Chargeback

There are many reasons that a consumer might request a chargeback. These include legitimate reasons such as fraud (e.g. a stolen credit card) or the item failing to be delivered, as well as illegitimate chargebacks as a result of buyer’s remorse or intentional fraud by the cardholder (ordering an item with the intention to file a chargeback afterwards). Other reasons can include unrecognized purchases, an attempt to cancel a subscription or double billing.

The first step leading to a chargeback is when a consumer files a dispute for a charge to their card. The dispute is reviewed and the merchant is given the opportunity to challenge the claim and provide evidence that the claim is illegitimate. This could include evidence that the item was delivered to the consumer, e.g. a signed delivery confirmation.

If the merchant is unsuccessful in fighting the claim or chooses not to respond, the customer’s claim is upheld and the funds are returned to them.

A certain number of chargebacks are expected and tolerated by the card schemes. However, if the chargebacks incurred by a merchant exceeds certain thresholds (both in absolute terms and as a percentage of all transactions), the merchant may be fined and subject to higher processing fees, as well as being enrolled in the card scheme’s chargeback monitoring programs. If the merchant fails to implement measures to reduce their chargeback rate, their merchant account may be terminated.

Furthermore, dealing with chargebacks can result in additional overheads for the merchant, such as time spent disputing illegitimate claims. Merchants may also lose revenue directly if goods have been shipped to a customer but a successful chargeback is filed. It is therefore in the interest of merchants to keep their chargeback rate as low as possible.

Merchants can reduce the number of chargebacks in several ways. Chargebacks that are the result of fraud can often be prevented before they happen, either by using a fraud and risk management tool or by requiring 3D-Secure for online card purchases.

Risk and fraud prevention services use a variety of data points to analyze a transaction and will flag any suspicious transactions, e.g. where there are discrepancies between the cardholder and delivery address, the IP of the consumer vs the card’s originating country, or based on previous transactions with the card, such as flagging unusually high value transactions.

3D-Secure (3DS) shifts the liability for fraud from the merchant to the card’s issuing bank. 3DS requires consumers to complete an additional verification step with the card issuer - although exemptions can be requested - and is mandatory for certain transactions in Europe as part of the Payments Service Directive.

Good customer service can also help reduce the number of chargebacks by taking preemptive measures to prevent the consumer filing a dispute. For example, if an item was damaged or failed to be delivered, the merchant can issue a refund or send a new item to the consumer prior to them filing a chargeback. This helps keep merchants in good standing with card schemes and helps safeguard the merchant’s reputation with their customers.

Chargebacks and disputes are related concepts that are sometimes used interchangeably. This is further complicated by the fact that Visa refers to disputes as chargebacks, whereas other credit card schemes distinguish between the two terms.

In general:

• Dispute refers to the first step in the process, i.e. when a customer disputes a carge for being illegitimate. This can lead to a chargeback if the claim is upheld.

• A chargeback occurs once the customer’s dispute is upheld and the funds are returned to the customer’s account.