What Are Chargebacks, and How Can You Avoid Them?

What is a chargeback?

A chargeback is a reversal of funds that occurs when a cardholder asks their bank to cancel a credit card charge posted to their account. Chargebacks differ from refunds: merchants issue refunds, while card issuers handle chargebacks.

Customers might request a chargeback for several reasons: 

• They didn’t receive the product or service.
• The product or service description was inaccurate. 
• The product was damaged or lost during shipping.
• Duplicate billing occurred.
• Recurring billing was not canceled as requested.
• There was a technical error.
• The charges were fraudulent.

Monica Eaton, co-founder and CEO of Chargebacks911, says credit card chargebacks can damage a business’s reputation with banks.

“Banks gauge a merchant’s risk and reliability on the number of chargebacks they receive,” Eaton-Cardone said. “Multiple chargebacks on a regular basis can lead to even greater merchant challenges down the road. Merchants are essentially ‘guilty until proven innocent.’ Chargeback fees and reimbursements are deducted from the merchant’s account automatically — no questions asked.”

Nydelis Ortiz, an underwriting manager at FFB Bank, emphasized that businesses that want to counter a chargeback claim have only a short time to gather information and submit a defense claim to the credit card issuer.

“The issuer will then review all documentation and determine who is liable for the transaction,” Ortiz said. “If the merchant wins the dispute, then the liability either falls on the cardholder, the issuer or the acquirer to pay for the transaction in question, depending on the nature of the dispute and the supporting documentation. If the merchant loses the dispute, they are liable for returning the funds to the cardholder.”

How can you reduce and avoid chargebacks?

Eaton advises businesses to adopt the following best practices to help reduce and avoid chargebacks: 

• Create standard procedures for accepting credit cards.
• Train employees to ensure everyone follows the protocol. 
• Evaluate your team periodically and update protocols as needed. 
• Use the address verification system to authenticate cardholders. 
• Consistently collect CVC2/CVV2 verification codes.

Here’s more advice and best practices on minimizing chargebacks and improving overall customer satisfaction:

Make your policies clear to customers.

• Create clear, detailed product or service descriptions: Let customers know exactly what they’re purchasing by providing clear and detailed product and service descriptions.
• Maintain and publish clearly defined shipping expectations: Advertise shipping policies on your website and provide a copy after each purchase.
• Enact a comprehensive, easy-to-understand refund policy: Display your return policy at registers, post the information on your website and add the details to each paper or digital receipt. Be as specific as possible, stating the return window, restocking fees and exclusions.
• Post company contact info clearly: Set clear parameters for when and how customers can reach your business; return client messages promptly to nip issues in the bud.
• Use self-explanatory billing descriptors: Ensure all product descriptions reference the product or service by name; they should be clear and understandable on receipts. When clients receive a credit card bill, they should see your store name, the transaction date and the correct purchase amount.

Leverage the right technology.

• Use EMV-capable terminals: Ortiz advises brick-and-mortar businesses to adopt EMV-capable terminals (chip readers) to reduce their liability risk for fraudulent transactions. Businesses that process card-present transactions and are not EMV compliant are liable for fraudulent transactions.
• Work with a chargeback management service: Eaton recommends using a chargeback management service with an end-to-end, multitier approach that helps fight and reduce the risk of chargebacks. “The best is a turnkey chargeback management system covering the entire chargeback process,” Eaton-Cardone advised.

Do your due diligence.

