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Chargeback Management

What is a chargeback?

A chargeback is the reversing of a credit card transaction.

When a customer buys a product or service, money moves from the customer’s bank account to the seller’s bank account. A chargeback causes the money to be taken back from the seller’s bank account. It is then returned to the customer’s bank account. The credit card transaction is no longer valid.

Businesses can lose a lot of money from chargebacks. Businesses should, therefore, try to avoid receiving chargebacks as much as possible. More information about how to avoid chargebacks is below, including using BinLists.COM to check for fake cards.

What are chargebacks used for?

Chargebacks started in the 1970s. They protect customers from dishonest sellers and from illegal use of credit cards by criminals.

Chargebacks protect customers against other people using their credit card illegally. If their card is used illegally, they can get their money back.

Businesses don’t want to get chargebacks and are therefore more likely to do everything they can to avoid them. They are, therefore, more likely to provide:

  • excellent customer service
  • good quality products and services as described
  • delivery on time
  • refunds if there is a good reason for a refund

A chargeback can be caused by:

  • conditions for conformance
  • illegal use of the customer’s card; a credit card is used without the owner’s permission
  • a technical problem with using the credit card, where a seller has made a mistake at the point of sale
  • a customer is unhappy with the product

How chargebacks affect merchants and consumers

Chargebacks involve a lot of time and cost for the business. Chargebacks should be that last option for customers wanting to get a refund.

The costs to a business include:

  • Every time a chargeback is requested, there are administrative fees.
  • The business can’t resell the product if the customer keeps the product as well as filing a chargeback. The business loses profit from being able to resell the product.
  • If a business has too many chargebacks requested, it will get a fine.
  • If a business continues to have too many chargebacks, they can be black-listed by the bank. This means they might need to get money through accounts that have high fees.
  • Processing chargebacks and filling out all of the paperwork takes up a lot of time.

The costs to customers include:

  • Chargebacks take up to several months to be processed. Funds won’t be available quickly. This is in contrast to a refund where the money is available right away.
  • If the bank finds out that a customer has asked for a chargeback for reasons that aren’t genuine, the credit card account could be closed. This could affect a consumer’s credit score.
  • A business could successfully dispute a chargeback. In this case, the consumer might have to pay the chargeback fees.
  • Some cardholders might ask for chargebacks often for reasons that aren’t genuine. They might not be taken seriously when they have a real reason to ask for a chargeback.
  • Chargebacks are expensive for businesses. They need to increase their prices to make up for the money that they lose on chargeback fraud.

When should a customer ask for a chargeback

The purchaser's credit card has been used illegally...

If a customer has their identity stolen or someone uses their card without permission, they should contact the bank straight away to report it. The bank might start a chargeback process.

Sometimes a customer might think that their card has been used by someone else. The customer might see a transaction on their account for something that they think they didn’t buy; or they might see a business name that they don’t recognize.

The customer could contact the seller to ask them about the transaction to check if it was a mistake. There might be a simple explanation. For example, the customer might have just forgotten that they bought the item; or the seller might have made a mistake. In these cases, a refund straight into the customer’s account will be arranged much more quickly than a chargeback.

Chargebacks can take between 6 to 12 months to process. Refunds only take a few days to process.

The customer is unhappy with the item they bought...

Sometimes, a customer is, for some reason, unhappy with the items they have bought. For example, the customer thinks the items they bought:

  • haven’t been delivered
  • are broken or don’t work properly
  • aren’t the same as what was described or what they expected

In these cases, the customer should first try to contact the business for a refund. A refund will be processed much more quickly than a chargeback.

If the customer decides that they can’t be bothered with getting a refund, they might try to get a chargeback. Instead of going back to the business, they contact their bank. They ask the bank to start a chargeback process, and take the money back from the business’ bank account (see the section on ‘How is a chargeback processed?’).

The customer should be careful about making a chargeback request just because they’re unhappy with the product. If the bank decides that they don’t have a good reason to get the money back, the customers actions could be seen as stealing—‘chargeback fraud’ (see below, ‘What is chargeback fraud?’).

How is a chargeback processed?

