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Chargebacks 101

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Published: 06/18/2019

If you’re a business owner, your company may have had to issue a chargeback before.  Unfortunately, there will be times when customers are unsatisfied with the goods and services they purchased or times that their credit or debit cards have been fraudulently used, so they will request that a transaction be reversed.

For businesses, if a consumer initiated a charge-back dispute, you may end up having to refund the money and not get your product back. For consumers, you will most likely want a refund if you are not satisfied with your good/service or if you are a victim of fraud. To help guide you through these confusing transactions, we will be exploring what chargebacks are, how chargebacks work, and how businesses can go about preventing chargebacks.

What is a Chargeback?

A chargeback can be thought of as a refund. It is the return of funds to a consumer for a past transaction. A consumer is likely to request a chargeback when they do not recognize transactions that appear on their credit or debit account history, or when they are not satisfied with a good or service they receive. Chargebacks exist to give consumers legal protections when it comes to obtaining a refund. In the United States, consumers are protected when it comes to both debit card and credit card chargeback under Regulation E of the  Electronic Fund Transfer Act and Regulation Z of the Truth in Lending Act, respectively.

The Four Different Chargeback Reasons

Chargebacks can generally be put into one of four categories: criminal fraud, consumer dispute, authorization issues, or processing issues.

Criminal Fraud: A criminal fraud chargeback is a chargeback where the consumer believes their debit or credit card has been fraudulently used.

Consumer Dispute: A consumer dispute chargeback is when a consumer does not receive the item they ordered, or they are not satisfied with the good or service they received. This may be because the good or service malfunctions, is expired, etc.

Authorization issues: An authorization issue occurs when there is no valid authorization approval for the charge the consumer is receiving. For example, if the amount the consumer was charged is greater than the amount that they approved at the point of sale terminal.

Processing issues: A consumer might initiate a chargeback if the merchant is experiencing transaction processing issues. For instance, if a consumer cancels a recurring payment, but the merchant doesn’t process that cancellation and the consumer is accidentally charged, then that chargeback would be due to a processing issue.

How do Chargebacks Work?

Settling a chargeback is a process that involves the consumer, the consumer’s bank, the merchant, and the merchant’s bank. The chargeback dispute travels through this chain and takes time and resource allocation before it is complete. The entire chargeback process can be summed up in nine (9) steps:

  1. A consumer makes a purchase they are unsatisfied with or notices a charge to their credit or debit account that they did not create themselves.
  2. The consumer initiates a chargeback by contacting their credit or debit card issuer to let them know they need a refund for a specific transaction, as well as why they need a refund for that transaction.
  3. The card issuer who receives the dispute from the consumer sends the dispute to an acquiring bank–a bank that processes credit and debit transactions for a merchant.
  4. The acquiring bank reviews the dispute, accepts or denies the dispute, and sends it to the merchant.
  5. The merchant can either accept or challenge the acquiring bank’s decision. After the merchant decides to accept or challenge, they inform the acquiring bank of their decision.
  6. If the merchant does not agree with the acquiring bank’s decision, they can send evidence to their acquiring bank. The acquiring bank then reviews the merchant’s response and sends to the consumer’s card issuer.
  7. The issuer receives the final information from the acquiring bank, which is either resolution or dispute, and then informs both the consumer and the merchant what the outcome of the chargeback dispute was.
  8. If the chargeback is resolved, the acquiring bank will give the consumer a refund.
  9. If either party has a problem with the outcome, they can take the chargeback case to arbitration. Arbitration can be thought of as a case-management desk where chargeback disputes are analyzed. Arbitration is governed by the consumers’ issuing credit card company. The arbitrator has the final say regarding the chargeback dispute, and the party that loses arbitration is responsible for paying all arbitration costs.

The Impact of Chargebacks

Chargebacks are geared towards protecting the consumer. From the consumer side, if their card was stolen or the merchant sold them a defective item, they can depend on getting that transaction refunded.

But from the business side, a chargeback is a process that digs into profits and takes up valuable time and resources that could be better used in other areas. It is not unusual for acquiring banks to charge companies a chargeback fee for the costs they accrue when disputing the consumer’s chargeback. According to The LexisNexis Risk Solutions 2018 True Cost of Frauds report, the cost per dollar lost on fraud was 2.40 per dollar spent. In other words, a $100 purchase has the potential to cost a business $240 in chargeback fees. However, the total chargeback expense to a business will ultimately depend on the rates being charged by the acquiring bank, the risks associated with the business, and if the chargeback goes to arbitration or not.

Preventing Chargebacks

Preventing chargebacks is difficult because if a customer wishes to return a good, or fraudulent payments have been made via their account, under the United States laws, they can receive a refund. However, it is possible to decrease how many chargebacks your business is held accountable for. Technological improvements like the EMV chip have made it harder for credit card fraud to occur, thus reducing the potential for chargeback claims. There are also a few common features of credit card fraud that your business can look out for in order to help you evaluate your business’ chargeback risk level.

While chargebacks are a part of doing business that you should be prepared for, your business can take internal measures to reduce the amount of friction and stress during the chargeback process.  For instance, if customer returns frequently occur in your industry, your business should have a return-team that can efficiently handle consumer returns and navigate the chargeback resolution process.


Overall chargebacks are great for protecting consumers from credit card fraud but can be costly for businesses that unknowingly process a fraudulent transaction. As a business, the best way to handle chargebacks is to prevent them: look out for signs of unauthorized credit card use, make sure your products are not defective and meet customer standards, and use up-to-date payment technology that can offer your business chargeback protection.

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