Credit Card Chargebacks Explained: What Merchants Need To Know

As consumers, most of us have looked at last month’s credit card statement and experienced the panic of not recognizing a charge. Most of the time, customers can identify what the charge is or where it came from by doing a bit of research. If not, filing a chargeback is the next best option.

But credit card chargebacks also occur for a variety of other reasons — and they’re not always honest. This puts merchants in a tough position. If chargebacks start mounting up, this is bad news for your business.

This is why it’s vital to have a good understanding of:

  • Why credit card chargebacks happen
  • Why they’re becoming more common
  • Steps you can take to reduce chargebacks
  • What to do when you receive a chargeback

Luckily for you, that’s exactly what this guide is for.

Table of Contents

What Are Credit Card Chargebacks?

Debit or credit card chargebacks are when a disputed charge made to a merchant’s account is refunded to the customer’s bank account. Chargebacks are often described as a forced refund, as retailers cannot contest a chargeback until after it’s taken place.

This can be done both for credit card transactions made on an eCommerce website or at a physical store. Chargebacks can occur for a variety of reasons, including:

  • Billing errors (e.g. when someone has canceled a subscription and still receives a charge)
  • Goods or services not being received after the purchase
  • Being charged an incorrect amount
  • Unauthorized credit card usage (i.e. fraudulent charges)

The main purpose of chargebacks is to protect consumers from shady vendors or fraudulent activity. According to the federal Fair Credit Billing Act, consumers can dispute a charge in the case of billing errors and the failure of a business to render goods or services as described.

However, chargebacks have emerged in recent years as the first course of action for consumers who want a refund as quickly as possible — and as a tool for fraudsters looking to take advantage of CNP (Card Not Present) transactions.

This has been aided by the rise of online banking, which has made the chargeback process as easy as a few clicks. It’s possible for cardholders to get a chargeback approved from either their bank or the credit card processing company (e.g. Visa or Mastercard) without having to come face to face with the merchant.

However, a high number of chargebacks has significant implications for businesses. As well as chargeback fees, there’s also the risk of banks choosing to freeze or even terminate merchant accounts.

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Steps you can take to reduce chargebacks

To mitigate the impact of chargebacks and protect their businesses, merchants should take proactive measures. Here are some steps you can take to reduce chargebacks and maintain a healthy merchant account:

Improve Communication

Establish clear lines of communication with your customers. Ensure that your contact information, including customer support channels, is readily available and easily accessible. Promptly respond to customer inquiries, address concerns, and provide timely updates on order statuses and shipping information.

Implement Clear Refund Policies

Clearly state your refund and return policies on your website or at your physical store. Make sure they are easy to understand and prominently displayed. Transparent policies help set proper expectations and can reduce instances where customers file chargebacks instead of seeking refunds directly from the merchant.

Strengthen Fraud Prevention Measures

Implement robust fraud detection and prevention systems to minimize the occurrence of fraudulent transactions. Use address verification, CVV checks, and fraud scoring models to identify potentially fraudulent orders. Monitor suspicious activities and flag any irregularities for further investigation.

Enhance Transaction Descriptions

Ensure that your customers can easily recognize the transactions on their credit card statements. Use clear and concise descriptors that accurately reflect your business name and the purchased goods or services. Vague or misleading transaction descriptions can confuse customers and lead to unintended chargebacks.

Prioritize Customer Service

Provide exceptional customer service to address any issues or concerns promptly. A positive customer experience can encourage customers to reach out to you directly rather than resorting to chargebacks. Make it easy for customers to contact you and offer solutions such as exchanges, store credits, or partial refunds when appropriate.

Keep Detailed Documentation

Maintain thorough records of transactions, receipts, order confirmations, shipping details, and customer communications. These records can serve as valuable evidence in the event of a chargeback dispute, helping you present your case to the card networks or issuers.

Monitor Chargeback Ratios

Regularly monitor your chargeback ratios, which is the percentage of chargebacks compared to your total transactions. Keep track of industry benchmarks and aim to stay within acceptable limits. High chargeback ratios can trigger scrutiny from card networks and increase the likelihood of penalties or account closures.

It’s important to note that chargebacks can also occur due to “friendly fraud” – where customers intentionally abuse the chargeback process to obtain refunds while retaining the received goods or services. Recognizing the signs of friendly fraud and implementing appropriate measures to address it can help protect your business.

