Introduction to the Chargeback Dance

Introduction to the Chargeback Dance

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Online retail is an extremely lucrative industry, but chargebacks have long been a pain point for most companies. While there have been new advances in technology and policy that have helped reduce fraud overall, chargebacks can still significantly impact a business’s bottom line. Because the process is fairly confusing, these costs often have the most impact on newer companies who don’t really understand what chargebacks are or how they work. Here’s a quick overview of what chargebacks are and what to expect from the dance that is the chargeback dispute process.

Why Chargebacks Exist

To protect consumers, the Fair Credit Billing Act was enacted in the 1970s and introduced chargebacks. They were meant to give consumers a way to prevent fraud from damaging their finances and credit. It gives consumers 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 for 60 days or until 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 giving a refund for a return. However, chargebacks can incur significant penalty costs and products are rarely recovered. This makes chargebacks very expensive for the merchant.

Terminology 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

Understanding the Chargeback Dispute Process

Dispute processes can vary significantly, but most follow a similar pattern:

  1. The consumer notifies the issuer that a charge is incorrect for one of the appropriate reasons (fraud, missing merchandise, incorrect billing amount, etc).
  2. The issuer notifies the acquirer, who removes the amount in dispute from the merchant’s account.
  3. The merchant is notified and has a certain amount of time to settle or argue the dispute.
  4. 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.
  5. At arbitration, the merchant must show all records relating to the transaction to explain why the disputed charge was correct.
  6. A decision is made, and 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.
  7. If a merchant has too many chargebacks, they’re 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 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 merchants can protect themselves from costly chargebacks and chargeback fraud, including strong fraud prevention and keeping good records. Read more about chargeback prevention in our blog post on the topic.

Post Author: Jackie Long

Jackie Long

Blog Manager at NS8. With a varied background and over 5 years of content creation experience, Jackie works hard to provide a compelling range of informative articles.