Credit Card Chargebacks: What Businesses Should Know

Sep 15, 2023

Dealing with chargebacks is one of the most dreaded parts of business. As long as your business accepts card payments, you won’t completely eliminate chargebacks. Fortunately, there are ways to manage chargebacks so they don’t consume an unreasonable amount of time for your business.

What is a Credit Card Chargeback?

A chargeback is a type of transaction reversal that happens after the customer has already been charged.

When a chargeback happens, the issuing bank—the company that issued the consumer’s credit card—deducts the money from the business’s account and returns the funds to the cardholder. It’s up to the business to prove the transaction is legitimate.

Why Chargebacks Happen

In most cases, consumers have 60 days from their billing date to dispute a credit card transaction. Consumers have a limited number of reasons they can dispute a transaction,

  • The cardholder didn’t authorize the transaction.
  • The customer never received the product or service. Or, in some cases, what they received was damaged or not as described.
  • The customer was billed incorrectly.
  • There were errors during the transaction process. For instance, the cardholder was charged twice.
  • A refund didn’t go through as promised.

Chargeback Fraud

A growing number of businesses are suffering losses due to chargeback fraud—where consumers dispute a credit card transaction with the intent to keep the purchase. Because chargeback rules favor consumers, chargeback fraud can be difficult for businesses to fight against.

Chargeback fraud is expected to cost businesses more than $48 billion in 2023, according to Juniper Research.

With chargeback fraud, also referred to as “friendly fraud”, a customer essentially tries to get out of paying for a purchase by using otherwise valid dispute reasons. Examples include customers who:

  • Knowingly make a purchase and then disputes the transaction
  • Dispute a transaction to avoid the business’s returns process
  • Claim not to have authorized a recurring subscription after several months of using it.
  • Dispute a digital product purchase after using it

How Chargebacks Can Harm Your Business

Unfortunately, the consequences of chargebacks fall on merchants, who have a lot to lose when too many customers dispute credit card transactions.

  • Lost revenue. The most immediate and direct risk of chargebacks is financial loss. When a chargeback occurs, the disputed amount is refunded to the customer, and the business may also incur chargeback fees.
  • Disruption to cash flow. Refunding disputed transactions can strain a business’s finances, especially if it’s a small or startup business with limited capital. Chargebacks can happen weeks after a transaction has been completed.
  • Increased processing rates. If your business has a high chargeback-to-transaction ratio, your business could face fines or increased processing fees from your payment processor or card network.
  • Increased operating costs. Dealing with chargebacks can be time-consuming and may require dedicated resources to investigate and respond to disputes leading to increased operational costs.
  • Loss of merchandise or services. You may not only lose the revenue from the sale but also the product or service provided to the customer, especially if the product has already been shipped or the service has been rendered.
  • Increased reserve requirements. Your payment processor may require your business to put up cash reserves as a buffer for potential chargebacks.
  • Placement in a chargeback program. Both Visa and Mastercard have chargeback programs as remediation for businesses with a high chargeback ratio. Your business may face fines if you can’t reduce chargebacks within a certain timeframe.

Protecting Your Business from Chargebacks

Many chargebacks happen simply because the customer forgot about a transaction or doesn’t recognize your business on their billing statement. Not all chargebacks are preventable, but there are a number of steps you can take to reduce the number of disputes and chargebacks.

  • Provide clear payment descriptors to your card processor. This is the name and information that appears on the consumer’s credit card statement so it should be easily recognizable to avoid confusion. It may help to provide consumers with your billing descriptor to make it easier for them to recognize. Otherwise, consumers may dispute a legitimate transaction because they think it’s fraud.
  • Provide detailed receipts with each transaction. Include a description of the charges, prices, and your business’s contact information. Including your refund policy on the receipt so consumers understand how to contact you with product concerns.
  • Use strong authentication. Always get authorization before processing credit cards. Ask for the CVV code with online transactions to verify the consumer has the physical card with them when they’re making the purchase. Use Address Verification Service (AVS) to validate the customer’s billing address. There may be a small fee for each transaction, but it’s a small price to pay to keep chargebacks at bay.
  • Get the customer’s acknowledgement and agreement to recurring charges. Provide a copy of the agreement and keep a copy for your records. Notifying the consumer before each recurring transaction prevents confusion.

How to Handle Card Transaction Disputes

You’ll have a chance to address disputes and ideally prevent them from becoming chargebacks.

Make sure your customer service team is accessible. Customers often dispute transactions when they’re unable to communicate with the business and resolve the issue directly. Consider offering multiple ways for customers to contact you: phone, email, chat, and social media are popular options. Communicate your business hours and respond to incoming messages quickly.

Address chargeback notices quickly. You’ll have a limited amount of time—which varies by card network and acquiring bank—to respond to a dispute. The clock starts ticking when the dispute is filed, not when the business finds out, which can cut your time even shorter.

Keep detailed records of all transactions, communications, and proof of product delivery to service as evidence when you need to dispute chargebacks. Keep transaction details accessible for at least 180 days after the transaction, so you can respond to inquiries quickly.

By clicking “Subscribe” you agree to HealPay’s Privacy Policy and consent to HealPay using your contact data for newsletter purposes.

Related Posts

What’s New With PCI DSS 4.0?

What’s New With PCI DSS 4.0?

PCI DSS 4.0 is effective starting March 31, 2024. Organizations have a transition period of one year to become compliant.