What is a chargeback?

A chargeback is something every customer feels safe with. No matter the fail of the product or service, the buyer can request a return of money. But what does a chargeback mean for the business, how it differs from the refund, and why it must be avoided. In this article, we will go through the concept of chargeback and answer the following questions.

What does a chargeback mean?

The chargeback is an old concept in the history of market relations. It is basically a demand to return the money for goods or services that are somehow not satisfying for the customer. The problem is most likely to be solved personally, between a seller and a consumer. 

Well in the credit card world it is a bit different. And this is when danger can come. Originally chargebacks migrated into the system of electronic payments back in 1974. There was the goal among banks to encourage consumers to use credit cards, and so there was a need to calm the worry about accident payments, fraud, and things like that.

In the system of electronic transactions, a chargeback means a return of money to the customer for purchased goods or services. The return is processed due to a valid reason and it is performed not directly but through the chain of banking institutions.

How do chargebacks work and why are they so dangerous?

The chargeback definition points that banks are involved in the return of funds. Simply put, the process is a request of the customer that first goes to their issuing bank, then to the merchant’s bank, and only then to the merchant. In this chain, the merchant suffers losses three times: once because of the customer, and twice because of the financial institutions.

The ‘damage’ by the customer is just monetary compensation, and a customer has a full right to demand it. Except for friendly fraud attempts of course, of which we will talk a bit later. In the end, the business should keep consumers satisfied. But chargebacks on credit cards that passed through the bank can harm the business.

For every chargeback a merchant’s bank takes fees. And every chargeback means damage to the merchant’s statistics, potentially dragging the business into the high-risk category. Besides that, there is a special ratio, above which there are measurements of harsh charges or closing of the merchant account. For these causes exactly it is better to avoid chargebacks in all the possible causes.

Now let’s get a detailed understanding of a chargeback process for the different card types: credit and debit, and direct debit.

Chargeback process for credit cards and debit cards

For debit and credit cards a chargeback can be initiated by a merchant or by a customer. If the merchant has initiated the chargeback it is quite similar to the transaction process. The merchant sends a request to an acquiring bank (another word for merchant’s bank), an acquiring bank sends a payment from the merchant’s account to the account of a customer in his or her issuing bank.

In a case when it is a customer who initiates the chargeback, the request is sent to an issuing bank. Then the issuing bank through the processing network connects to an acquiring bank that takes funds from a merchant. Afterward, the merchant also pays fees to cover the costs of the processing network and fees to the acquiring bank.

Chargeback process for Direct Debit in the UK

Direct Debit is a popular payment method in the UK. It allows the bank to collect regular payments from the customer’s account. Direct Debit is mostly used for bill payments, subscriptions, memberships, donations, and so on. To do so, a customer gives authorization by filling in a Direct Debit Mandate form online or on paper.

Chargebacks for Direct Debit differ a little from debit and credit card ones. A customer or a cardholder contacts an issuing bank to charge back the Direct Debit payment that was collected by mistake. The issuing bank notifies the Direct Debit provider and takes a requested amount from it. The Direct Debit provider sends a notification to the merchant and takes a request by the issuing bank amount of funds.

Chargeback process for Direct Debit around the world

There is no particular scheme for the Direct Debit chargeback of the global level. Each provider has its own rules. The only thing in common is that the cardholder contacts an issuing bank to proceed with the chargeback.

Reasons for chargebacks

There are completely normal reasons for issuing a chargeback. When a purchased item is multiplied, when the product is not the same as on the website, or when it is just lost in the delivery. But there is also a friendly fraud possibility that has nothing to do with a product itself. 

  • Technical issues. This is relevant if during checkout a customer could purchase the same item several times, or by mistake proceed to checkout with the wrong product.
  • Delivery issues. This covers all the cases when the package comes seriously damaged, or when it is lost.
  • Quality issues. This happens when the quality of the purchased product or service does not meet the customer’s expectations.
  • Fraud. The only case when there is no objective fault of the merchant. In this case, a customer pretends to have a valid reason for the chargeback without actually having it.

How can my business minimize chargebacks?

There are ways to minimize the number of chargebacks, some of them can cost money, but some of them depend on the accuracy and customer care. Let’s see what can be done.

  • Website descriptions. Customers must see a description of the product or service as it is, with details. Making it look better on the photo can be the first reason for the chargeback.
  • Open communication. It is good to keep customers updated with emails regarding the delivery and possible returns and refunds. Practice shows that customers first temp to contact the seller instead of launching the chargeback.
  • Delivery tracking. Business must know where the product is, how long does it take to get to customers, and if it is lost.
  • Easy refunds. A chargeback does not mean a refund. The refund is way better because it is a direct problem solving between a merchant and a customer, without bank fees and bad statistics. 
  • Fraud protection. There are fraud prevention systems that can save the business from massive chargebacks. They are not free, but they are definitely worth it. 
  • Chargeback alerts. Same with chargeback alert services. They take a fee per chargeback but they allow merchants to solve the issues without including a bank.

Having a reliable payment gateway service provider is also crucial if you want to stop worrying about chargebacks. Maxpay has all the tools necessary for it! We provide multiple features that will help you avoid chargebacks and fraud. 

Get alerts about confirmed fraud cases with Ethoca – to issue a timely refund. Be notified about chargebacks to prevent friendly fraud using the VMPI solution. Manage risks and forget about fraudsters with Covery anti-fraud platform