Chargebacks: What are they? And how can you make them stop?

Every chargeback tells a story. It could be the story of a child that’s gone rogue on a parent’s credit card. Or perhaps it’s a story about someone who doesn’t recognise the name of a merchant on their bank statement. And, of course, it could also be a story about fraud.

Whatever the story, no one enjoys them. They’re costly, time-consuming, and can result in some nasty fines and consequences. This article will explore what chargebacks are, how the process works, and ways you can prevent and respond to them.

A chargeback is a forced refund initiated by a customer’s bank on their behalf. In some cases, a bank will do this unprompted (if it notices fraud or there’s been an error in the process) but usually it’s initiated by the customer.

There are several reasons a customer might want to initiate a chargeback:

Not all chargeback requests are created equal. Here’s a breakdown of chargeback reasons that have legal backing:

It’s also worth reiterating that the chargeback request must come within 120 days (365 in the case of some issuers). After this time, it has no legal grounds.

Chargebacks and refunds both involve a return of funds, but they’re processed in different ways.

In most cases, a customer simply requests a refund and receives it. But not always. Sometimes a business feels the refund request is outside their policy. Perhaps the items were returned showing obvious signs of use. Or perhaps the business disputes the claim that the items were delivered late or damaged. If a refund is refused, the customer has the option to request a chargeback from their bank instead.

It should be noted that chargebacks take much longer, involve more steps and the associated fees are much higher. So it’s often better to simply issue a refund in the name of good customer relations.

The chargeback process differs depending on the payment provider. On a basic level, a customer requests a chargeback and the bank validates it. Funds are taken from the business’ account and returned to the customer. Once this has happened, you have the opportunity to dispute the chargeback.

In a bit more detail, it usually looks like this:

Customers have anything between 120 days and 365 days to initiate a chargeback. How long it then takes will vary but after eight weeks, the customer has the right to escalate the claim to the Financial Ombudsman Service (FOS).

There are three different types of fraud associated with chargebacks.

1. Genuine fraud; when a customer’s card details have been stolen and items or services purchased without their knowledge or consent.

2. Friendly fraud; when a cardholder wrongly initiates a chargeback due to genuine mistake. This happens when they don’t recognise the name of a business’ trading name on their bank statement, or they simply forget having made a purchase.

3. Fraudulent chargeback; when the cardholder wants a refund although they intend to keep the product or make use of the service they’ve purchased. We’ve seen this in action with opportunists using chargebacks to get free pizzas, or travelers getting refunds on ‘no-show’ charges. And of course it’s used by more sophisticated criminals when they purchase and then resell goods.

There are many reasons to avoid chargebacks. First of all, you’ll lose the revenue you gained from the sale, not to mention the cost of shipping an item if you’re selling physical goods. You’ll also be charged a chargeback fee by your acquirer, which can be anything from £5 to £100. Long term, if your chargeback rate exceeds a certain threshold, you may be subject to higher processing fees since you’ll become labeled a ‘high-risk merchant’. In the extreme, you may even lose your merchant account and have to find another payment processor.

Preventing chargebacks is more important than defending against them. Even if you win the chargeback defense, it’ll still count against your chargeback ratio which means you still risk being labeled ‘high-risk’. Plus, disputing chargebacks is a huge drain on resources.

Although you can't avoid chargebacks altogether, there are ways to lower the amount. Here are key areas to prioritise:

After a chargeback is initiated, you’ll receive a Notification of Chargeback (NoC). From this point, you can choose to defend the chargeback within 14-40 days (see the exact time frame per card scheme).

Start by reviewing the case and the reason code to understand why you received the chargeback and if it’s worth disputing.

Build a case with as much evidence as possible. Try to collect all your interactions with the customer to help disprove the chargeback claim.

For instance, if the cardholder claims they didn’t take part in a transaction, you could provide:

Some payment providers, like Adyen, will automatically defend chargebacks if the case is straightforward. For example, if you’ve already refunded a transaction before the cardholder filed for the chargeback, Adyen’s auto-defense feature will defend it with no action needed on your part.

Once you’ve submitted the defense, the card issuer will either accept or decline it.

See how disputing a chargeback works in practice. Learn how you can defend a chargeback in the Adyen platform: