Understanding chargebacks: How to prevent chargebacks, win disputes, and reduce fees

Chargebacks can be an expensive and time-consuming headache for businesses. By understanding what chargebacks are, you can improve your chances of winning, save money, and shift your focus back to your business.

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What is a chargeback?

A chargeback is the reversal of a credit card transaction that occurs because the cardholders has raised a dispute with their bank regarding the purchase.

Although this seems similar to a refund, there is one major difference. A refund occurs when the cardholder contacts the business for a refund, whereas a chargeback occurs when the cardholder speaks to their bank to forcibly take the funds back from the business.

With this in mind, cardholders should first speak to the business about getting a refund. If the cardholder and business are not able to work toward a mutually acceptable solution, only then should the cardholder consider a chargeback.

What are the most common chargeback reasons?

Chargebacks are a legitimate method for a cardholder to retrieve funds that were incorrectly charged to their credit card. Common chargeback reasons include:

  • Fraudulent transaction: The cardholder was the victim of theft or fraud, and somebody else illegally used the card for a transaction.
  • Processing error: The transaction was legitimate but there was a processing error, such as an incorrect transaction amount or incorrect card on file used.
  • Duplicate transaction: The transaction had been processed and it was processed for a second time for the same purchase.
  • Non-receipt of goods or services: The cardholder claims that the goods or services they ordered never arrived.
  • Goods or services not as described: The cardholder claims that the goods or services were different than described and the merchant refuses to refund the transaction.
  • Credit not processed: The cardholder returned the goods and was promised a refund or credit that never occurred.

However, some cardholders abuse the chargeback process and use it inappropriately. Examples include:

  • Chargeback fraud: The cardholder receives a good or service and does not want to pay for it, so they raise a chargeback to retrieve their money.
  • Buyer’s remorse: The cardholder regrets making a purchase and wants their money back.
  • The returns process is too cumbersome: The cardholder wants to return an item for a refund but cannot be bothered following the normal returns process.
  • The cardholder forgot about a transaction: A legitimate transaction was made but the cardholder misremembers and believes it to be fraudulent.

There are both legitimate and illegitimate reasons for chargebacks

What is the chargeback process?

Every chargeback follows a process defined by the credit card networks:

  1. Cardholder files a chargeback. The cardholder has seen a transaction in their bank account that looks fraudulent or incorrect, so they dispute the transaction with their bank.
  2. The cardholder’s bank reviews the case. The cardholder’s bank (known as the issuing bank) reviews the cardholder’s explanation for the dispute and assigns a reason code to the case.
  3. Cardholder is credited for their funds. The cardholder’s bank alerts the merchant’s bank and funds are immediately credited to the cardholder.
  4. The chargeback alert is passed to the merchant’s bank. The cardholder’s bank then passes the case to the merchant’s bank, which then alerts the merchant either online or via mail.
  5. Merchant contests or accepts the chargeback. The merchant can then contest a chargeback if they believe it is unjustified. To do this, they send evidence to their bank, which might include an eftpos receipt, proof of delivery or other relevant information.
  6. The chargeback evidence is passed to the cardholder’s bank. The merchant’s bank then passes the evidence back to the cardholders bank. At the same time, the funds are credited to the merchant. This means there are two active credits at this stage; one with the cardholder, one with the merchant.
  7. The cardholder’s bank reviews the evidence and makes a decision. If the cardholder’s bank decides the merchant’s evidence is compelling enough to refute the cardholder’s claim, they will cancel the cardholder’s credit and finalise the merchant’s credit. Otherwise, they will finalise the cardholder’s credit and cancel the merchant’s credit.

Unfortunately, merchants only have one chance to dispute a chargeback. You cannot dispute a final decision, even with more evidence.

Chargeback process

The end-to-end chargeback process

Who is liable to cover the funds for chargebacks?

By default, chargeback liability rests with the merchant. So for any successful chargeback, the merchant will have to pass the funds back to the cardholder.

However, liability can shift to the cardholder’s bank when a transaction is fraudulent and the merchant has followed the correct security protocols. This means that the cardholder’s bank will pass the funds to the cardholder; the merchant does not lose money.

In-store transactions with chip-and-pin or tap-and-go

Chip-and-pin transactions (also known as ‘insert’ or EMV chip transactions) and tap-and-go transactions have much stronger security measures than magstripe transactions.

