What is a Chargeback?

A chargeback is a refund of funds paid by the consumer for their orders. A chargeback occurs when a customer/consumer raises a dispute over a fraudulent transaction done from their bank cards. This request for refunds is initiated by the consumer’s card issuing bank.

Once a customer disputes a purchase, the payment gateway or intermediary (bank or a third-party facilitator) has to reverse the charge and reimburse the customer in full. 

The money is also reversed/debited from the business bank account. This is probably why sellers and businesses try to avoid chargebacks. This means not only loss of business revenue, it can lead to penalties as well if too many chargebacks occur.

What are the reasons for a chargeback request?

A chargeback request may be raised for various reasons, like:

• Fraud: Purchase was made, and the amount was deducted from the customer’s bank account without their knowledge or consent.
• Quality: The customer disputes the quality of the item they paid for or that they have not received the product that was ordered.
• Clerical: The customer was billed more than once for the purchased item. Or, the customer must have returned the product and the refund is due.
• Technical: The order remains unfulfilled despite payment being processed because of certain technical errors or glitches in the gateway. It can also happen if the customer’s bank account has inadequate funds or if there is a bank error.

Take adequate steps to ensure that clients can recognise their purchases from your company even after some time has passed (like including business names in credit card transactions). To eliminate clerical errors, avoid manual processing. Also, providing customer service by phone or email might help resolve consumer concerns before they resort to chargebacks.

Chargeback Dispute

Not all chargeback claims get through. The business owners are also given a chance to dispute a chargeback if they believe the customer has misrepresented the situation. 

For example, if, despite delivering the item, the customer claims to have not received it, the merchant can provide proof of delivery. Another other way to dispute is by verifying claims of fraud. 

How does the chargeback process work?

Say an amount got debited from your bank account without your knowledge. Then you will have a time limit of up to 120 days to raise a chargeback request. 

• You must contact the card issuer bank to dispute a transaction. 
• The issuer bank will contact the recipient/acquirer bank. 
• The acquirer bank further contacts the payment gateway, and the payment gateway contacts the merchant for additional information based on the merchant’s line of business.
• The resolution time will be informed to the merchant, who will respond with proof related to the order and the transaction. There could be two scenarios:
  • If the issuer accepts the proof/evidence, the chargeback request will be denied. 
  • If the issuer rejects the proof/evidence, the chargeback is held to be valid and you will get a refund.
• After producing proof, banks can take up to 21 to 45 days to reach a decision, commonly referred to as the representation time.
• If the merchant fails to provide the necessary response, the chargeback process will be terminated, and the customer will be given a refund.

In the event of a chargeback, the same amount will be deducted from the merchant’s unsettled balance and released or refunded based on the outcome.

How to reduce chargeback and fraud?

Two-Factor Authentication (2FA) for Payments

A two-factor authentication (2FA), also known as 3D Secure transactions, requires customers to go through checks before completing a genuine transaction. The 2FA uses two separate forms of identification, usually a password and a verification code sent to smartphones. Nowadays, most mobile phones have options of verification through fingerprint and face scans that ensure an additional level of safety even in case of a smartphone theft.  It is one of the most commonly used methods to reduce fraud and misuse of stolen data. 

Third-Party Intermediaries

Building or employing a third-party risk engine can add another layer of risk mitigation to ensure business payment authenticity. This option helps overcome the shortcoming of a non-3DS transaction where the verification process does not occur. For example, redirecting the payment page to the bank-authorised website where the customer has to fill in the card details and enter a verification code sent to the mobile number registered with the bank. 

Maintaining records

Once a chargeback request is raised, merchants are required to submit documents or other evidence to support their response. Therefore,  it is recommended that merchants keep these documents handy from the start so that they are prepared to deal with it. The proof may be available across multiple data sources and may differ depending on the line of business.

Flagging Suspicious Transactions

Implementing checks on your payment gateway can help identify and prevent fraudulent transactions. These checks may examine various factors such as email address, card number, IP address, billing address, and so on, and identify repeated transactions in a short time. Identifying and declining such transactions will reduce the risk of fraud for businesses.

Frequently Asked Questions(FAQs):

What is the difference between a chargeback and a dispute?

A claim submitted by either the cardholder or the issuing bank is referred to as a dispute. A conflict may progress through several phases before it is resolved. A chargeback is a stage in the life cycle of a dispute. If a dispute settlement has not reached the inquiry stage, the seller initiates a chargeback, in which the transaction is reversed, and the client receives their money back.

How to open a dispute or raise a chargeback request with a seller?

A consumer can raise a chargeback request within 30 days of making payment. The request can be raised in these two cases: 

1. Payment has been made, but the order has not been delivered.
2. Order delivered, but it differs significantly from what was advertised on the seller’s website.

What is the difference between a chargeback and a refund? 

While both result in a customer receiving a credit, the major difference between a chargeback and a refund is who issues it. 

Chargeback is the money returned to a customer’s original mode of payment when you make a chargeback claim with your bank. It is often referred to as a “payment disagreement” or a “transactional reversal.” When a corporation refuses to grant a refund, you can use chargeback to protect yourself and get your money back.