchase. Customers might also make purchases from merchants that are new to them and they sincerely don’t remember buying the item. Think about how many times you reviewed your credit card statement, couldn’t identify a purchase, called your credit card company and had an “aha!” moment.

  • Someone is fraudulently using the customer’s card. A customer might go through the process of trying to identify a transaction with their credit card issuer and realize that an unauthorized person has been using their card. Sometimes this can be determined by the location the card was used in.

    For example, you might be in California and your card is being used at restaurants in New York. There are also specific ways fraud is committed – think really large, out-of-character online transactions – that can be detected by a credit card issuer.

  • The customer ordered the product but it was not received. The order process might break down anywhere between the “place my order” button and the product arriving at the appropriate location.

    The order may not have been processed or shipped, the product could be lost in transit or stolen from the customer’s location. Package theft has become such a common issue that entire businesses (like Doorman) have popped up to address the need for secure delivery.

  • The customer placed an order but was billed incorrectly. Billing inaccuracies can also occur throughout the purchase process. Customers might be double-billed for an item, accidentally purchase an item they thought they had removed from the cart, or return an item and not receive the appropriate refund.

  • The customer is dissatisfied with the products or services. There are a wide variety of reasons here. Products could be damaged in transit – think about furniture orders, for example, where a wooden table was scratched or broken. Shipments can be delayed, negating the need for the products (i.e., party supplies).

    A customer might also receive a product on time and in good condition, but it doesn’t meet the customer’s expectations. You might order a dress for a company party. It arrives on time and it fits, but the color of the dress (turquoise) is vastly different than the color displayed on the website (royal blue).

  • The customer is practicing “chargeback fraud” or “online shoplifting”.This practice is becoming a common occurrence in online shopping. A customer may purchase a product and then dispute the charge with their credit card processor, even though the product was received and the customer intends to keep and use it.

    Online shoplifting can have increasingly negative impacts for the merchant. If a merchant incurs a high number of chargebacks, credit card processors may choose to discontinue the relationship with that merchant. The merchant is now unable to accept that credit card.

What does a typical chargeback scenario look like?

There’s a standard set of steps that happen in any given chargeback scenario. First, the customer submits a record of the disputed charge to the credit card company. Once the record is received, the credit card issuer investigates to see if the customer has filed a credible complaint.

If the complaint is found to be false, the credit card issuer discontinues the process and charges a processing fee to the customer. If the credit card issuer finds the complaint to be legitimate, it will further investigate the transaction and provide a provisional credit to the customer.

The credit card issuer will then notify the merchant and request documents related to the transaction. If upon further investigation the complaint is deemed false, no funds will be extracted from the merchant.

But if is proven to be a credible claim, funds will be transferred from the merchant’s account to the credit card issuer, and then to the customer. The entire process can take anywhere from 6 weeks to 6 months.

What can you do to prevent chargebacks?

Chargebacks are one of the risks of doing business with credit cards. Though you can’t completely prevent chargebacks, there are ways to minimize the potential downside. Here are a handful of best practices that can help keep chargebacks at a minimum.

  • Request additional information up-front to reduce fraudulent transactions. When gathering information during the checkout process, make sure to gather both the standard level and any recommended extra data to complete secure transactions.

    Ask for the billing address, security code, and name of the issuing bank in the transaction process. If the billing and shipping addresses don’t match, attempt to confirm the information before checkout.

    Use a tracking service for shipment of packages, and include a signature requirement. Look for suspicious transactions that request express delivery or are using several different credit cards at the same address.

  • Make sure the company name and transaction description are clearly listed with each charge. Many transactions are simply not recognized by customers because the business name and the name on the transaction are not the same. When setting up your merchant account, configure the merchant name to be the same as your business name.

    Work with the credit issuer to provide details of the transaction in the notes field. In most cases the order number is the only thing provided. A brief description of the item(s) purchased might help trigger the customer’s memory.

  • Provide clear, easily accessible information to customers so they’ll come to you first. Post your contact information on every page of your website, and make return and shipping policies easily searchable.

    Offering a chat service can also help customers address concerns without picking up the phone. If they do need to call you, make sure customer service agents are empowered to help them to avoid a call to the credit card company.

Offering credit cards as a form of payment comes with rewards and risks. The best way to reduce chargebacks is to understand why they happen and take steps to avoid them. Protect your business by asking for (and providing) clear information in advance to help minimize your chances of encountering chargebacks.

Read Next:
PCI Level 1 Compliance Explained
Published on August 16, 2016

Latest Stories

Here’s what we've been up to recently.

cash conversion cycle
Companies can improve their cash flow and liquidity by shortening the cash conversion cycle. Here are five ways to reduce it.
Accounts receivable management involves tracking and securing customer payments. Learn how to improve the process with these best practices.