What is a credit card chargeback?

A credit card chargeback isn’t the same as a simple refund. When a customer is unhappy with a product, they may ask the retailer directly for their money back, often by returning the item in-store.

For merchants, handling a direct refund is generally straightforward. If approved, the customer’s payment is promptly returned to their credit card.

However, sometimes customers choose to dispute a charge through their credit card company (their issuing bank) instead of reaching out to the merchant. When this happens, they initiate a credit card chargeback, essentially reversing the transaction back to the merchant’s bank (or acquirer). The issuing bank requests that the acquirer withdraw the disputed funds from the merchant’s account and credit them to the customer.

The acquirer then contacts the merchant to see if they’d like to challenge the claim. Merchants have limited time to respond, and if they choose to contest the chargeback, it can extend the timeline for a final resolution.

Common Reasons for Chargebacks

Chargebacks can happen for various reasons, but they generally fall into two main categories:

1. Fraud

• Criminal Fraud: This occurs when scammers use a stolen card or identity. Merchants are generally advised not to dispute these chargebacks, as the fraud involves unauthorized use.
• Friendly Fraud: In this case, the transaction is legitimate, but the customer disputes the charge out of buyer’s remorse or to avoid payment. They may claim they didn’t authorize the purchase, even though the transaction was valid.

2. Merchant Error

Sometimes, operational issues on the merchant’s end can lead to chargebacks. This can include processing expired or stolen cards or failing to complete proper verification steps. Training staff on secure and correct card acceptance practices can help reduce these types of disputes.

Why Are Credit Card Chargebacks Bad for Business?

Chargebacks come with direct costs for businesses, as merchants must pay chargeback fees each time one is filed—whether they win or lose the case. Retrieval request fees alone typically range from $5 to $20, while chargeback fees vary by payment processor and can cost anywhere from $20 to $100 per dispute.

If a dispute escalates to arbitration, the stakes increase: the card network may charge $250 to $500, with the losing party covering the costs.

Beyond these fees, major card networks enforce strict chargeback limits (often 1% of sales volume). Exceeding these thresholds can lead to further fines or even account termination, creating serious risks for businesses.

How Can Businesses Reduce Chargeback Fraud?

Reducing chargeback fraud involves a few key strategies: providing excellent customer service, maintaining open communication, training staff thoroughly on payment processes, and upholding strong payment security standards.

Communicate with Customers

Open and proactive communication can often prevent chargebacks. Consider these best practices:

• Clearly describe products and services to avoid misunderstandings.
• Clearly outline return, cancellation, and refund policies so customers don’t see chargebacks as their only option.
• Set clear expectations for after-sales support.
• For in-person transactions, include full return and refund policies on all receipt copies.

These simple steps can help reduce the risk of chargebacks while improving customer satisfaction.

How Can Businesses Minimise Chargeback Fraud?

Minimising chargeback fraud relies on proactive customer service, clear communication, well-trained staff, and strong payment security.

Engage with Customers Proactively

Clear, direct communication can prevent many chargebacks. Here are a few key steps:

• Accurately describe products and services to set the right expectations.
• Make return, cancellation, and refund policies easy to find and understand so customers know they have options beyond chargebacks.
• Inform customers about what to expect from after-sales support.
• For in-person transactions, include return and refund policies on receipt copies.

By keeping customers informed and maintaining secure practices, businesses can significantly reduce chargebacks and improve customer satisfaction.