Because of this, if a cardholder claims a chargeback due to a fraudulent transaction and chip-and-pin was used, then liability rests with the cardholder’s bank.

Online transactions that use 3D Secure

Unlike in-store transactions, merchants cannot physically inspect the credit card when accepting online transactions. All a fraudster needs is the card number and expiry date to make some dodgy transactions.

To combat this, industry bodies have developed a technology called 3D Secure to improve security for online transactions. An online 3D Secure enabled payment might look as follows:

  1. Cardholder inputs their card details on a retail store website
  2. Data is sent to the cardholder’s bank, that requests more information from the cardholder to confirm their identity
  3. A push notification is sent through the cardholder’s online banking app asking for confirmation of purchase
  4. Cardholder confirms purchase on their smartphone and the transaction completes

If a cardholder’s online purchase goes includes 3D Secure, then liability rests with the cardholder’s bank.

How to prevent chargebacks from happening

They say that prevention is better than a cure. Merchants are better off preventing chargebacks, instead of spending time fighting them (even if they win).

There are a number of simple ways that merchants can reduce the number of chargebacks they receive:

  • Use the latest security technology for in-store and online payments. As we mentioned above, this refers to using chin-and-pin or tap-and-go instead of magstripe payments for in-store transactions, and using 3D Secure for online transactions. By doing this, merchants should reduce the number of legitimate fraud-related chargebacks they receive.
  • Use a clear merchant and payment descriptor. When a customer looks at their bank statement, they should immediately recognise the business they shopped at. Otherwise, seeing an unknown business on their bank statement may result in merchants mistakenly assuming the transaction is fraudulent.
  • Ensure you have transparent delivery and refund policies. Ensure that cardholders are aware of delivery times and refund policies, so they don’t mistakenly believe the merchant is defrauding them.
  • Clearly communicate your product or service. Don’t surprise a customer with a product or service by blatantly exaggerating a feature or benefit. Not only does it tarnish your reputation but disappointed customers will easily raise a chargeback.

How much do chargebacks cost?

You might follow all the best practices for preventing chargebacks but still receive them every now-and-again. Unfortunately, they’re simply a reality of running a business.

It is important to note that some eftpos providers charge a fee for chargebacks. Some examples include: PayPal ($15), Commonwealth bank ($30) and Westpac ($33). Note that Square does not charge a chargeback fee.

In addition, for every dollar lost through chargebacks, merchants lose an additional $2 in lost goods, time and effort, administrative costs, and shipping costs.

Chargebacks cost a merchant almost 3x the value of the transaction in dispute

How to win chargeback disputes

Many merchants feel chargebacks are always foud in favour of the cardholder.

It’s true that chargebacks can be difficult to win. In fact, more than one-third of merchants will lose more than 70% of their chargeback disputes.

However, there are a number of things you can do to improve your chances of winning chargeback disputes:

  • React quickly. Most banks will stipulate that you have 10 days to respond to a chargeback notification (although you should always check this). You need to act quickly to gather your and lodge your evidence. Don’t miss the deadline and lose the dispute.
  • Check the chargeback reason code. Every chargeback comes with a reason code, which identifies the reason the customer gave for filing the dispute. Understanding the reason code will help you determine what type of evidence is required to support your defence.
  • Keep all important documents and submit the right evidence. You need to show clear evidence that the chargeback is not valid. This means you must always hold onto merchant copies of eftpos receipts, invoices, delivery confirmations, and any correspondence with the cardholder.
  • Prepare a chargeback rebuttal letter. Write a succinct and objective rebuttal letter that summarises the situation, the timeframes and your supporting evidence. Make it easy for the reviewer to understand your (evidence-supported) position regarding what occurred.

Other frequently asked questions

What is the difference between a retrieval notification and chargeback notification?

A chargeback is an official notice from your bank that a cardholder has disputed a transaction with your business.

A retrieval notification is an official request from your bank (on behalf of a cardholder) for more information about a transaction. This often occurs when a merchant is unsure about a transaction on their bank statement and want to learn more before lodging a chargeback.

How long do I have to respond to a chargeback notification?

The short answer is that is depends. But most Australian banks require a response within 10 days. You should check with your bank.

Can I dispute the chargeback decision?

Unfortunately no. You only have one chance to present your evidence to refute the chargeback. If the decision supported the cardholder, then there is no opportunity to appeal.