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 dispute a credit card charge posted to their account. Chargebacks differ from refunds: merchants issue refunds, while card issuers initiate and process chargebacks, though merchants may still be financially responsible if they lose a dispute.

Monica Eaton, co-founder and CEO of Chargebacks911, warned that chargebacks can hit hard. “Merchants are essentially ‘guilty until proven innocent,'” Eaton noted. “Chargeback fees and reimbursements are deducted from the merchant’s account automatically — no questions asked.”

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.

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 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 so everyone follows the same protocol.
• Evaluate your team periodically and update procedures as needed.
• Use the address verification system (AVS) to authenticate cardholders.
• Consistently collect CVC2/CVV2 verification codes.

Here’s additional advice and best practices for minimizing chargebacks while 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 accurate, 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. Consider requiring delivery confirmation signatures for high-value items.
• Enact a comprehensive, easy-to-understand refund policy: Display your return policy at registers, post the information on your website and include the details on each paper or digital receipt. Be as specific as possible, stating the return window, restocking fees and exclusions.
• Post company contact information clearly: Set clear parameters for when and how customers can reach your business, and return client messages promptly to resolve issues early.
• Use self-explanatory billing descriptors: Ensure product descriptions reference the product or service by name and appear clearly on receipts. If a customer doesn’t recognize the merchant name on their bank statement, they are more likely to initiate a dispute.

Leverage the right technology.

• Use EMV-capable terminals: Ortiz advises brick-and-mortar businesses to adopt EMV-capable terminals (chip readers) to help reduce liability risk for fraudulent transactions. Businesses that process card-present transactions and are not EMV compliant may be held liable for certain types of fraud.
• Work with a chargeback management service: Eaton recommends using a chargeback management service with an end-to-end, multitier approach that helps reduce dispute risk. “The best is a turnkey chargeback management system covering the entire chargeback process,” Eaton advised.
• Implement 3-D Secure technology: Protocols like 3-D Secure 2.0 help authenticate cardholder identity during online transactions by sending transaction details to the issuing bank, adding an extra layer of protection against fraud-related disputes. 

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.

Financially, chargebacks can be expensive for businesses in several ways: 

• Chargeback fees: Credit card processing companies impose a nonrefundable fee ranging from $20 to $100 per incident, even if a merchant wins a chargeback dispute. This money is typically deducted from the merchant account for every chargeback filed. 
• Additional costs: The merchant is also often liable for covering shipping costs and returning payment to the cardholder.
• Processor fees and issues: Merchants who fail to reduce their chargeback rates may be charged higher processing fees or even have their accounts frozen. 
• Chargeback monitoring fees: If multiple claims are filed against you, you will likely be enrolled in a monitoring program, which comes with a fee. “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,” Eaton said. “Businesses in a chargeback monitoring program are also subject to periodic reviews of their mitigation plan — yet another fee.” For context, Visa and Mastercard maintain chargeback monitoring programs with tiered thresholds that vary by volume and risk level. While the exact criteria differ, merchants whose monthly chargeback ratios approach or exceed about 1 percent may face increased scrutiny, additional fees or placement into monitoring programs.

Chargebacks negatively impact a merchant’s reputation.

A chargeback reflects poorly on your company, even if you win the dispute. For instance, if you end up enrolled in a chargeback monitoring program, it may signal to processors and card networks that your business presents elevated risk. Eaton warned that credit card chargebacks can also damage a business’s reputation with banks.

“Banks gauge a merchant’s risk and reliability on the number of chargebacks they receive,” Eaton explained. “Multiple chargebacks on a regular basis can lead to even greater merchant challenges down the road.”

In some cases, that reputational risk can escalate beyond monitoring programs. Merchants with frequent forced payment reversals may be added to the Member Alert to Control High-Risk (MATCH) list — formerly known as the Terminated Merchant File — which can prevent a business from opening a new merchant account for about five years.

What is friendly fraud, and how does it affect chargebacks?

Some consumers dispute transactions they recognize or authorized — a practice often referred to as friendly fraud. In these cases, a cardholder files a chargeback without first working with the merchant to resolve the issue.

“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.”

However, not every dispute stems from intentional abuse. Chargebacks can also arise from buyer’s remorse, dissatisfaction with a product or service or confusion about billing, subscriptions or refund policies. In many cases, customers believe they are taking the fastest route to resolve a problem, even when the transaction itself was legitimate.

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.”

Ortiz noted that a chargeback may only be reversed when a merchant submits strong supporting evidence showing the transaction was legitimate and fulfilled as promised. Even then, the issuing bank makes the final decision on whether to overturn the dispute.

How can you fight a chargeback dispute?

The sooner you address a chargeback dispute, the more likely you are to achieve a favorable outcome. Here’s how to get started:

• Review the chargeback reason code: When a company notifies you of a chargeback, the notice typically includes a reason code (for example, Visa Reason Code 13.1 for merchandise not received). Review the code to understand the basis for the dispute and any additional details.
• Check with your payment processor: Review your credit card processor’s policies to determine whether they will handle the dispute on your behalf. If the case is automatically represented, you may not need to spend additional time and resources preparing a response.
• Submit your rebuttal letter and documentation: If the dispute requires your input, complete the rebuttal form by the deadline and include supporting evidence. Compelling documentation may include order confirmations, delivery tracking with signatures and correspondence with the customer.

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,” Ortiz advised. “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.