A chargeback happens when a customer tells the company that gave him his credit card that it was used to buy something he didn’t agree to.
It’s a policy meant to protect customers, and when customers know they can count on their banks, they’re happy. If they are scammed, they can rest assured that they won’t have to pay for something they didn’t order.
This usually happens when a customer’s card gets lost and someone finds it and uses it to buy something online. Most of the time, these purchases are digital goods like gold or gems for games like World of Warcraft, Candy Crush Saga, and others.
In more serious cases, a customer’s credit card information could have been stolen, and then a person would buy something online and have it shipped to another country, where he would get it under a fake name.
A lot of chargebacks are true. This means that the people who owned the credit cards were really the victims of fraud. But some people use chargeback to get ahead of other people.
These are customers who ordered something and got it in great shape, but they will still file a chargeback to get their money back and the item they ordered.
As an online seller, you need to know how to avoid chargebacks. Here, we’ll look at this process in more detail and show you how to keep your sales going and keep bad customers from taking advantage of you.
Chargeback: A Brief History
The Truth in Lending Act of 1968 is what set up the rules for credit card chargebacks. Most experts, though, say that the Fair Credit Act of 1974 was the real start of the chargeback law.
This was done at first to protect people from thieves or bad merchants who charged their credit cards for things they didn’t buy.
Let’s say you went to a store to buy a dress and then found out that you were charged for two dresses. You can file a chargeback so you don’t have to pay for the second dress in this case.
In another situation, the shopkeeper might charge you for the dress once today and then again five days later, either by accident or on purpose. You can also file a chargeback in this case.
Why do customers try to get their money back?
A customer can file a chargeback in a number of different ways.
If you ordered a Louis Vuitton bag and got a fake, you can ask for a chargeback.
- Fraud: You can be a victim of fraud even if your credit card is not with you. In either case, the purchase was made without your permission, and someone else used your credit card to pay for it.
- Incorrect amount: The merchant charged you more than you thought they would. In this case, you can get your money back, but only for the amount that was overcharged. You won’t get your money back for the whole purchase. If you bought a $10 dress online but were charged $20, you will only get back $10.
A broken product was sent to you. The product you got doesn’t work.
- Cancelled transaction: The merchant said the transaction did not go through when the credit card was swiped. You either pay in cash or with a different credit card, only to find out later that you were charged for the amount you thought didn’t go through.
- If any of these things happened, the customer could call their credit card company or bank. They can ask for a chargeback, but they have to do it in a certain amount of time.
From the date of the transaction, the average time allowed is 120 days. If they do it after that, the bank probably won’t take their request any longer.
The Chargeback with a Smile
A friendly chargeback is another thing that can happen.
In this case, it’s the fault of the customer. In a friendly chargeback, the merchant did his job right, sent the item as described and without any damage, and did not overcharge the customer.
Here are some times when a friendly chargeback is a good idea:
- Customer doesn’t want to pay the handling fee. In a normal online transaction, customers can only get a refund if they ship the item back to the seller. The problem is that some customers don’t want to pay this shipping or handling fee.
- The customer has buyer’s remorse. He bought something on a whim and now wants his money back, probably because he realizes he can’t afford it.
- Customer doesn’t want to return the item. In this case, the customer loves the product but just wants his money back and to keep the item.
- The customer doesn’t want to wait for the shipping to be done. Some customers don’t read the shipping policies and estimated time of delivery. If they think that 30 days to ship is too long, they will file a chargeback.
- Someone close to the customer used his or her credit card. Sometimes, the cardholder’s son used the card to buy something. He doesn’t want to pay for it, but his son already has it, so he will file a chargeback to get his money back.
- The customer bought something, but he says he doesn’t remember. Some customers really can’t remember what they bought, and others are just acting like they don’t remember.
- The customer is a fraudster pretending to be a victim. In this case, the customer is a professional fraudster who knows how to trick the system.
- In a lot of these situations, the chargeback will work. The bank and the government are to blame in this case. Since 1974, the laws about chargebacks have not been changed. Because of this, the laws and rules can’t keep up with what’s going on in the world today.
- Also, the banks might not have enough people to fully look into the problem. Since the customer is what makes them money, they always do what is best for the customer. They will rule in the customer’s favor just to make sure the customer is happy and the problem can be solved.
Is Chargeback the Same as Refunding?
A chargeback is not the same as a refund.
When a buyer asks for a refund, he agrees that he has received the product and that he has a good reason for wanting a refund.
