What is a chargeback?
A chargeback is a process in which a cardholder disputes a debit or credit card transaction with their issuing bank, instead of the merchant, to claim a refund or recover potential fraudulent charges.
How do consumers perform a chargeback?
- To initiate a chargeback, the cardholder contacts their bank and provides information about the dispute, such as fraud or not receiving an order.
- The bank then reviews the transaction, and, if it judges the reason for the dispute to be valid, it issues a provisional credit to the customer’s account and immediately debits the merchant for the disputed amount. The customer will have to provide evidence of the claim.
What’s the chargeback process for a merchant?
Chargebacks are initiated by the cardholder, evaluated by the cardholder’s bank, and either accepted or represented by the merchant.
A resubmitting of the transaction occurs when the merchant believes the validity of the transactions or had already issued a refund.
What are chargeback reason codes?
Reason codes inform merchants about the reason why the customer is disputing a transaction, based on the information they provided to their bank.
Types of chargebacks
Chargebacks can be classified into three types: criminal fraud, friendly fraud, and merchant error.
Criminal fraud chargebacks occur when a scammer or identity thief makes an unauthorized transaction on a credit card.
Merchant error chargebacks happen when the chargeback is due to an error made by the merchant, such as shipping the wrong product, a damaged or defective product, or not delivering the product.
Friendly fraud chargebacks refer to customers who abuse the chargebacks procedure by reporting valid transactions as being fraudulent to get a refund. Customers can behave this way on purpose, or they might do it by mistake or out of confusion.
Tips to prevent chargebacks
Monitoring and analyzing your chargeback reason codes can provide valuable data and insight into what may be causing recurring chargebacks. Chargeback reason codes can also help you identify trivial chargebacks that your organization may disagree with and choose to dispute.
Best practices for reducing chargebacks:
- Ensure your billing descriptor is recognizable and easy to determine
- Communicate with your customers
- Clearly describe your product or service
- Process and handle refunds and cancellations promptly
- Ensure your customers can easily reach customer service
- Utilize additional layers of authentication when possible
- Set clear return policies
- Notify your customer of upcoming recurring payments
- Provide your company’s contact information on receipts and your website
- Keep detailed records of all transactions
- Use a delivery confirmation service and set clear shipping expectations
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