Chargebacks and Your Merchant Account

They compromise credibility and standing with financial institutions, but understanding risk factors and implementing the right tools can help you prevent and manage them.

What is a Chargeback?

A chargeback is a forced refund from business to customer after the customer disputes a payment. Instead of getting a refund directly from the merchant, the customer initiates the chargeback by bringing a claim to the payment card-issuing bank. Through a retrieval request, the issuing bank asks the merchant for proof of the authorized transaction. After more investigation, and if the customer’s claim is valid, the issuing bank removes the funds from the merchant’s account and replaces them in the customer’s account. If the issuing bank and merchant bank can’t come to an agreement about whether the chargeback is warranted or not, the credit card company steps in to make the final decision in an arbitration process.

Card Purchase Protection

Customers initiate chargebacks for a variety of reasons. They might have paid for something they never received, received subpar goods or services that didn’t match the company’s advertising, or fallen victim to a billing error or fraudulent charge. The typical window for customers to ask for a chargeback is 120 days from the payment date.

With their ability to reverse card purchases, chargebacks keep businesses accountable by ensuring that they provide quality goods and services, issue refunds when necessary and keep cardholder data safe from fraud. Businesses that incur a lot of chargebacks lose credibility and are classified as high risk by service providers, resulting in higher transaction fees or disapproval for merchant accounts.

Ways to Decrease Your Chargeback Ratio Include:

  • Making sure your business name matches its billing name so customers recognize it on their card statements
  • Having a visible, clearly-worded return policy and issuing returns promptly when due
  • Implementing the Address Verification System (AVS) and Card Verification Value (CVV) to confirm the legitimacy of cardholder information before accepting payments
  • Increasing communication with customers (for example, a merchant should provide order tracking numbers for shipped products to customers, require a signature upon receipt, let them know how to reach customer service and encourage feedback)
  • Delivering quality products and services that match advertising
  • Making sure you keep documentation on file for every part of the transaction process—invoices, receipt signatures and signed credit card authorization forms for recurring billing plans. Chargeback fraud, sometimes called “friendly fraud,” happens when customers try to reverse transactions that were actually valid, so it’s important for merchants to keep documentation in case they need to disprove false claims.