Remember, chargeback fees can vary depending on the credit card networks and processors involved. Familiarize yourself with the fee structures and ensure they are accounted for in your business calculations.

By understanding the reasons behind chargebacks, implementing preventative measures, and fostering good customer relationships, merchants can minimize the negative impact of chargebacks and maintain a healthy business environment.

Credit Card Transactions

Credit card transactions occur when a consumer uses their credit card to make a purchase from a merchant. The transaction involves the transfer of funds from the consumer’s credit card account to the merchant’s designated merchant account.

Initiating a Credit Card Purchase

When a consumer wishes to make a credit card payment, they present their credit card to the merchant. The merchant processes the payment using a card terminal or an online payment gateway. The transaction details, including the purchase amount, are transmitted to the merchant’s acquiring bank for authorization.

Authorization and Settlement

The acquiring bank, upon receiving the transaction details, verifies the availability of funds in the consumer’s credit card account. If sufficient funds are available, the bank approves the transaction and sets in motion the settlement process. Settlement involves transferring the authorized funds from the consumer’s credit card account to the merchant’s designated merchant account.

Merchant Accounts

Merchant accounts are specialized accounts established by merchants to facilitate credit card payments. These accounts are typically provided by acquiring banks or third-party payment processors. Merchant accounts serve as a bridge between the merchant and the credit card network, enabling the seamless processing of credit card transactions.

Payment Disputes and Chargebacks

Sometimes, credit cardholders may encounter issues with their credit card purchases, leading to payment disputes. Common reasons for payment disputes include fraudulent transactions, billing errors, goods not received, or dissatisfaction with the quality of products or services. In such cases, credit cardholders have the right to initiate chargebacks, seeking a resolution and potential refund for the disputed amount.

Chargeback Process

When a cardholder disputes a credit card payment, the chargeback process is set in motion. The cardholder contacts their credit card issuer, providing details of the disputed transaction and the reason for the dispute. The issuer investigates the claim, collaborating with the merchant to gather relevant information. Following the investigation, the issuer makes a decision regarding the chargeback request, either crediting the cardholder’s account for the disputed amount or denying the claim based on the findings.

Your Credit Card Issuer and Chargebacks

Credit card issuers play a crucial role in the chargeback process as they act as intermediaries between cardholders and merchants. When a cardholder initiates a chargeback request, it sets in motion a series of steps that the credit card issuer undertakes to investigate the disputed transaction.

Initiation of a Chargeback

A chargeback request is typically initiated by the cardholder contacting their credit card issuer and providing details of the disputed transaction. The issuer may require specific information such as the transaction date, amount, and a valid reason for the dispute.

Investigation and Provisional Credit

Upon receiving a chargeback request, the credit card issuer conducts an investigation to assess the validity of the claim. They may review transaction records, communication between the cardholder and merchant, and any supporting documentation. During this investigation, the issuer may temporarily provide the cardholder with a provisional credit, returning the disputed funds to their account.

Collaboration with Merchants

Credit card issuers also collaborate with the merchants involved in the disputed transaction. They share relevant information, including the chargeback request details and any supporting evidence provided by the cardholder. The merchant has an opportunity to present their case and provide evidence to refute the chargeback claim.

Adherence to the Fair Credit Billing Act (FCBA)

The Fair Credit Billing Act (FCBA) is a federal law designed to protect consumers in credit card transactions. Credit card issuers must comply with the FCBA guidelines when processing chargebacks. These guidelines ensure that cardholders are afforded certain rights and protections throughout the chargeback process, such as the right to timely notification of the investigation results and the right to dispute the issuer’s decision.

Decision and Resolution

Based on the information gathered during the investigation, the credit card issuer makes a decision regarding the chargeback request. If they find the dispute valid, they will permanently credit the cardholder’s account for the disputed amount. However, if the issuer determines that the cardholder’s claim lacks merit, they may deny the chargeback request and inform the cardholder of their decision, providing a rationale for the denial.

Credit card issuers are vital players in the chargeback process, acting as intermediaries between cardholders and merchants. They diligently investigate chargeback requests, following the guidelines outlined in the Fair Credit Billing Act, to ensure a fair and impartial resolution. By understanding the role of credit card issuers in chargebacks, cardholders can navigate the dispute process more effectively and protect their rights as consumers.

