What is a chargeback?
A chargeback is the process of reversing a card payment and returning the money to the cardholder's bank, usually due to a disputed or unauthorised transaction.
At a glance:
- Chargebacks are a safety net for consumers, protecting them from unauthorised payments.
- Cardholders initiate chargebacks through their bank in response to disputed transactions.
- Cardholders may dispute transactions for several reasons, including fraud, unsatisfactory service, and billing mistakes.
- Merchants can dispute a chargeback and provide counter-evidence if they believe the transaction was indeed valid.
- After reviewing evidence from the cardholder and the merchant, the cardholder’s bank makes the final decision on whether or not to return the funds.
Main reasons for chargebacks
Fraudulent transactions
1. Stolen cards
A cardholder may dispute a transaction if a criminal steals their physical card and uses it to make fraudulent payments.
2. Identity theft
A cardholder may dispute a transaction if a criminal gains access to their personal identifying information and uses it to access the cardholder’s banking information.
3. Account hacking
A cardholder may dispute a transaction if a criminal gains access to their online banking account information and/or other accounts where payment information is stored electronically.
Service disputes
1. Non-delivery of goods or services
A cardholder may dispute a transaction if the item or service they purchased isn’t delivered within the agreed timeframe.
2. Misrepresentation of goods or services
A cardholder may dispute a transaction if the item or service they purchased does not match the advertised description and/or images, or if the agreed terms of the purchase were not met.
Processing errors
1. Non-delivery of goods or services
System errors are increasingly rare, but can still occur within payment processing technologies. Examples include accidental double payments (being charged twice for the same service/item) and being charged for a subscription despite having cancelled it. These technical errors are typically easy to identify and resolve.
2. Human errors
Most processing errors are the result of mistakes made by either the merchant or the customer. Examples of human errors that can lead to chargebacks include merchants accidentally entering the wrong amount when charging the customer, and customers entering the wrong quantity when making online payments.
What's the difference between a refund and a chargeback?
A refund is when a merchant willingly returns funds to the customer based on direct, unmediated communication between the two parties. This differs from a chargeback, wherein the customer’s bank acts as a mediator, issuing a provisional credit for the transaction amount until the dispute is finalised.
In many cases, customers only initiate the chargeback process after the merchant has refused their request for a refund. When initiating a chargeback, cardholders are advised to provide comprehensive evidence supporting their case. This evidence can include correspondence with the merchant, receipts, signed contracts, and in certain complex transactions, a debt validation letter. A debt validation letter serves as a formal request to verify the accuracy and legitimacy of the charged amount. Including such a letter can strengthen the cardholder’s position, especially when the dispute involves significant sums or intricate billing details.
The chargeback process
1. Cardholder raises concerns with their bank
The chargeback process beings when the cardholder contacts their bank to question and dispute a payment made from their account. There are a number of ways a person can contact their bank to enquire about a disputed transaction, including:
- Phone - Cardholders can contact their bank’s customer service line, where they’ll be directed to the team that specialises in handling payment disputes.
- Email - Some banks allow their customers to request a chargeback via email, although this is increasingly less common, as banks tend to direct customers to their online banking portals instead.
- Online banking/banking apps - Most banks make it easy for customers to request a chargeback via their online banking account or banking mobile app. This usually involves completing a form and submitting it to the bank electronically. Customers may also choose to initiate the process through their bank’s secure messaging system, within their online banking account or through the mobile app.
- In-person - Somer customers prefer to visit a branch of their bank and speak in person with a staff member about a disputed transaction. Customers may need to contact their bank in advance to book an appointment.
2. Cardholder’s bank investigates, provisionally returns funds
After receiving the cardholder’s concerns, the bank will conduct an initial investigation into the transaction in question to determine the validity of the dispute. They will likely ask the cardholder for evidence that clarifies the issue and provides more context about the situation. Common examples of evidence include receipts, screenshots of the advertised goods/service, emails with the merchant, and photos/videos that showcase the issue.
If the bank determines that their customer’s dispute is valid, they will return the payment amount to the customer’s account as a provisional credit. This provisional credit will become permanent should the bank ultimately side with the cardholder at the end of the chargeback process.
3. Merchant is notified and given a chance to respond
After receiving evidence from the cardholder and determining the dispute is valid, the cardholder’s bank will notify the merchant of the chargeback. The merchant can choose to respond and provide counter-evidence in their favour.
The amount of time that a merchant has to respond to a chargeback varies depending on the brand of card used and the nature of the dispute, with the most common time limit being 30 business days.
4. Cardholder’s bank makes final decision
If the merchant does not respond to the dispute within the required timeframe, the payment amount (initially returned to the cardholder as a provisional credit) is permanently returned to the cardholder.
If the merchant does respond to the dispute, the cardholder’s bank will review both sets of evidence to determine whether or not to uphold the chargeback.
Preventing and managing chargebacks
Secure payment processing
Ensuring that customer payments are made using the most secure, up-to-date payment technology is essential to preventing chargebacks caused by both fraud and technical glitches.
In addition to maintaining PCI compliance, merchants can increase the security of their payment processing by using the following security technologies:
- TLS data encryption
- Two-factor authentication (2FA)
- 3D Secure 2 (3DS2)
- Payment tokenisation
- Fraud detection software
Clarity and transparency
Merchants can help prevent chargebacks by presenting their goods and services in as accurate, clear, and transparent a manner as possible. This helps manage the customers’ expectations and prevent misunderstandings.
