Chargebacks 101

Description: Provides guidance for merchants on understanding, preventing, and responding to chargebacks. Covers the chargeback process, merchant response options, best practices, and strategies to reduce disputes and protect revenue.

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What Is a Chargeback?

A chargeback happens when a cardholder disputes a transaction through their bank, and the bank reverses the payment. Unlike a refund that you initiate directly with the customer, a chargeback is initiated by the issuing bank.

Chargebacks are designed to protect consumers from fraud or errors, but they can also occur because of misunderstandings, delivery issues, or even “friendly fraud” — when a customer disputes a legitimate purchase.

How the Chargeback Process Works

1. Customer Disputes a Transaction: The cardholder contacts their bank about a transaction they don’t recognize or believe is invalid.
2. Bank Reviews the Claim: The issuing bank reviews and, if valid, initiates a chargeback through the card network.
3. Funds Are Reversed: The transaction amount (plus any applicable fee) is deducted from the merchant’s account.
4. Merchant Responds: The merchant can either accept the chargeback or challenge it by submitting evidence that the transaction was valid.
5. Bank Decision: The bank reviews the submitted evidence and decides whether to uphold or reverse the chargeback.

Merchant Response Options

• Accept the Chargeback:
  By accepting, you agree not to dispute the claim. The funds previously removed from your account will remain with the cardholder, and the case will be closed.
  Merchants often choose this when the dispute is valid or the documentation is insufficient to contest it.
• Contest the Chargeback:
  You can submit supporting evidence to prove that the transaction was legitimate. Examples of useful documents include:
  
  • Copy of signed receipts or invoices
  • Proof of delivery (tracking numbers, signed delivery confirmations)
  • Customer correspondence (emails, chat logs, service confirmations)
  • Refund policy acknowledgment or terms agreed by the customer
  • Screenshots or system logs confirming service access or usage

Timely and complete documentation increases your chances of successfully reversing the chargeback.

Pre-Arbitration and Arbitration

If the issuing bank doesn’t accept your evidence, they may initiate a pre-arbitration stage. You can still respond, but additional documentation is usually not allowed at this point.
If the dispute continues, it may go to arbitration, where the card network makes the final decision. If the ruling goes against you, you may be charged additional fees.

How to Prevent Chargebacks

• Use clear product descriptions and accurate billing descriptors.
• Ensure delivery confirmations and maintain proof of fulfillment.
• Make your refund and cancellation policies visible and easy to understand.
• Provide responsive customer support to resolve issues before they become disputes.
• Implement fraud-prevention tools like 3D Secure, AVS, and CVV checks.
• Monitor transactions for suspicious behavior and maintain detailed transaction records.

Best Practices

• Respond to chargebacks as soon as they are received — deadlines are strict and vary by card network.
• Always provide complete documentation in your initial response.
• Keep an eye on your chargeback ratio — a high rate can lead to higher fees or account restrictions.
• When possible, resolve issues directly with customers to avoid formal disputes.

In Summary

Chargebacks are part of doing business with card payments, but proactive communication, clear policies, and quick responses can significantly reduce their impact.
By maintaining good records and following best practices, you’ll be better equipped to defend valid transactions and protect your revenue.