What exactly are chargebacks?
Chargebacks (also known as payment disputes) are a huge debilitating factor in a merchant’s ecosystem. They not only cost the merchant valuable revenue, but also damage relationships with customers and cause issues that can hinder a merchant’s ability to process payments.
Chargebacks are the primary tool banks use to resolve credit card payment disputes. When a consumer did not authorize a charge, or is unhappy with a product or service, they can challenge the charge with their issuing bank. If the bank feels the consumer’s claim is valid, they will initiate a chargeback in order to reverse the payment.
Moreover, a customer doesn’t even need to contact the merchant to initiate a chargeback!
CHARGEBACK VS. REFUNDS
Chargebacks are not returns or refunds. A return occurs when a customer takes a product back to a merchant for a refund. When a chargeback occurs, the customer bypasses the merchant altogether to resolve the situation through their card provider.
The chargeback process:
The customer is unhappy with a transaction or suspects a fraudulent transaction.
The customer contacts their credit card provider and disputes the transaction. The provider then issues a chargeback.
Once the chargeback has been issued. The bank collects the disputed amount from the merchant's account.
The merchant is notified by the bank of the chargeback.
The merchant has a brief window to attempt to contest the chargeback. If they do not dispute the chargeback, the customer wins the dispute by default.
NEGATIVE EFFECTS OF CHARGEBACKS
The cost of a chargeback doesn’t end with just the collected amount of disputed charges. There are additional costs associated with a chargeback including chargeback fees, administrative fees, and overhead costs such as fulfillment and customer acquisition costs. Furthermore, an increased number of chargebacks cause merchant to likely experience additional problems on the payment processing side of their business. An excessive chargeback rate can lead to the withholding of funds, more restrictive processing requirements, account suspension, or even an outright closure of a merchant account.
Sometimes the chargeback is a valid dispute, but other times it is invalid or fraudulent. The Fair Credit Billing Act of 1974 (FCBA) was passed in an attempt to protect consumers against charges resulting from stolen cards or unscrupulous merchants. It gives guidelines to protect consumers from fraud, such as inaccurate or unfair billing practices. Individual credit card companies set rules for investigation timelines and procedures, which banks and payment service providers must follow. However, over time unscrupulous customers have also learned to take advantage of the system in place, which lends itself to the customer more than the merchant.