Fast Facts About Credit Card Chargebacks

Credit card chargebacks are not a new issue for businesses. However, they’re fast becoming a much bigger problem for merchants. Current data suggests that global chargeback requests may cost retailers as much as $117.47 billion in 2023, an uptick that can be partly explained by the global boost in online sales caused by the COVID-19 pandemic.

Widespread supply chain disruption during 2020 is thought to have made a significant contribution to credit card chargebacks, with strained parcel networks resulting in bottlenecks during the shipping process. Merchants cite the following reasons why chargebacks have increased:

  • Delivery delays (45%)
  • Customer service delays (43%)
  • Worker shortage (41%)

According to the Chargeback Field Report, nearly 70% of merchants reported an increase in credit card chargeback rates as a result of COVID-19. Around 47% estimate their company’s current chargeback ratio is between 0.6%-1%, while 33% estimate that it exceeds 1% — a rate that can result in penalties from credit card companies.

The Difference Between Credit Card Chargebacks and Fraud

Chargebacks and eCommerce fraud are often talked about in the same breath, but not all chargebacks occur for fraudulent reasons. Chargebacks are an important consumer protection mechanism to ensure that consumers don’t fall victim to unscrupulous sellers or scams.

So-called “friendly fraud” is a specific form of credit card fraud where a consumer intentionally makes use of chargebacks to obtain a refund without having to pay restocking fees or return shipping. It’s also a way to get around restrictive return policies that don’t allow for buyer’s remorse. It’s estimated that 61% of chargebacks issued in North America by 2023 will be due to incidences of friendly fraud.

How Much are Credit Card Chargeback Fees?

Chargeback fees are non-refundable fees levied by banks for each credit card payment that results in a chargeback. The purpose of chargeback fees is to cover administrative costs accrued by the acquiring bank.

The size of chargeback fees can vary significantly depending on the type of good/service being disputed and whether the merchant has a prior history of chargebacks. Most chargeback fees vary from $20-$100. However, it’s important to acknowledge that the real costs of chargebacks aren’t just monetary, especially for small businesses.

Dealing with credit card chargeback fees isn’t as simple as just paying the amount due and moving on. The more chargebacks you receive, the higher your chargeback ratio becomes — i.e. your risk factor in the eyes of banks and credit card issuers. A high chargeback ratio can mean additional fees, or even a monthly penalty until your ratio drops.

Chargebacks can also cost businesses in other ways, including:

  • Transaction fees charged by the payment processing company (usually 3-4% of the transaction value).
  • Damage to your credit score.
  • Opportunity costs (i.e. lost sales and customer relationships).
  • Fulfillment and logistics costs (i.e. packing, shipping, and storage).

When adding up these costs, it’s clear that chargeback fees and their associated costs are extremely harmful to your bottom line. So, what can merchants do to prevent chargebacks from mounting up?

Preventative Steps to Combat Credit Card Chargebacks

Ensure That You’re Following the Protocols of Your Payment Processor

Payment processors have rules for handling orders placed online, which are known as “Card Not Present” interactions. These involve the highest risk of fraud, which is why extra information such as CVV card numbers or AVS (Address Verification System) is often required. For in-store payments, check that your credit card machine has an EMV reader. This helps you to weed out fraudulent interactions before they happen and cause chargebacks.

Work with a Payment Processor that Offers Credit Card Chargeback Protection

Some payment processing platforms (including Stax) offer features that help businesses avoid chargebacks. Ensure that you’re working with a processor that provides secure payment systems (SPS) that can encrypt and tokenize cardholder information to prevent fraudulent transactions.

This adds another layer of security (particularly for online transactions) so you can avoid incidents that lead to chargebacks.

Maintain Clear, Consistent Communication

Many customers pursue chargebacks because the business is either difficult to contact or doesn’t respond to their concerns in a timely manner. By putting your best foot forward during the shopping journey with responsive communications, you can establish a trusting relationship where customers feel comfortable reaching out to you. This also means ensuring that your return and cancellation policy is clear to avoid any confusion. You should provide multiple contact options (e.g. email, live chat, and social media) to make it easy and convenient for customers to touch base.

Ensure that Customers Receive Their Goods as Promised

ECommerce is made up of a lot of moving parts, and it’s easy for standards to slip when order volumes are high. But poor product descriptions or delayed shipping can result in customers becoming frustrated and pursuing chargebacks, especially if they don’t receive an apology from the merchant. It’s your job to effectively manage expectations and ensure that customers get what they paid for.

