A chargeback occurs when a bank reverses a credit or debit card transaction at a customer's request, usually due to fraud or disputes with merchants. This protection for customers as cardholders has been in place since the 1970s. If cardholders believe a transaction is unauthorised or unjust, they can challenge it with their bank, which can then initiate a chargeback to refund the payment.
The chargeback procedure and steps
The chargeback process can be a bit complex, and disputes may arise weeks or even months after a sale. Multiple parties are involved in this process.
On one side, there's the customer and their bank (the cardholder and the issuing bank) who initiate the chargeback and question the transaction. On the other side, there's the business where the customer made the purchase and the bank or institution that handles card transactions for the business (the merchant and the acquirer). Additionally, card schemes act as referees to ensure a fair process.
While it might seem like the system favours customers over merchants, it plays a vital role in consumer protection, especially as card payments become more widespread.
Breakdown of the process in steps:
1. The cardholder contacts their bank and explains why they want a refund, initiating a chargeback request.
2. The card issuer reviews the cardholder's information and files a chargeback with the card scheme.
3. The card scheme receives and forwards information.
4. The acquirer is notified of the chargeback.
5. The merchant is informed of the chargeback.
6. The merchant investigates the claim and determines whether the cardholder should receive a refund.
7. If the cardholder is eligible for a refund, the chargeback is accepted, and the case is closed. If not, the merchant shares information with the acquirer explaining why.
8. The acquirer may dispute the chargeback.
9. The issuer reviews the dispute documents with the cardholder and decides whether the refund request is valid or not.
10. The acquirer and merchant decide if they want a neutral third party from the card scheme to arbitrate the dispute.
11. The issuer decides whether to proceed to arbitration or accept the case.
12. A neutral arbitrator makes a final ruling on the case to determine if the chargeback is legitimate or not.
Note - if a merchant immediately accepts the chargeback, they accept the responsibility and the case ends there.
Common chargeback reasons
Chargebacks can be categorised into four main reasons: Fraud, Authorisation, Processing, and Customer disputes. They have subcategories that further explain why cardholders believe they should receive their money back.
Common reasons for cardholder disputes include:
1. Unrecognised or unauthorised transactions.
2. Merchants failing to obtain proper authorisation for a transaction.
3. Cardholders asserting that they didn't receive the purchased service or merchandise.
4. Cardholders claiming that the service or merchandise is defective or not as described.
5. Cardholders stating that the merchant did not display a cancellation policy at the time of purchase.
Common chargeback codes
Below you can find a list of common chargeback codes and what each of them means per different card schemes.
The chargeback process at Teya
When a chargeback occurs, the transaction amount is deducted from your settlement, and you'll receive email notifications with information about the chargeback. You can dispute it within a specific timeframe, and if successful, the amount is returned to your settlement.
The exact steps are outlined below:
1. If a cardholder initiates a chargeback through their card issuer against your business, the transaction amount is automatically deducted from your settlement. This deduction will be visible in your next settlement report.
2. You'll receive an automated email at the email address you registered with in Teya, informing you that your business has received a chargeback. This email will provide details about the chargeback and notify you that the amount has been debited. You'll have 7 days to respond, and a reminder email will be sent with an additional 7 days if needed.
3. If you wish to dispute the chargeback, you'll be required to provide specific documentation. Teya will assist you in the dispute process.
4. If the chargeback dispute is successful, the disputed amount will be returned to your settlement.
How to prevent chargebacks
By implementing some of the preventive measures listed below, merchants can reduce the likelihood of chargebacks and maintain positive customer relationships.
1. Clear and accurate descriptions - ensure that product descriptions and service terms are clear, accurate, and transparent. Misunderstandings can lead to chargebacks.
2. High-quality customer service - provide excellent customer service, including prompt responses to inquiries and addressing customer issues and concerns promptly. Happy customers are less likely to initiate chargebacks.
3. Secure payment processing - use secure and reputable payment processing systems to reduce the risk of fraud.
4. Authentication measures - implement strong customer authentication methods, such as two-factor authentication, to verify transactions.
5. Delivery confirmation - for physical goods, use shipment tracking and require signatures upon delivery to confirm that products reach the intended recipients.
6. Clear return and refund policies - Clearly communicate your return and refund policies on your website and during the checkout process. Make it easy for customers to understand the process for returns and refunds.
7. Keep records - maintain detailed records of transactions, customer communications, and delivery information. This documentation can be crucial when disputing chargebacks.
8. Address billing descriptors - ensure that your business name or billing descriptor on customer statements is recognisable and matches your website. This reduces confusion and prevents customers from disputing unfamiliar charges.
9. Honor refund requests - if a customer requests a refund and you determine it's valid, process the refund promptly rather than waiting for them to initiate a chargeback.
10. Communication - keep customers informed about order statuses, delays, and any changes to their orders. Effective communication can prevent misunderstandings.