What Does Chargeback Mean and How Can You Protect Yourself?

A chargeback happens when a customer tells his credit card issuer that there was a purchase made from his credit card that he did not authorize.

It is a consumer protection policy, and this keeps customers happy because they know that they can count on their banks. If they are victims of fraud, they have an assurance that they will not be paying money for something that they did not order.

In a common situation, this happens when a customer’s card got lost, and then somebody picks it up and buys something online. Usually, these purchases are digital goods like gold or gems for games like World of Warcraft, Candy Crush Saga, and others.

In more serious cases, a customer’s credit card information could have been hacked, and then a person buys an item online, to be shipped to another country, where he will receive it under a fake name.

Many chargebacks are real. What this means is that the credit card holders were really a victim of fraud. However, there are also those who use chargeback to get ahead over others.

These are customers who ordered a product, and the product came in great condition, and yet they will file a chargeback to get their money back, plus the item that was shipped to them.

As an online seller, you need to be able to protect yourself from chargebacks. Here, we will be taking a closer look at this process and help you learn how to keep your sales intact and keep yourself safe from bad customers who can take advantage of you.

A Brief History of Chargeback

The credit card chargeback policy can be traced to the Truth in Lending Act of 1968. However, most experts will say that the real starter of the chargeback law is the Fair Credit Act of 1974.

This was first used to protect consumers against criminals, or bad merchants who charge their credit cards for items they did not purchase.

Let us say that you bought a dress from a store, only to realize that you were charged for two dresses. It is in this situation where you can file a chargeback, so you do not have to pay for the second dress.

In another situation, the merchant may charge you once for the dress today, and then do it again 5 days later, either by mistake or by malicious intent. In this case, you can also file a chargeback.

Why Do Customers File a Chargeback?

There are several possible situations where a customer can file a chargeback.

  • Counterfeit item – if you ordered a Louis Vuitton bag and got a fake one, you can file a chargeback
  • Fraud – you can be a victim of fraud with or without the credit card present. In either case, you did not authorize the transaction, and someone used your credit card to purchase something without permission.
  • Incorrect amount – the merchant charged a higher amount than what you were expecting. In this case, you can get your money back but only for the excess amount that was charged, not for the entire amount of the purchase. If you bought a $10 dress online and got charged $20, you will only get back $10.
  • A defective product received – the product you received is not working.
  • Cancelled transaction – during the time the credit card was swiped, the merchant said it did not go through. You either pay in cash or another credit card, only to realize later that you are billed for that amount that supposedly did not go through.

Customers could call their credit card companies or banks if these things happened. They can file a chargeback, but they must do with within a certain timeframe.

The average allowable time is 120 days from the date of the transaction. If they do it after that, it is likely that the bank will not process their request anymore.

The Friendly Chargeback

There is also a thing called a friendly chargeback.

This is a situation where the consumer is at fault. In a friendly chargeback, the merchant did his job properly, sent the item as described with no damage, and did not overcharge the consumer.

Here are some situations for a friendly chargeback:

Customer does not want to pay for handling fee – in a normal online transaction, customers can only get a refund if they ship the item back to the seller. The problem is, some customers do not want to pay for this shipping or handling fee.

The customer has buyer’s remorse – the customer made an impulse purchase and now wants his money back, probably realizing that he cannot afford what he bought.

Customer does not want to return the item – in this case, the customer loves the product but only wants his money back, and then keep the item for himself

The consumer does not want to wait for the shipping to be completed – some consumers do not read the shipping policies and estimated time of delivery. They will file a chargeback if they think 30 days of shipping is too long.

A relative used the customer’s credit card – sometimes, the cardholder’s son used his credit card to make a purchase. He does not want to pay for it, but his son already has the item, and then he will file a chargeback.

The customer made the purchase but claims he does not remember it – some customers cannot really recall the purchase, and some are pretending not to remember.

The customer is a fraudster pretending to be a victim – here, the customer is a professional fraudster and knows how to game the system.

In many of these cases, the chargeback will succeed. The institutions at fault here are the bank and the government. The laws for chargebacks have not been updated since 1974, and this results in laws and regulations that cannot keep up with what is happening in the world today.

Also, the banks may not have enough employees to investigate the issue fully. As a result, they always favor the customer as it is the customer who makes them money. They will rule in favor of the customer just so the customer stays happy and that the issue can be closed.

Is Chargeback Also a Refund?

No, a chargeback is not a refund.

In a refund, the buyer is agreeing that he has received the product, and he has a real and acceptable reason for asking for a refund.

And for a refund, the buyer must return the item to the seller before the seller gives him his money back. For refunds, only the merchant and the buyer are involved. They agree together that the buyer deserves to get his money back, and it is the merchant who processes the return of payment.

