Chargebacks

A chargeback refers to a previous transaction that is being disputed by the credit card holder or debit card holder or their issuing banking institution. A chargeback typically occurs when a credit card holder disputes an individual charged transaction or when proper bankcard acceptance and authorization procedures were not correctly initially followed. In the final sum of a successful chargeback, the credit card processor reverses a transaction and withdraws the funds from the merchant’s bank account, depositing them back to the customer’s account.

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, a merchant may incur a fee if they failed to follow proper credit card acceptance and authorization procedures originally.

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

Other reasons for chargebacks include the customer never receiving a service or product that was paid for, the customer not being satisfied with quality of the product or service purchased, the customer not recognizing the merchant that charged their credit card, or a merchant charging a card without the customer ultimately authorizing that the card be charged in the first place. Also, when a customer returns store merchandise in exchange for funds originally taken from the customer’s credit card, a dispute may arise over the proper amount of credit returned. In some cases, if the credit has not posted back to the account at all, the merchant must, of course, 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 reverses the charge due to insufficient funds, the closure of the customer’s account, or the freezing of the credit card for fraud (or mistaken fraudulent use, such a rapid-succession use by the cardholder). Often of the information required in a credit card sale must match the records held individually by the merchant, the customer, and the banks and credit card companies. Anything out of synchronization can abort a sale in the first place and, if not, may result in a chargeback.

Chargebacks can frequently be due to merchant processing error, such as duplicate processing (when a customer is charged twice).

For a business or corporation, chargebacks are more than an inconvenience. They can cost that company significant time and profit loss. Merchants should take the precautions to significantly reduce the chance of receiving a chargeback. It is advisable to never charge a credit cardholder before shipping any purchases. Also, they should never accept sales that are declined. The credit card holder’s bank may collect a fifty-dollar fee if a merchant fails to follow card acceptance and authorization procedures. Merchants should not accept sales that are not authorized for the exact amount of the sale. They should not accept sales from expired credit cards or, conversely, accept a card before the effective date on a dual-dated card. It is advised that merchants do not process a credit as a sale. Merchants should not deposit a sales draft more than one time. Of course, for card present sales, a merchant should never accept a sales draft without a verifiable cardholder signature and a verified authorization code. Common merchant sense should also prevent any sales representative from engaging in a suspicious transaction, which includes instances in which the account number obtained off the magnetic stripe does not match the account number on the draft.

Merchants should understand that they assume every responsibility for the identity of a credit card holder for all fax, online, mail order and telephone order sales transactions. During a chargeback dispute, merchants should prepare and submit a written refutation within the time specified on the chargeback notification received. Of course, a merchant should accept credit cards in which the card holder account number is valid. A merchant should also give his own approval on all sales; charge the cardholder for the correct amount; verify the math on sales drafts; and deposit the sales draft within the contractual time limit. Merchants should also credit the credit card holder for legitimately returned merchandise or canceled orders.

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

Sometimes for merchants the 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 result in pending checks being returned due to insufficient funds. Ultimately, merchants should be on the lookout for chargebacks in order to pay pending debits, or else they could face exponentially mounting penalties.