And if the buyer wants his money back, he has to return the item to the seller first. Only the seller and the buyer are involved in refunds. They both agree that the buyer should get his money back, and that it is the merchant’s job to make that happen.
In a chargeback, the bank is involved, and the customer usually doesn’t have to talk to the merchant. There will be an investigation, and there will be a lot of paperwork going back and forth between three people.
In a chargeback, it is the bank, not the merchant, that makes the decision.
Also, refunds do not cost fees. On the other hand, chargebacks can cost the business between $20 and $100. In some countries, the customer who filed a chargeback will also have to pay a fee that can be at least $5.
In a chargeback, the person who loses is the business. He has already paid for shipping, and it is unlikely that he will get the item back. He also has to pay a chargeback fee.
When a customer gets a refund, both the customer and the business lose money. Most of the time, this loss is the cost of shipping, which both parties have to pay for.
How to get your money back
So, what happens if someone files a chargeback?
Here is what happens during a chargeback.
A chargeback is put in by the cardholder.
This is the first step, in which the customer calls his bank or credit card company to make a claim. He can give different reasons and then tell the bank that he was a victim of fraud or an unauthorized transaction.
The issuer decides what to do.
Based on what the customer said, the bank may take the money out of the merchant’s account right away. In these situations, the customer will also get his money back right away on his credit card, which will show up on his bill.
But some people don’t have a good enough reason, so the issuer’s representative will deny the claim. A customer might say that his son broke the item or that it got wet when it rained.
Most of the time, a chargeback cannot be accepted for processing because the customer did something wrong.
A choice will be made by the card network.
The banks are not the only ones involved in the chargeback process. American Express, Visa, and Mastercard, which are all credit card networks, also have a say.
The merchant can get his money back if the card network can prove that the merchant didn’t make a mistake or that there was no fraud.
But if the customer has a good reason to file a claim, like being a victim of fraud, the card network will back the bank’s decision.
The shopkeeper steps in.
The merchant can also talk about what happened. During this step, the merchant can either admit that he made a mistake or fight against the chargeback.
For example, you had to pay in cash at a restaurant because your credit card wasn’t working. Then, two days after that, he charged your card. In this case, the merchant can’t fight the chargeback because he already knows that he charged you twice.
But the merchant can dispute the claim if he has proof that you got an item he sent and that it is in good shape.
The card issuer puts the chargeback back on the table.
If a merchant files a dispute, the credit card network will contact the bank that issued the card to ask them to look at the transaction again and do more research.
This is the last step, where the bank has to decide whether to give the money back to the merchant or to the customer.
How to keep from getting chargebacks
A chargeback is a long process that can take at least three months to finish. It’s also expensive because the merchant loses the profit, the shipping money, and has to pay the bank a lot of fees. He may also have a bad record in the credit books of the bank that gave him the loan.
If you’re the business owner, you don’t want this to happen. You want to keep yourself safe from chargebacks, especially those that are caused by friendly fraud.
Here are some ways you can keep yourself safe:
Follow the steps.
Every payment processor has a set of rules that you should follow. For example, you have to make sure the card isn’t expired or write down what you said to the buyer, especially if the transaction is done online. You have to make sure the buyer agrees that he wants to buy the item.
You can do this by sending the customer an email and asking for their approval in the reply, or by getting their IP address. You can also use payment systems that need a password instead of just the security code on the back of the card.
You should also get a receipt from your shipping partner that shows the name of the person who got the package.
Use a recognizable name
If your business is called ABC Company, that’s what should be on the customer’s credit card bill, not The Good Guys. A customer will remember that he bought something from your store if it has a name that fits it.
The name for this is “payment descriptor.” You can change the name that shows up here when you are filling out an application form for a payment processor.
Quickly answer customers
Customers want answers, especially when they buy something online and it takes a long time to get there. If they ask, make sure you answer and tell them what to expect. If you don’t, they’ll think you’re a scammer and call their banks to get their money back.
Look at the signs
If you take credit card payments online, look out for red flags or warning signs. One example is when the customer’s billing address and shipping address are different. If a customer’s credit card billing address is in the United States, but he wants the items to be sent to Nigeria, this should be a red flag.
In this case, you should ask for proof of identity, like credit card bills that match the billing address.
Your business can suffer from a chargeback. You should know that not every customer is a good person. There are real con artists in the world, and there are also bad people who will do anything to get ahead, even if it means lying.
If you are a good merchant, don’t be afraid to fight chargebacks, especially if you did your job and shipped the item in good condition.
But what’s most important is that prevention is better than treatment. Use technology to your advantage and only use strict processing systems that are safe to use electronically.