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

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:

• Their card’s been stolen and someone’s using it fraudulently

• They’ve been refused a refund

• They made an accidental purchase or don’t remember making it

• They don’t recognise the trading name used on a billing statement

• They’re trying get free stuff

When are chargebacks legal?

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

• The merchant has gone bust

• The service or items were not up to the quality advertised

• Items were never delivered

• The customer was billed multiple times

• The customer was a victim of fraud

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:

1. The cardholder files a chargeback via their bank. They usually have up to 120 days after purchase to dispute a charge, though some card schemes allow up to 365 days.

2. The issuer reviews the case, assigns a reason code, and initiates the chargeback.

3. The card scheme receives the chargeback and forwards it to the acquirer.

4. The acquirer receives the chargeback and debits the funds from the merchant’s account. The acquirer also charges the merchant a fee ranging between $5-100.

5. The merchant reviews the chargeback and provides a defence document if they choose to challenge it. They must defend the chargeback within 14-40 days (see specific time frames per scheme here). The acquirer forwards the merchant decision through the scheme to the issuer.

6. The issuer reviews the defence document and decides to accept or decline.

7. If the issuer accepts the defence, the acquirer returns the funds to the merchant.

How long do chargebacks take?

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.

What impact can chargebacks have on your business?

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:

Make returns easy

• Refund as quickly as possible when the customer requests one

• Have a clear returns policy

• Provide your email address and phone number on your website and emails so that the customer can easily contact you

Get the goods to the customer on time

• Set a realistic delivery date. If there are delays, let the customer know as soon as possible

• Refund customers proactively if you can't provide the goods/services by the expected delivery date

• Track your goods to monitor their delivery date. Ask the customer to sign for the package on delivery for extra security

Avoid any miscommunication

• Ensure the payment descriptor of your bank account is clear and accurate

• Respond to any customer questions quickly

• Alert your customers if a product is out of stock as soon as possible

• Provide detailed product descriptions on your website

Prevent fraud

• Use authentication tools like Address Verification Service (AVS), card security codes (CVV), and 3D Secure 2

• Make sure your risk system can identify customers who regularly file a chargeback and could be committing friendly fraud

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.

When is it worth disputing a chargeback?

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:

• evidence of their previous undisputed purchases

• proof of delivery at the cardholder’s address

• or any contact they’ve had with your customer service team

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.