Explaining Credit Card Chargebacks

A chargeback refers to a previous, usually completed transaction that is being disputed by the credit cardholder or their issuing bank. A chargeback actually occurs when a credit cardholder disputes an individual charged transaction or when proper credit card acceptance and authorization procedures are not correctly followed.

The final result of the chargeback process is when a credit card processor reverses a transaction and withdraws the funds from the merchant’s bank account, depositing them back to the customer’s account. Many fees are incurred in this process by the merchant’s processing bank and ultimately, the merchant. This makes chargeback fees the largest risk that is regularly faced by banking institutions and merchant service providers, and therefore their biggest fear.

If a merchant or business receives a chargeback, the deposit account of that merchant is debited for the amount that is indicated. In addition to the chargeback, merchants may easily incur a fee if they failed to follow proper credit card acceptance and authorization procedures the first time around.

There are several reasons for chargebacks, which include a cardholder dispute or an error in handling on the part of a merchant staff. The vast majority of the time, chargebacks happen because of fraudulent transactions, such as when a cardholder has not authorized credit card use. At that point, the merchant is solely responsible for the charges brought upon a customer.

Other reasons include consumers being charged for a service or product that was never received; the customer not being satisfied with quality of the product or service purchased; the customer not recognizing the merchant that charged their credit card; and/or the cardholder denying they authorized the merchant to charge their card in the first place. Also, when a customer returns store merchandise in exchange for credit originally spent on the customer credit card, a dispute may arise over the proper amount to be credited.

In some cases, if the credit has not posted back to the account at all, the merchant must, chargeback that credit to the customer to settle the matter. The fault can just as easily fall upon the shoulders of the customer, such as when a cardholder’s banking institution at first approves the sales transaction but later returns the charge for insufficient funds, the closure of the customer’s account or the freezing of the credit card for actual or mistaken fraudulent use, such as rapid-succession use by the cardholder. The information required for a credit card sale must match every record that the merchant sees, what the customer sees and what the banks and credit card companies see. Anything “out of sync” can abort a sale in the first place and, if not, may result in a chargeback.

For a business, credit card chargebacks are more than an inconvenience. They can easily cost a company significant time loss and lost profits as well. Credit card chargebacks can frequently be due to merchant processing error, such as duplicate processing, when a customer is charged twice. Merchants should take the precautions to significantly reduce the chance of receiving a chargeback notification during the course of their business. It is advisable to never charge a credit cardholder before shipping any purchases. Also, never accept sales that are declined, and if so, do not attempt authorization a second time on such a declined sale. The credit cardholder’s bank may collect a fee if a merchant fails to follow card acceptance and authorization procedures.

Other defensive strategies will minimize chargebacks, too. Merchants should not accept sales that are not authorized for the exact amount of the sale, sales on expired credit cards or sales dated before the effective date on a dual-dated card. Common sense should also prevent any sales representatives or cashiers from approving any of the “usual” suspicious transactions, such as when an account number obtained off the magnetic stripe does not match the account number on the card itself.

Merchants must ultimately understand that they assume every responsibility for the identity of a credit cardholder for all fax, online, mail order and telephone order (MOTO) sales transactions. During a chargeback dispute, merchants should prepare and submit a written refutation within the time specified on the chargeback notification form. Of course, a merchant should accept credit cards in which the cardholder account number is valid. A merchant should also authorize all sales; charge the cardholder for the correct amount; verify the math on sales drafts; and deposit the sales draft before the contractual time limit. Merchants should indeed credit the cardholder for legitimate returned merchandise or for a canceled order.

Merchants are essentially billed for individual credit card chargebacks as they individually cross their path. Since many credit card chargebacks are not the fault of the merchant and the process by which credit card chargebacks are conducted is often complicated, the merchant may appeal such a dispute and if this appeal is upheld, a reversal of the chargeback will occur.

Sometimes, for merchants, the credit card chargeback and associated fee may cause an overdraft or leave insufficient funds to cover a subsequent withdrawal or debit from the merchant account that initially received the chargeback. This scenario could drive checks that are pending to be returned due to insufficient funds. This suggests, certainly, that merchants need to keep close track of what is happening with their merchant accounts. Ultimately, merchants should be on the lookout for credit card chargebacks in order to pay pending debits, or risk being charged the resultant penalties.