What is a chargeback? And how does it affect your business?

What is a chargeback? And how does it affect your business?

A chargeback is a form of refund process where the customer seeks a return of funds from the merchant.

It is a process with steps in it intended to protect both the merchant and the card holder from potential fraudulent transactions and honest mistakes.

A chargeback can occur for a variety of reasons, but essentially it will be because a customer disputes a payment on their bank statement and so they ask their bank to return the funds from the merchant’s bank. There is a dispute procedure which should offer some protection to the organised merchant from unjust disputes. Chargebacks should only take place when it can be proven that the initial transaction took money unfairly, mistakenly or fraudulently for a range of reasons.

The cardholder may have been charged for goods they never received, a fault with the payment terminal or electronic point of sale may have caused an accidental charge, the cardholder may have had their card information stolen or compromised, or the merchant may have accidentally charged the cardholder twice. 

Chargebacks are different from failed or voided transactions. The latter occur when either the customer or the merchant cancels the transaction before any monies are transferred from one bank to another. Chargebacks are required to return funds to the cardholder after a transaction has taken place.

Chargebacks can be requested for both credit and debit cards and are usually initiated by the cardholder’s bank. There is generally a chargeback period of around 120 days following the initial purchase or delivery of goods in which the cardholder can dispute a charge, although this timeframe can change depending on the payment type and payment processor

How does a chargeback work for merchants?

Once a customer initiates the chargeback process with their bank, the merchant has very little control over the process. They will be issued with a request for information (RFI) which should give them sufficient information to identify the transaction in question. 

The merchant will then have a set period of time in which to dispute the chargeback request. The way to respond will depend on why the transaction is being disputed and can take a wide variety of explanations.

It might be as simple as “the transaction was a chip & PIN transaction and happened at our Winchester store”, or detailed history of the customer contact record to a claim for damaged goods and the merchant’s refund policy. The better the merchant has explained their terms & conditions, kept their transaction records and customer contact history, the better their chance of successful appeal. 

If the merchant’s appeal is unsuccessful or they do not respond, the funds will be taken straight out of the merchant’s account and deposited to the customer’s account. The merchant may also be required to pay a fee to the acquirer to cover the costs incurred by the processing network. The sum of these fees varies between different payment processors but should be detailed in the merchant’s account agreement. 

To protect against receiving frequent chargeback requests from customers who don’t recognise the transaction on their bank statement, it’s important that the description associated with the merchant account relates to the business in question.

For example, RSM 2000’s EventPay service uses a generic ‘Event Payment Services’ description as most people will be able to remember the event they attended and can relate their payment to that event on a particular date. 

If a merchant uses a less identifiable merchant description at events, such as the business owner’s name or business’s name and location, they may leave customers confused when they check their bank statements. 

For example, if the merchant is “JJ Furniture Birmingham” and they sold furniture at an event in London, the cardholder may be more likely to dispute the transaction on the basis they have never been to Birmingham.

How does a chargeback work for customers?

Raising a simple query on a transaction is straightforward, but initiating a chargeback can be more difficult and time-consuming. If the merchant is able to identify that a valid transaction took place, then the customer will have to explain why they feel the transaction is incorrect and persuade their card issuer that they have a valid claim.

If a customer requests a chargeback due to fraudulent activity on their credit or debit card, the process is generally simpler as banks will usually take a more sympathetic view of their situation and will be supportive in their handling of the chargeback request. However, the issuer will probably disable their card on the basis it has been compromised, so the card holder may be without a means to pay for several days whilst a new card is sent.

When a card holder raises a query on a payment, the customer’s issuing bank communicates via the payment processing network to issue a request for information (RFI) to the merchant. The merchant’s acquiring bank will receive this request and alert the merchant who will be sent the request and given a set period of time to confirm that the transaction was valid, or to dispute a chargeback request if they feel it’s invalid.

If the merchant doesn’t dispute the chargeback request then the funds will automatically be taken from the merchant’s bank and deposited into the cardholder’s account. 

In the case of a chargeback being requested for the return of funds that were taken fraudulently, the customer’s bank may issue the customer with the funds in advance while the chargeback claim is ongoing. 

In these situations, the bank shoulders the expenses and liability for the chargeback by issuing the customer with money from the bank’s reserve of funds. These funds will then be settled directly into the bank’s reserves when the claim is settled. 

Is a chargeback the same as a refund?

A chargeback is a form of returning funds to a customer, so, in some cases, it may be viewed as a refund. However, chargebacks differ from refunds as, due to the various different reasons leading to a chargeback, the customer isn’t always required to return their goods in order to receive the refund. Indeed, in some cases the card holder may never have received the goods in question.

One of the most frequent reasons that a merchant may be required to issue a chargeback is if a customer wishes to return an item but is frustrated by the merchant’s returns process. If selling on-line it’s important that the Merchant adheres to the distance selling regulations whereby a customer can return items without having to give a reason.

If a customer feels they have been unfairly denied a return of funds by the merchant, then they may initiate a chargeback dispute via their bank which can be a lengthy and complicated process.

How to avoid chargebacks?

By ensuring your ‘plate name’ – the description that appears on the card holders statement accurately reflects your business, you can avoid many of the initial queries.

If you do receive an RFI, ensure you respond within the stated timescales, otherwise the chargeback will automatically be processed and funds deducted straight from your account.

Make sure you keep records of transactions, including POS print-outs, for sufficient time to support any RFIs, and in a sensible way that allows you to quickly identify a specific transaction. Usually filing in date/time order is the best approach as the RFI will always include the original transaction date.

Keeping good customer records and up to date terms and conditions that are demonstrably communicated to customers will help.

If you need additional information or help with chargebacks on your merchant account, speak to RSM 2000 today and one of our payment processing experts will be able to advise you.

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