- If applicable, product descriptions should be accompanied by the following:
- Photos that accurately depict the product
- Product specifications (e.g. dimensions, weight, type of materials)
- Product parts and components
- Assembly, usage, and care instructions
- Sizing guidelines
- Shipping and delivery information
- Customer reviews with photos
- Return and refund policy
Excellent customer service
Merchants can help prevent disputed payments from escalating into chargebacks by encouraging customers to contact them directly to resolve any issues. This includes having a reasonable refund policy that makes it easy for customers to return items or cancel services in exchange for a timely refund.
The easier a merchant makes it for customers to resolve disputes directly—through live chat, email, phone, or email—the less hassle and money they lose on avoidable chargebacks.
Record-keeping and documentation
Although it’s best to prevent chargebacks altogether, merchants should be prepared to appeal chargebacks when necessary. Solid record-keeping and documentation allow merchants to quickly access evidence in order to make their case.
These records may include:
- Customer receipts and order confirmations
- Tracking details and delivery confirmations
- Signed contracts
- Email and chat archives
- Phone call logs and recordings
- CCTV footage
Routine monitoring and timely responses
Merchants can put measures in place to reduce the amount of chargebacks they receive through customer service measures, but it’s impossible to prevent chargebacks completely. Merchants who are proactive in monitoring transactions regularly can identify unusual patterns and suspicious chargebacks before it’s too late to resolve them. Having a dedicated person or department responsible for monitoring transactions is crucial as it allows businesses to respond quickly to “red flag” chargebacks.
FAQs
What information does a cardholder need to provide to initiate a chargeback?
A cardholder should provide any and all compelling evidence that proves the transaction to be invalid, for example:
- Correspondence with the merchant (emails, phone records, etc.)
- Receipts
- Signed contracts
- Photos of goods
- Screenshots of advertised goods/services
Cardholders should be precise, organised, and professional when explaining the dispute and laying out the evidence.
How can merchants dispute a chargeback?
Merchants can dispute a chargeback by presenting any and all evidence showing that the goods or services they provided were as advertised and delivered according to the agreed time frame.
Types of evidence might include:
- Tracking/delivery confirmations
- Signed contracts
- Merchant invoices
- Any communications with the customer that show the transaction was approved
- Photos of the customer using the product or service provided
- Product/service terms and conditions agreed to by the customer
- Digital records for online goods and services, including subscriptions (e.g. IP match, AVS and CVV match, location data etc.)
Along with the evidence, merchants can provide a rebuttal letter that clearly and professionally explains their case.
How long after the payment is taken does a customer have to initiate a chargeback?
Most card companies give customers 120 days to dispute a transaction and initiate a chargeback. Some card brands don’t state an explicit deadline, but a cardholder’s chances of success are typically higher if they file their claim as soon after the transaction date as possible.
How long does a merchant have to respond to a chargeback before the funds are returned?
The merchant typically has 30 to 45 days from the day the chargeback is filed to respond to a chargeback and present counterevidence. If the merchant does not respond by the deadline, the merchant accepts the chargeback by default and the funds are permanently returned to the cardholder.
How long does the chargeback process usually take?
The duration of the chargeback process depends on whether or not the merchant chooses to dispute the chargeback and present their case to the cardholder’s bank. The process is further extended if the merchant pursues arbitration after the chargeback is upheld, although this is a rare occurrence.
In most cases, where the chargeback is straightforward, the process is complete within around 30 to 40 days from the date the chargeback was issued.
If a chargeback is denied, can the cardholder appeal the decision?
Yes, cardholders can appeal a chargeback that has been denied. To do this, they must present new and compelling evidence to their bank that proves the transaction to be invalid. The bank can then decide whether to re-open the case and proceed with the chargeback.
If a chargeback is upheld, can the merchant appeal the decision?
Yes, merchants can appeal a chargeback even after it’s been upheld.
The first step of this appeals process is known as pre-arbitration, where the merchant is able to present new evidence supporting their case to the card network.
If the merchant is unsuccessful in pre-arbitration, they can choose to accept the chargeback or continue to dispute it by entering arbitration. During arbitration, a third-party arbitrator is assigned to review the case and make a final decision.
Unless merchants have new evidence to present during arbitration, it is unlikely for the arbitrator to decide in their favour. Since failed arbitration costs merchants hundreds of pounds in fees, it’s not usually worthwhile to escalate a dispute to arbitration.
Are there any fees associated with chargebacks?
For consumers, it’s free to request a chargeback.
For merchants, chargebacks come with an additional processing fee, which varies based on their agreement with their acquiring bank. These fees can range from as low as £5 per chargeback, to as high as £100 per chargeback, but the typical fee is in the £10-£20 range.
What’s the best way for merchants to avoid chargebacks?
In addition to providing high-quality goods or services, merchants can reduce the number of chargebacks they incur by:
- Providing accurate descriptions of their products and services
- Making it easy for customers to raise their concerns directly through customer service channels (e.g. live chat, email, phone)
- Clearly stating their company’s refund policy and procedures
When is it worthwhile for merchants to dispute chargebacks?
It’s worthwhile for merchants to dispute chargebacks only if they have strong evidence that the transaction was valid. It is particularly worthwhile for merchants to investigate and dispute high-value chargebacks that have a significant financial impact on the business.
It’s also important for merchants to investigate any patterns among chargebacks that indicate a more widespread issue is occurring, such as fraud, technical issues, or a critical failure within their customer service pipeline.
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