  1. The chargeback is started...
      A customer asks for a chargeback because they don’t want to pay for the charges on their credit card. This might be because they think that someone has used their card without permission, or because they’re unhappy with the item they bought.
      The bank that issued the credit card starts a chargeback process because of a technical problem with the credit card.
  2. Where the customer starts the chargeback, they contact the bank that issued the credit card. They explain what the problem is—the reason for the chargeback. They then ask for their money back.
      The bank that issued the card checks the details of the claim. They check the details to see whether there really is a problem.
      If they find that there is no problem, the customer will need to go ahead to make the payment.
      If the bank finds that there is a problem, they will temporarily put the money back into the customer’s account. The bank then starts the chargeback process.
  3. The bank that issued the card will get the money from the credit card company (eg Visa, MasterCard, etc). The credit card company then gets the money from the bank of the business that sold the item or service.
  4. The business’ bank tries to fix the problem automatically. If they can’t, they take the money from the businesses account. They then contact the business to ask them for more information about the sale.
  5. The business then have the chance to give the bank more information and documents about the sale. They have to do this within a certain amount of time. When they give the bank this information, an analyst at the bank will look through it and decide if the information is enough to make a decision about the chargeback process. If it is, they send the information to the credit card company (eg Visa, Mastercard, etc).
  6. The credit card company looks at this information and decides if the argument against the chargeback is successful or not. Either:
      The credit card company agrees that the original sale was proper and legitimate. The business will get its money back.
      The credit card company finds that there was a problem with the original sale. The money that has already been given back to the customer, stays with the customer.

If the business wants to make an argument against the chargeback, they only have a short amount of time to do this. This time is set by the credit card companies (Visa, Mastercard, etc). For Discover, MasterCard and Visa credit cards, the business’ bank has only 45 days to give the credit card company the information about the chargeback. For debit chargebacks, they only have 10 days to give the credit card company this information.

Use of a chargeback management system

A chargeback management system can be used to help businesses to make the chargeback process easier.

Many banks and financial institutions have some kind of chargeback management system. This can be an online system. This can also be a free service depending on the bank.

Using a chargeback management system that is online is better for the business. It means less paperwork and mailing costs. It also makes communication between the bank and the business easier and quicker.

If the business doesn’t use an online chargeback management system, all of the chargeback paperwork will be done by mail or fax.

How to reduce the likelihood of chargebacks for a business

The best way for a business to avoid chargebacks is for all employees to be trained properly.

This means that they provide high quality products and services. They offer excellent customer service that is quick and pays attention to the needs of the customer.

This also means that they know how to check credit and debit cards to see whether they are genuine or not.

Employees can check whether credit cards are genuine or not by using the free service at BINLists.COM. Using, employees can lookup, validate and verify BIN and IIN numbers of any debit or credit cards.

Other ways of recognising credit/debit cards that might not be genuine can be found at:

What is chargeback fraud?

Sometimes a customer might ask for a chargeback for reasons that aren’t genuine. If they do this, their action can be considered fraud. Such improper reasons include:

  • having ‘buyer’s remorse’—no longer wanting the item
  • trying to avoid a restocking or handling fee
  • not being bothered to go through the return and refund process
  • not patient enough to wait for the item to be delivered
  • they did not return the item within the time limit, and it has expired
  • a family member bought something using the credit card, and the cardholder doesn’t want to pay the bill.
  • they forgot about or didn’t recognise the transaction.
  • they want to make some extra money (they are intentionally committing fraud)

If a customer is not satisfied with the item they bought, they should ask for a refund. This means that they take the item back to the seller. The seller will be able to sell the item again.

If a customer asks for a chargeback instead, they can keep the item. They also, at the same time, still get the money through the chargeback process. They get both the money and the item. The business can’t sell the item again, and they lose the money too.

This is called ‘chargeback fraud’ or ‘friendly fraud’. Chargeback fraud is very common. It can result in large financial losses for many businesses.

It is very important the businesses know that they can, and should, argue against chargebacks (see above—How is a chargeback processed?). When a bank sends the business the paperwork about a chargeback, the business should fill it out and send it back.