In a chargeback, the bank is involved, and the customer typically does not have to talk to the merchant. An investigation will occur, and several documents have to go back and forth between three parties.

In a chargeback, the bank is the decision-maker, not the merchant.

Also, refunds do not cost fees. Chargebacks, on the other hand, can cost the merchant between $20 and $100. In some countries, the customer who filed a chargeback will also pay a fee that can be at least $5.

In a chargeback, the merchant is the losing party. He has paid off the shipping, and it is not likely he will get the item back, and then he has to pay for a chargeback fee.

In a refund, both the customer and the merchant have losses. Most of the time, this loss is in the form of the shipping cost that both parties paid for.

The Chargeback Procedure

So, what happens if a chargeback is filed?

Here are the steps that occur in a chargeback.

The cardholder files a chargeback

This is the first step wherein the customer will call his credit card company or bank issuer to make a claim. He can use different reasons and then explain to the bank issuer that he was a victim of fraud or unauthorized transaction.

The issuer makes a decision

Depending on what the customer said, the bank may immediately remove the money from the merchant’s account. In these cases, the customer will also immediately get his funds back to his credit card, which will reflect on his billing statement.

However, some consumers may not give a good enough reason, and the representative of the issuer will deny the claim. An example is if the customer said his son destroyed the item, or it got wet when it rained.

The most common reasons where a chargeback cannot be accepted for processing have something to do with the customer’s negligence.

The card network will make a decision

It is not only the banks who are involved in a chargeback processing. The credit card networks like American Express, Visa, and Mastercard, also have a say.

If the card network can prove that the merchant did not make a mistake, or that no fraud occurred, the merchant can get his money back.

But if there is evidence that the customer has a valid reason to file a claim, such as being a victim of fraud, the card network will support the bank’s decision.

The merchant gets involved

The merchant also has a chance to explain what happened. It is during this step that the merchant can admit that a mistake was made, or he can contest or dispute the chargeback.

For example, a merchant charged you cash in a restaurant because the card was not processing. Then, he charged your card two days later. It is in this case that the merchant cannot dispute the chargeback, knowing that he charged you money two times.

But if the merchant has evidence that you received an item he shipped, and that it is in good condition, he can dispute the claim.

The card issuer re-presents the chargeback

If a merchant files a dispute, the credit card network will contact the issuing bank to review the transaction again, and then conduct further investigation.

This is the final step where the bank has to make a decision as to whether they will issue the money back to the merchant, or to the customer.

Ways How to Prevent Chargebacks

A chargeback is a lengthy process that can take three months to complete or more. It is also costly, as the merchant will lose the profit, the shipping money used, and also pay huge fees to the bank. He may also have a bad record in the issuing bank’s credit books.

If you are the merchant, you do not want this to happen to you. What you want is to protect yourself from chargebacks, especially the friendly fraud ones.

Here are some things you can do to protect yourself:

Follow the procedure

Every payment processor has a procedure, and you are expected to follow them. For example, you have to ensure that the card is not expired, or that you document your conversation with the buyer, especially for online transactions. You have to ensure that the buyer agrees that he is buying the product willingly.

You can do this by sending an email and asking for a reply for approval, or getting the customer’s IP address. You can also use payment processing systems that require a password and not just the card’s security code at the back.

You should also get a proof of delivery from your shipping partner, showing the name of the recipient.

Use a recognizable name

If your business name is ABC Company, then the name that must appear on the customer’s credit card bill is ABC Company, not The Good Guys. A name that matches your store will help a customer remember that he went there and bought an item.

This is called payment descriptor. You are in control of the name that appears here, and you can do this when you are filling up the application form of a payment processor.

Respond to customers quickly

Customers want answers, especially for online purchases, where the shipping can take so long. If they inquire, make sure you respond and set their expectations. If you don’t, then they would think you are a fraudster so they will call their banks and file a chargeback.

See the signs

If you take credit card payments online, you should watch out for red flags or warning signals. An example is of the shipping address is different from the customer’s billing address. If a customer’s credit billing address is USA, but he wants the items shipped to Nigeria, this should sound the alarm bells.

In this case, you need to ask for proof of identity, such as billing statements that match the credit card billing address.

Summary

A chargeback can hurt your business. You must be aware that not all customers are good guys. There are real fraudsters in life, and there are simply bad people who want to get ahead of others, even if it means they are dishonest.

If you are an honest merchant, do not be afraid to fight chargebacks, especially in cases where you did your job and shipped the item in good condition.

But more importantly, prevention is better than cure. Use technology to your advantage and only use strict and electronically safe processing systems.

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