What is a chargeback?
Most businesses will encounter them at some point. In fact, if you’ve landed on this page, you’re likely dealing with them right now. So, what exactly is a chargeback, and how does the process work?
Originating in the 1970’s, chargebacks are a consumer protection tool from the early days of credit cards. In essence, they’re supposed to be a last resort for consumers to recover money from a merchant via the consumer's bank when a purchase goes wrong. Despite their intended use, chargebacks have become a serious problem for some merchants—especially those selling online.
Regardless of the business you’re in, failure to educate yourself on the ins and outs of chargebacks - and the proper safeguards to protect against them - can have a negative impact on your business.
First, there’s the immediate fallout—you risk losing the money from the sale as well as the goods. This is quickly followed by a series of fines and fees. Later, if chargebacks pile up, the price you pay to accept credit and debit cards can increase. Finally, if left unchecked, you can lose the right to accept credit and/or debit cards - which can derail any business operating online.
How do chargebacks work?
There are numerous types of chargebacks. So many that the card networks created a system of codes to keep track of them all. For simplicity’s sake, think of them as falling into four categories linked to their root cause: Clerical, Technical, Customer Service and Fraud.
Let’s look at a typical fraud chargeback flow
1. A customer looks at their statement and sees a transaction they don’t recognise.
2. Assuming fraud, the customer calls their bank to dispute the purchase.
3. After investigating, the bank pulls the funds from the merchant and refunds the customer.
4. Days or weeks later, the merchant receives notification that the transaction has been disputed.
5. Merchants then have the option to accept the chargeback or fight it (called representment).
6. Regardless of whether a merchant wins or loses, the sale is lost - and the fees remain.
Preventing credit card chargebacks
For every dollar disputed via chargeback, merchants face an average of $1.50 in associated costs (Source: Javelin). And the problem isn’t going away any time soon. The annual cost of chargebacks for US banks is set to grow from $585 million in 2019, to more than $1 billion in 2023 (Source: Aite).
Now that you get a sense of what’s at stake, how do you protect your bottom line from chargeback fraud? See below for some additional resources to help you understand strategies to help merchants dispute and prevent chargebacks.