Online retail is an extremely lucrative industry, but chargebacks have been a recurring pain point for most companies. While there have been new advances in both technology and policy that have helped reduce the overall impact of fraud, chargebacks can still significantly impact a business’s bottom line. Because the whole process is fairly confusing, these costs often create a heavier burden on newer companies who don’t really understand what chargebacks are or how they work.
Why Chargebacks Exist
To protect consumers, the Fair Credit Billing Act was enacted in the 1970s and introduced chargebacks. They give consumers a way to flag fraudulent purchases and prevent fraud from damaging their finances and credit. Consumers have 60 days to dispute a charge made on their card for a variety of reasons including fraud, missing products, or incorrect billing amounts. Once disputed, the card issuer cannot collect on the debt or report it to credit agencies as delinquent until 60 days have passed or the dispute has been settled.
Chargebacks vs Returns
Though very different in nature, sometimes consumers get confused about the difference between a chargeback and a return or cancellation. With a return or cancellation, the product still belongs to the company. There are also no penalties on the merchant for cancelling an order or providing a refund for returned purchases.
On the other hand, chargebacks can incur significant penalty costs —win or lose— and products are rarely recovered. This can make chargebacks very expensive for the merchant.
Understanding the Chargeback Dispute Process
Dispute processes are often complicated, leading to wasted time, difficult arguments, and multiple fees, Even when merchants win a chargeback dispute, they can be subjected to fees for the arbitration. Every payment method generally sets their own process and fees as there is no federal standard.
Terms to Know
- Acquirer: The bank that is handling the transaction for the merchant.
- Issuer: The bank that provided the consumer account used in the purchase.
- Payment Processor: The company making the transfer between the acquirer and issuer.
Dispute processes can vary significantly by payment provider, but most follow a similar pattern:
- The consumer notifies the issuer that a charge is incorrect for one of the appropriate reasons (fraud, missing merchandise, incorrect billing amount, etc).
- The issuer notifies the acquirer, who removes the amount in dispute from the merchant’s account.
- The merchant is notified and has a certain amount of time to settle or argue the dispute.
- If the merchant chooses to fight the dispute, it goes to arbitration. Otherwise, the matter is settled, and the appropriate fees are then deducted from the merchant account while the disputed money is returned to the consumer.
- During arbitration, the merchant must show all records relating to the transaction to explain why the disputed charge was correct.
- A decision is then made by the arbiter about whether or not to uphold the chargeback. Depending on the decision, the money is either returned to the consumer or the merchant. Any additional fees that have been incurred are then deducted from the merchant account.
- If a merchant has too many chargebacks, their acquirer/payment processor may levy additional charges or require costly fraud risk monitoring.
Fighting Chargeback Fraud
While many chargebacks are the result of consumers following the correct process, chargeback fraud can still occur. Also known as “friendly fraud,” chargeback fraud occurs when a consumer deliberately orders a product and then initiates a chargeback after receiving the item. If the merchant loses the dispute, the consumer then gets to keep both the product and the money.
There are a few ways that merchants can protect themselves from costly chargebacks and chargeback fraud, including strong fraud prevention and keeping good records. Having the right chargeback fraud prevention in place can reduce unnecessary fees and keep friendly fraud from draining your bottom line.