If your business is issued a chargeback, it can be a frustrating and costly experience for you as a business owner.
Understanding how your business should respond to a chargeback can be helpful in preparing you for what to do if there is ever a chargeback filed against your business. If you’re unfamiliar with what a chargeback is and how it might affect your business, then we recommend that you check out our overview on chargebacks to help understand the basics.
How the Chargeback Process Works and What Your Options Are
Here is an overview of how the chargeback process works from beginning to end if a chargeback is initiated by a customer of yours (if they don’t try to resolve it with you first) and what you can do to defend against the customer's claim if it is false.
- The chargeback process begins when your customer takes a look at their statement and notices a transaction that they do not remember, that they did not authorize, or that they believe has been processed in error. Once the cardholder notices the transaction of concern, they will contact their card issuing bank to dispute the transaction.
- The card issuer reviews the dispute filed by the customer, determines if the claim is valid, and ultimately decides if the chargeback will be taken forward, sometimes requiring proof from the customer that their claim is legitimate. If they determine the claim to be invalid, then the process would end here, and the cardholder would be notified. Keep in mind that the ability to file a chargeback is part of consumer protections that your customer benefits from by using their credit card, so the card issuer is likely to side with their consumer.
- If the chargeback was determined to be valid by the card issuer, they will then submit the chargeback to the card network involved for reimbursement. The card network will instruct your acquiring bank or processor to immediately withdraw the funds for the original purchase, along with a chargeback fee (usually around 15 dollars), from your account which will be used to refund the customer. This ultimately means that your business has reimbursed the funds for the purchase to your customer and you will no longer have the proceeds from the transaction.
- When your business receives notice of the chargeback, you’ll also receive instructions on how to dispute the claim if you wish to do so. If you know that the chargeback has been filed in error and that the transaction is valid, you can provide supporting details and documentation to dispute the chargeback and make your case.
- You will put together the documents needed for the merchant response to prove that the transaction was valid. Before submitting your document, be sure to look up the reason code for the chargeback so you can specifically address the reason the customer filed the chargeback. The information that you will need to fight a chargeback – and information you should collect if you’re at all able – may include:
- Date/Time Stamp for the transaction
- The device used for the purchase
- Shipping verification
- CVV Match for the transaction
- Device fingerprinting
- Past transaction history
- Subsequent transactions from the customer if applicable
- Any email communications or interactions with the customer
- Phone call transcripts
- Live chat transcripts
- Social media interactions and shares
- After you have submitted your supporting documentation to prove the transaction was valid, the acquirer takes your documentation and submits it to the card network, who will then give it to the issuer to review.
- Once the card issuer reviews the documentation for the dispute, they will determine whether the documentation you provided was enough to disprove the cardholder’s initial dispute, or if the customer was correct and the chargeback will be upheld.
- If you lose the dispute, you can file for arbitration with the card network, but this will cost you upwards of 500 dollars or more. If you win the dispute, then the refund is reversed, and you are reimbursed the funds for the initial transaction by the processor. Some processors will also refund the chargeback fee to you, but many will not. There is still a chance that the cardholder will dispute this outcome with a second chargeback and the process would begin again.
Avoid Chargebacks By Avoiding Customer Confusion
The key to avoiding chargebacks is to prevent them altogether. If your customers are always 100% clear on what your return policy is, what they're receiving from your business and when they're receiving it, and when they're enrolling or opting out of a recurring billing cycle, then your customers have less opportunity for confusion, and your disputes should be significantly decreased. If you encourage your customers to engage with you (and not their bank) if there is an issue by clearly stating your contact information and ensuring you respond to queries promptly, then you can hopefully resolve most disputes before they are escalated to chargebacks.
It is also your responsibility as a business owner to ensure you're not processing stolen credit cards, which, if caught by the cardholder, would likely result in potentially significant chargebacks for your business. Check out our article on how to avoid processing stolen or fraudulent credit cards.
What If the Customer is Lying?
First of all, don't accuse the customer outright of lying before you have all the facts. Often, customers file chargebacks that are born from genuine confusion, legitimate product deficiencies, or shipping problems. This is called friendly fraud, and these customers are not a threat to your business. In fact, they can represent opportunities to pinpoint gaps in your website messaging and ordering process that you can work to address in order to avoid future chargebacks and safeguard yourself from chargeback fraud.
If a customer makes a false claim that causes a chargeback to be issued to your business, it is called chargeback fraud. Unfortunately, it can be difficult to prove a customer is lying, but there are ways to protect yourself. The best way to avoid chargebacks is to not give your customers any chances to be confused, as outlined above. But if they do try to commit chargeback fraud, you need to ensure you have your bases covered.
If you're shipping products, provide tracking numbers and require customers to sign for purchases upon receiving them. If you offer an online service, make sure you can monitor member logins and usage so that you can potentially catch them in the act, using your service or app after claiming to have canceled their subscription. Always gather as much relevant information about your customers and transactions as possible, these practices, and their resulting documentation, will be the biggest aid in supporting any dispute you may need to fight on behalf of your business.
As a business owner you hope to never have to deal with a chargeback but, unfortunately, they may occur at some point. Understanding how chargebacks work and what your options are for disputing illegitimate claims is important for protecting your business from additional costs.