What is a chargeback – and why do they happen?
From your customer’s perspective, a chargeback is a reversal of a payment transaction, in an attempt to get their money back.
The difference between a chargeback and a refund is that with a chargeback, instead of your customer trying to get a refund through your normal process, they would take up the issue with their bank.
Chargebacks give cardholders a way to claim back money for transactions that they or their bank feel isn’t justified.
By definition, chargebacks can cost your business money – so it’s important to know what they are, how to respond to them, and how to prevent them from happening.
A chargeback can happen for many different reasons:
- The customer doesn’t recognise the payment on their statement (this could potentially be due to fraud)
- The goods or services the customer ordered weren’t delivered
- The customer was expecting a refund that hasn’t come through to their account
- An error with the sale. For example: the customer was charged twice for one set of goods; or they were charged the wrong amount; or if they cancelled a subscription plan but were still charged.
- You or your customer has made an error at the point of sale, such as by using a card that’s expired
Chargebacks may also happen because the customer’s bank disputes a transaction, for example:
- The transaction was not authorised by the cardholder’s bank
- The account is closed
- The incorrect card details have been processed
About the chargeback process
Chargebacks happen in several stages:
1. Request for information, also called a ‘retrieval’.
(Sometimes this step is skipped, and the claim immediately jumps to step 2)
If a customer or their bank simply wants to question what a transaction was, they can send a ‘request for information’. This only requires that you respond with information about the transaction in question, usually just requiring a copy of the transaction receipt.
At this stage, you won’t be required to pay back any money. You’re encouraged to respond a request for information as quickly as possible.
If a claim reaches this stage, the money is automatically taken from your merchant account and returned to the customer or their bank.
There will nearly always be an additional fee from your acquirer for each chargeback claim on your account.
3. Dispute / No dispute
If you want to dispute the chargeback, you’ll have a certain amount of time to defend it by providing evidence, depending on the reason the chargeback was raised. An example would be to provide the merchant receipt of the transaction. That’s why it’s important you keep your merchant receipts safe for record keeping.
Alternatively, you can choose to not dispute the chargeback if it you see it as a legitimate claim.
Even chargebacks which you successfully defend will ultimately cost you money or time, due to the resource involved in order to defend them.
4. Refund (if applicable)
If your chargeback defence is upheld by your acquirer and the customer’s issuing bank, then you will be given the money back in due course.
If you lose the chargeback appeal, then the customer keeps the money and you will unfortunately be out of pocket. The disputed amount will be added to your merchant bill, and the customer will keep their money.
What can you do to prevent chargebacks?
There are lots of ways that you can protect your business from chargebacks, ranging from common sense methods, to some less obvious best practices:
For more in-depth information on chargebacks and how to prevent them, please visit our help and support page.
Now you’re clued up on chargebacks and how to prevent them, you might want to read our other introductory guides on payment security: the beginner’s guide to PCI DSS, and the beginner’s guide to preventing fraud.
Or for more in-depth info on chargebacks and how to prevent them, visit our chargebacks help & support page.