A Guide to Chargeback

What is a Chargeback?

Chargeback is a dispute raised by a cardholder directly from their bank for the return of payment or reversal of a credit card transaction. It is very different from that of return of sale as this comes directly from the cardholder's bank and is processed via the Payment Gateway to the merchant.

Chargebacks were brought into the picture to protect the buyer from businesses selling subpar products or services or performing unethical activities.

Difference between a Chargeback and Refund.

Although from the customer's point of view it seems to be the same. But from a merchant's point of view, the chargeback comes with the additional fee along with the product or service cost amount. In refund, a merchant directly refunds the amount to the customer using his merchant account, whereas in chargeback the issuing bank presses the administrative charges.

3 Types of Chargebacks / Fraud

True fraud

Under this category, unauthorized transactions take place. The cardholder is completely unaware that the card is used to benefit products or services, this means theft has occurred. Here when the cardholder files a chargeback it results in discontinuation of the credit card number first and a new card with a new number is issued.

In this case, the cardholder is encouraged to approach their bank first rather than getting in touch with the merchant to resolve the issue.

Chargeback fraud

Here the cardholder is a deceitful customer having ill intent. He is trying to get away like that, which is by not paying for a product or a service that they have truly ordered or purchased. The cardholder's ill intent is the reason behind the chargeback.

Even though the business has rightfully delivered the products or catered the services as described, the consumer will file a chargeback dispute so that he/she can avail of it for free and not pay for it. Business owners have to then play defense by proving their case in the process. This in reality is daunting because the cardholder is unethically trying to take advantage of the protection policy and going against the very nature or reason behind bringing this policy into existence. The policy is supposed to provide protection but they’re abusing it.

Friendly fraud

The cardholder issues a chargeback due to an honest mistake. The cardholder issues chargeback with no malicious intent. It could be due to common, honest mistakes or errors like forgetfulness, being unclear of what they purchased, not recognizing a charge, delays in shipping, or the consumer not receiving a product along with many other scenarios, and here’s a quick shortlist of why chargebacks could occur.

Not receiving the item

Received incomplete/partial item.

Damaged item or not in compliance with description

They thought they were billed the incorrect amount

Child making purchase on parents credit card without their knowledge

Forgot about the purchase or someone else was authorized to use their credit but didn't tell them.

Friendly fraud is mainly related to miscommunication or misinformation on either or both parties.

The chargeback process is made to favor the customer so you should necessarily know the process and best equip yourself before keeping your side safe and winning a dispute when you are caught in a chargeback situation. Presenting basic documents is enough and can help you win, additionally, you must gather as much information about the customer as possible at the point of purchase to prevent and protect yourself in future chargeback situations. By doing this step you are ensuring that you gather proofs if required to present.

Chargeback Process

The cardholder calls their bank

The customer calls their bank to initiate and file the chargeback and states their reason for doing so. And while filing they attach their evidence to support their claim.

Bank Review

In this step, the bank reviews the application submitted and verifies its legitimacy and depending upon the results approves or rejects the issues disputed as an invalid dispute.

Credit of amount

The cardholder bank on approval gives credit to the consumer on their credit card immediately.

Issuing chargeback to the card network

The fourth step includes formally issuing chargeback to the credit-card networks and a fee is also charged.

Receiving chargeback

The merchant account processor (acquirer) receives the chargeback and notifies the business via Payment Gateway and other dedicated communication channels. It requests the merchant to display the proof of purchase. This is the right place where a business owner can submit his records as evidence of purchase. Here’s a list of proof you can provide,

Printed receipt

Signed contract

Transaction details from merchant’s portal

Stamp verifying date and time of purchase.

Signature of cardholder

Choice of business owner

Here the business sometimes just lets go of the chargeback, the process ends but also at the same time the business owner is found at fault.

If the owner chooses to reply then will be required to provide proof of purchase to fight against the chargeback

Submission of documents

The business owner or the merchant then provides the documents displaying proof of purchase to the card-issuing bank.

Upon the result of a dispute in whose favor it is either cardholder or merchant, either party can file a chargeback if not satisfied with the results, only if you have strong supporting documents otherwise it will result in a huge penalty.

Ways to Avoid/Prevent Chargeback.

The key to preventing chargebacks is providing excellent customer service and delighting the customer. This doesn’t eliminate the possibility, the risk remains. But the intention should always be to prevent them as much as possible by practicing certain activities.

If the ratio exceeds a certain threshold there are bright chances that it will result in serious consequences to the business. Either your merchant account will be shut down or blacklisted. High-risk merchant accounts are at high risk of getting chargebacks.

There are certain procedures that you can put into practice to prevent chargebacks.

Secure Payment Gateway

A secured payment gateway acts as an extra wall of security and can considerably help a business to reduce overall chargebacks. To avail of robust solutions, Radiant Pay helps merchants with a rugged Payment Gateway. High-Risk Merchant accounts are very susceptible to meeting chargebacks, having extra walls of security saves you from unpleasant situations.

Card Verification

By performing card verification, you ensure that the customer placing the order is the cardholder or another authorized person.

Clear descriptors

This is the label that the customer sees in his purchases on the credit card bill or their statements. The best practice is to use the company name that you have on your merchant account here so that the customer recognizes the purchase and avoids confusion about where this charge is coming from.

Refund/Exchange Policy

Businesses can post their refund/exchange policy in storefronts and websites, and whichever furthermore places are applicable. By doing this you are informing your customers in advance about your policies.

Terms & Conditions

Add terms and conditions checkbox on order details form or payment pages if you are selling online

Email sales receipt

Provide your customer a sales receipt on their email also, set your software such that it automatically sends receipts to your customers. While doing so you are also gathering the customer information in your database which businesses can utilize for marketing purposes and updating offers and discounts promotions.

Email reminders

This practice is for reminding the customer about the monthly subscriptions or bills due. The reminder goes out before the charge is due. This gives customers the benefit of anticipating the charge to pay in the coming days. And also notified when the card is charged along with the receipt to the customer on his/her email address.

Risk scoring

It is a fraud prevention tool, using advanced statistical tools to compare every car-not-present transaction against a set of predefined rules.

There are many more ways a business can prevent chargeback or get chargeback protection by monitoring order velocity of card, identity morphing prevention, adding no chargeback payment method, etc.

Conclusion

The robust, effective payment gateway can help any business to prevent chargeback to a considerable amount along with the smooth functioning of payment transfers. Radiant Pay is a leading Payment Solution Service Provider that understands your needs according to the type of business you deal in and offers you suitable services.