• Keep detailed sales records: Detailed records make it easier to fight chargebacks, as you can analyze and review disputed transactions and submit supporting documentation. 
• Be wary of suspicious purchases: Confirm the legitimacy of any suspicious credit card charges before processing them. Credit card companies have protocols, including fraud alerts, to help protect consumers and businesses.
• Understand chargeback regulations: Chargeback guidelines are updated regularly; monitor regulations and adjust your procedures to reflect the most recent rules. 
• Investigate why you’re experiencing chargebacks: Review your chargeback history and identify trends if your business’s chargeback rates increase. “Are you receiving a lot of chargebacks due to fraud? This may be an opportunity to invest in an EMV-capable terminal,” Ortiz advised. “Are your chargebacks related to the quality of goods or services? This may be an opportunity to examine potential areas of improvement within the business.”
• Handle legitimate complaints promptly: You may encounter a customer who must legitimately dispute a fraudulent charge. If they contact you before filing a chargeback, remedy the situation as soon as possible. While you may incur shipping fees and lost revenue, it’s better than dealing with a chargeback dispute (that you’ll likely lose) and a nonrefundable fee.

What are the costs and consequences of chargebacks?

Here are a few financial and reputational consequences of chargebacks:

Chargebacks lead to lost revenue.

Credit card processing companies chargs a nonrefundable fee ranging from $20 to $50 per incident, even if a merchant wins a chargeback dispute. This money is deducted from the merchant account for every chargeback filed. Additionally, the merchant is often liable for covering shipping costs and returning payment to the cardholder.

Chargebacks negatively impact a merchant’s reputation.

A chargeback reflects poorly on your company, even if you win the dispute. If multiple claims are filed against you, you will likely be enrolled in a monitoring program. 

“Chargeback monitoring requires the payment of another ongoing fee,” explained Eaton. “Certain merchants might receive a grace period before becoming fee-eligible, but high-risk merchants are usually hit with fees as soon as they enter the program. Businesses in a chargeback monitoring program are also subject to periodic reviews of their mitigation plan — yet another fee.”

Merchants who fail to reduce their chargeback rates may be charged higher processing fees or have their accounts frozen. Additionally, merchants with frequent forced payment reversals may be added to the Terminated Merchant File, which would result in your business being blacklisted for five years.

Is a chargeback reversible?

While reversing a chargeback is technically possible, it’s not easy — and card issuers typically side with cardholders.

“When a chargeback is issued, merchants must respond to the case with all of the supporting documentation they have to back their claim that a payment was processed without error and that the goods or services rendered were satisfactory,” Ortiz explained. “If they do not respond, they are liable. If they do not provide enough documentation to back their claim, they are liable. If the issuer has additional information from the cardholder that supports their claim, they are liable.”

Consumers will sometimes dispute a legitimate purchase for fraudulent reasons.

“When it comes to merchants’ chargeback rights being violated, the single greatest threat comes from friendly fraud, also called chargeback fraud,” warned Eaton. “Experts estimate that over 85 percent of all chargebacks may be caused by friendly fraud — meaning they file a chargeback without valid justification.”

Chargeback fraud may stem from buyer’s remorse, dissatisfaction with the products or services or confusion about the refund process.

“The only instance where a chargeback will be reversed is if the business submits a valid dispute backing their claim that the transaction was processed without error and the goods or services rendered were satisfactory,” said Ortiz. “Ultimately, it is up to the issuer to determine whether a chargeback will be reversed or not.”

How can you fight a chargeback dispute?

The sooner you address a chargeback dispute, the more likely you’ll experience a favorable outcome. Here’s how to do it:

• Review the chargeback reason code. When a company notifies you of a chargeback, the document includes a reason code. Review the code to learn the reason for the chargeback and any other pertinent details.
• Check with your payment processor. Review your credit card processor’s policies to see if they will handle the dispute on your behalf. If the case is automatically represented, you don’t need to spend time and resources on the case.
• Submit your rebuttal letter and documentation. Should the dispute require your input, complete the rebuttal form by the deadline, along with any supporting evidence.

Manage your chargeback claims

Although dealing with chargeback claims can be time-consuming, managing disputes proactively can save you from unnecessary, painful losses to your bottom line.

“Be proactive and take measures to help reduce the number of chargebacks you are initially exposing yourself to,” said Ortiz. “If you’re strapped for time, maybe prioritize managing chargebacks that are above a certain dollar amount.”

Kimberlee Leonard contributed to this article. Source interviews were conducted for a previous version of this article.