What Are Chargebacks?
History of the Chargeback
Nearly every business accepting credit cards today has received a chargeback. Chargebacks have been a concern for all businesses since the 1970s when The Fair Credit Billing Act of 1974 was created, considered the beginning of the chargeback; a method of consumer protection.
Cardholders who have been victims of fraud or dishonest merchants have protection under the law which is a huge selling point for card issuing banks. The chargeback guarantees that cardholder funds will be secure no matter what happens to their card or their card information.
Chargebacks help customers secure a refund or dispute a purchase. The chargeback process cancels and reverses the original charge. The funds that were previously deposited into the business’ bank account are debited and held until the dispute is resolved. During the dispute process, credit card issuers provide cardholders with a temporary credit.
The main difference between a refund and a chargeback is during the chargeback process the customer goes above the business and contacts their bank directly to initiate a dispute. Normally this is done when the cardholder is unable to receive the desired result from the merchant. At the conclusion of the chargeback process, if the bank believes the customer is incorrect in the dispute process, the funds are returned to the business.
Purpose of the Chargeback
The original intent of the chargeback was to protect customers from fraud and deception.
• Customer satisfaction is a leading factor with chargebacks. Businesses that provide high levels of customer satisfaction will have minimal chargebacks.
• Chargebacks force merchants to sell sound products and services that are as described while offering customers good customer support.
• The chargeback window (180 days after the card is charged), guarantees that the products sold are fully functional and delivered as promised.
• With data breaches becoming something of the norm in society today, many cardholders are not surprised when they see a fraudulent charge on their card. Chargebacks help to easily dispute fraudulent transactions and keep customers safe.
Legal Use of the Chargeback
When a cardholder sees a transaction they do not recognize, their first reaction should be to contact the merchant and ask for clarification, which is not always the case. Card issuers should also confirm that cardholders have spoken to the merchant prior to opening a dispute, which is also not always the case either.
Most of the time, the transaction was for a product or service that the cardholder did not remember purchasing but once they speak to the merchant they recognize the charge. If the charge was an over payment or a mistake, having the merchant issue a credit immediately is a much easier and faster resolution to the problem. Chargebacks are rarely resolved within 30 days, with most of them stretching 2-3 months. It is highly recommended to contact the merchant first.
When blatant fraud has occurred, it is in the best interest of the cardholder to contact their bank and have the charges disputed while also requesting a new card. This will immediately stop any additional fraud and alert the card issuing bank to the fraud on your account.
The only issue with chargebacks is when cardholders try to game the system and file fraudulent chargebacks in order to receive a refund when one is not warranted. In the industry this is called “friendly fraud”.
An illegitimate chargeback is friendly fraud. A customer files a chargeback instead of traditionally returning the product or contacting the merchant to resolve the issue, if any issue actually exists.
Chargebacks have become a double-edged sword in the card world. Chargebacks were initially instituted as a consumer safeguard; however, they have been transformed into a costly dagger; decreasing the revenue of businesses throughout the world when customers file chargebacks with the sole intention of stealing from the company.
The most common reasons for friendly fraud or chargeback fraud are:
• Avoiding previously agreed upon fees such as; handling and restocking fees.
• Customer has buyer’s remorse.
• Return process is taking longer than the customer wants to wait.
• Customer was not patient enough to wait to receive the product
• Customer waited too long to return the product.
• A family member purchased a product on the card and the cardholder does not want to pay.
• Cardholder forgot and/or does not recognize a transaction and called the bank instead of calling the merchant first.
• Cardholder is planning on reselling the items they have purchased.
Last year, over $100 billion in lost merchandise, fees and revenue was realized by internet merchants. It is estimated that $4 billion of that was directly correlated to friendly fraud, however; the actual number is much higher. A recent survey confirmed this by finding that 81% of respondents have previously filed a chargeback because they didn’t have the time to request a refund from the business.
Hopefully in the future, merchants and customers will make it easier to work together through returns and disagreements, thus decreasing the amount of fraud and chargebacks.