Chargeback | B2B Finance Glossary

What is a Chargeback?

A chargeback – also called a reversal – occurs when there is a cardholder dispute. This happens when customers make a claim via their issuing bank and state that the payment they made to your company was fraudulent or made without their consent. When this happens, the disputed funds will be held from your business until the card issuer can get to the bottom of the issue and then choose which course of follow-up action to take. If the bank rules against your business, the funds will be returned to the cardholder. If the bank rules in favor of your business, you’ll receive the disputed funds.

What is the Difference Between a Chargeback and a Refund?

Customers might confuse a chargeback with a traditional refund, but chargebacks and refunds are two very different things. To initiate a refund, a customer will make an inquiry directly with the merchant in order to get the funds back; however, a chargeback occurs when a customer asks the inquiring bank to intervene directly in the situation.

If the merchant cannot prove to the customer’s bank that the charge was not initiated by the customer, the merchant loses not only the revenue from the sale but also the money associated with overhead costs, labor costs, and credit card fees that were involved in making the sale happen in the first place.

On top of all of this, the merchant also incurs a chargeback fee that they must pay to the customer’s bank as a result of the chargeback process.

What are the Different Reasons Chargebacks Occur?

A chargeback is usually put into effect as a result of fraud, but it can also occur if a consumer is not satisfied with her product or service. Here are the four main categories of reasons for chargebacks:

• Fraud. If a customer thinks someone used her credit card information to make a transaction without her knowledge, it’s likely that she will let her bank know, and a chargeback will occur. However, sometimes customers forget about purchases they made or are confused when it comes to their billing statement because the charge made might be tied to a different business name if the business she made her initial purchase from was operating under a DBA. So, the top reason for most chargebacks is true fraud; however, it’s still important to remember that customers can make errors, and a chargeback will still occur as a result of this.
• Poor quality. A customer might initiate a chargeback if he or she thinks that the product or service delivered was not up to the standards that were advertised. It’s also likely that a chargeback will occur if the product or service was never delivered.
• Clerical errors. If a customer is accidentally billed more than once for a single purchase, she can contact her bank and initiate a chargeback.

How Long Does a Business Have to Reverse a Chargeback?

Once a chargeback is initiated, the merchant must respond within a certain time limit. This time is set by the payment processor and usually lasts 30 days (however, some processors might have a different time limit). Within this time period, the merchant needs to provide enough evidence to show that the customer knowingly initiated the payment and that the charge is not fraudulent.

The merchant can do this by providing receipts, proof of communication with the customer, acknowledgment of the payment, a contract, or anything else that shows the customer agreed to the charge.

How to Reduce the Risk of Chargebacks Taking Place

• Show proof of shipment or delivery. In order to avoid customers being able to file chargebacks on the basis that they never received their shipment, your business can enlist tracking information providers to prove that items successfully reached their destination.
• Avoid manual processing. By avoiding manual processing, you can also avoid human errors, such as charging customers more than once or entering the wrong credit card number. The result? Fewer chargebacks.
• Make it easy to get in touch. If you add your phone number to all credit card transactions and encourage customers to call you before requesting a chargeback, you’re much more likely to avoid getting hit with a time-consuming process and added fees.
• Make your billing details clear. Make sure that your customers can clearly see the name of your business – and not your parent company – on any credit card receipts and billing statements. That way, they’re much more likely to recognize the transaction, and they won’t file a claim for a chargeback.