Chargeback Process: What It Is and When Will You Need It?

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Customers can initiate a chargeback by requesting that their issuing bank remit the funds they had spent at the merchant back to their account. Online stores regularly face chargebacks, so their owners must understand what causes them and how to protect themselves from financial losses.

chargeback process: A man makes a payment with his phone
A man makes a payment with his phone.

Understanding what chargebacks are will help you prevent or mitigate the losses and ensure that customers and sellers don’t have any issues. For this reason, today we will cover the chargeback process: what it is, and when will you need it?

Chargebacks: What Are They?

At the root of every chargeback is a contested payment. That means that both the seller and the customer can request it. However, in the vast majority of cases, it’s the cardholder who raises the issue. The issuing bank may also submit a chargeback if they feel it’s necessary for technical reasons. Once sellers know the chargeback, they may accept or defend the transaction. If they approve the chargeback, the charges in dispute are voided, and the money is sent back to the cardholder.

However, if the seller chooses to deny the chargeback, they must justify it along with the necessary documentation. In this situation, the issuing bank has the final say on whether or not to reverse the charges based on the proof the seller has submitted. That means that the burden of proof falls squarely on the shoulders of an online seller.

Common Reasons Why Consumers File Chargebacks

There are a variety of possible reasons why someone would initiate a chargeback. For instance, a merchant may have improperly charged a customer for goods or services they never got; or they may have made a technical error that resulted in a double charge; a customer’s card information may have been hacked, or all of the above. However, the most common reasons for a chargeback are:

1. Difficulties With Shipping, Product Quality, and Refunds

If a consumer is dissatisfied with a product or service (say, because the products supplied by the merchant are faulty), or if the customer never receives the product or service, the customer may register a chargeback. Additionally, the customer may submit a chargeback if the consumer asks for a refund after returning an item and does not get the expected amount.

2. Trouble With Credit Cards

Most chargebacks occur because of fraudulent or otherwise unauthorized purchases. However, they can sometimes come as a result of miscommunication. For instance, if you are moving, you need to notify your providers of utilities and subscription services that you are doing so. When this happens, most businesses assume the person hasn’t paid their bill and attempt to charge them for it, which often results in a late payment fee or a fraud-related chargeback.

3. Technical Difficulties

And lastly, chargebacks may come as a result of inaccurate billing and duplicate billing. Duplicate billing occurs when a customer is charged more than once for the same transaction, either by the vendor or the customer (in the case of the latter, because they accidentally pressed the PAY AMOUNT/PAY button more than once). If the customer’s issuing bank declines the transaction but charges the customer’s account, the customer may also file a chargeback.

The Chargeback Process

The business or the cardholder’s issuing bank may start the chargeback procedure by calling them or using a banking app. If a customer begins the process in a store, the procedure is similar to a regular purchase. The only difference is that the money goes from the merchant’s account to the cardholder’s issuing bank. If a seller starts a chargeback, the process begins with a request from the merchant to the acquiring bank. To move money from the merchant’s account to the cardholder’s account, the acquiring bank has to make contact with the card’s processing network.

Who Bares the Cost of a Chargeback?

If the issuing bank requests a chargeback, it is the issuing bank’s responsibility to coordinate the chargeback. The bank has to coordinate with the receiving bank through its processing network. If everything looks correct, the seller’s bank will get the signal and provide the go-ahead for the funds’ transfer. However, if the issuing bank determines the charge was fraudulent, the cardholder may request a chargeback, and the claim will be sent to the bank’s collections division.

While investigating and settling the claim, the bank takes responsibility and pays for it out of its reserve fund. Typically, the acquiring bank will charge the merchant a fee for each chargeback transaction. A merchant account agreement should include the specifics of these costs. Banks assess fees for each transaction to offset the expenses incurred by the processing network.

How Long Can the Process Take

You must generally submit a chargeback within 60-120 days of the original transaction. However, this time frame varies per payment processor. You can dispute claims up to 60 days from the billing date.

What Happens Following the Chargeback Procedure?

Whether you win or lose your appeal, the chargeback procedure may continue. In pre-arbitration, the cardholder has the opportunity to provide the bank with fresh evidence in support of reopening the case. Arbitration is the next step if the retailer denies responsibility. Once the payment process makes an arbitration decision, the losing side cannot file any further appeals.

Now you know all the necessary elements of a chargeback process: what it is and when will you need it? You have an idea of how complicated and time-consuming the process can be. If anything, you can be certain that preventing them is the best course of action. It’s bad enough that chargebacks jeopardize retailers’ ability to accept online payments, but the continual possibility of lost income is a perpetual concern, too. The longer you have a high chargeback rate, the harder it will be to locate a reliable payment processor to deal with you.

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