Provide Payment Processing Options that Suit Your Customer’s Needs

Traditional card networks such as American Express and Discover are no longer the only options for merchants accepting payments online. As eCommerce has grown, the number of payment options has proliferated. The growing popularity of Buy Now, Pay Later and digital wallets are great alternatives that provide more flexibility.

How To Combat Credit Card Chargebacks

What Merchants Should Do When They’re Hit With a Chargeback

Here is a quick summary of the standard chargeback process:

  • The customer decides to file a credit card chargeback with the issuing bank.
  • The issuing bank forwards the credit card chargeback request to the merchant’s bank, aka the acquiring bank.
  • The acquiring bank activates the credit card chargeback, and the customer receives temporary credit pending the merchant’s response.
  • The merchant chooses to either accept or dispute the credit card chargeback.

So, what should you do next?

Understand Why the Chargeback Took Place

Knowing why a credit card chargeback happened will help you to determine whether it’s worth disputing. When a customer files a credit card chargeback, a reason code will be supplied that explains the cause. These come in the form of two, three, and four-digit numbers.

Every credit card company has its own unique set of reason codes, which can get confusing for merchants. However, it’s important to have this documentation on hand so you can look up the cause of a chargeback and plan your next steps. For example, if the chargeback is due to an incorrect credit card charge, there’s little point in disputing this. But if a customer is claiming with their goods weren’t received while your shipping tracker says otherwise, it’s definitely worth it.

Note: Different reason codes often stipulate different time limits by which the merchant has to respond, so pay close attention to avoid missing out on a chance to dispute the credit card chargeback.

Prepare Your Documentation

The biggest downside of chargebacks is that merchants are usually considered guilty until proven innocent. This means that the burden is on you to prove that a credit card chargeback is fraudulent. To use our previous example, tracking information from your parcel carrier in addition to the initial delivery confirmation email will help to establish that the delivery did take place.

Ask Your Credit Card Company/Bank for Advice

Acquirers and credit card processors have a lot of experience dealing with chargebacks, so it’s a good idea to approach them before officially filing for dispute and evidence. This is especially important in the case that the issuing bank files a second charge or asks for arbitration. Remember: They have a vested interest in keeping chargeback rates low, so they’ll be happy to assist.

Take stock of the situation. Whether the issuing bank’s decision is in your favor or not, it’s a good idea to re-examine the process and whether you could have done anything differently. If the credit card chargeback was your fault, consider what mitigating strategies you can put in place to prevent that scenario from happening again.

Final Words About Credit Card Chargebacks

Chargebacks are a major hassle for merchants both large and small, so it’s well worth dedicating time and resources to preventing credit card chargebacks and refining your response to them. Even basic measures such as continually touching base with your customer during the post-purchase phase can make a huge difference to the likelihood of chargebacks taking place.

It’s also worth partnering with a payment processor that helps you minimize chargebacks. At Stax, we have payments security built into our platform to help prevent fraudulent transactions and chargebacks from taking place. Stax also provides tools that allow you to mitigate the risks and challenges that come with chargeback practices.

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FAQs About Chargebacks

Q: What is a credit card chargeback?

A credit card chargeback occurs when a cardholder disputes a charge on their credit card statement and asks the card issuer to reverse the transaction. It is typically initiated due to issues like fraudulent activity, unauthorized charges, or dissatisfaction with a purchase.

Q: How can I prevent credit card chargebacks?

Provide clear product descriptions, accurate billing information, and excellent customer service. Maintain thorough records of transactions, including receipts and delivery confirmations. Respond promptly to customer inquiries and attempt to resolve any disputes or issues before they escalate to chargebacks.

Q: Can I dispute a credit card chargeback?

In some cases, you can dispute a chargeback decision. If you believe the chargeback was unjustified, gather additional evidence and documentation to support your case. Follow the guidelines provided by the payment network or card issuer for initiating a dispute and present your compelling argument for a chargeback reversal.

Q: How long do I have to respond back to a chargeback request?

The timeframe to respond to a chargeback request varies depending on the payment network and card issuer. Typically, you have a limited window, often ranging from 7 to 45 days, to submit your response with compelling evidence to challenge the chargeback.

Q: Can chargebacks impact my ability to accept credit cards?

Excessive chargebacks can have negative consequences for your business. High chargeback rates may lead to increased processing fees, loss of processing privileges, or placement on the MATCH (Member Alert to Control High-Risk) list, making it difficult to obtain merchant accounts in the future.