Chargebacks: What Are They and What Retailers Need to Know

What is a chargeback | Shopify Retail blog

Every retailer can tell you that dealing with customer disputes is no fun, but it’s especially frustrating when you’re forced to deal with chargebacks. What was originally designed as a way to protect consumers has become a double-edged sword, and can even cost your business valuable time and money.

In 2017, retailers and issuers lost a combined $31 billion to chargebacks, with retailers suffering around two-thirds of the losses — around $19 billion.

While it would be great to be able to proactively prevent chargebacks, they’re an inevitable part of running a business that you’ll likely have to deal with at some point. If you’re lucky, they’re only an occasional annoyance. On the other hand, too many chargebacks can penalize you as a retailer and result in a complicated process involving a lot of paperwork, time, and money.

It helps to understand the chargebacks process, what causes them, and how you can take measures to minimize the damage.

What’s a Chargeback?

First of all, what is a chargeback? Also referred to as a payment dispute, a chargeback occurs when a cardholder questions a transaction and asks their card-issuing bank to reverse it.

It might sound like a return at first, but it’s completely different.

With a return, the customer gives the goods back to the retailer and gets a refund on the money they’ve spent. With a chargeback, the banks get involved and the disputed funds are held from the business until the card issuer works things out and decides what to do.

If the bank rules against the retailer, the funds are returned to the cardholder. To add insult to injury, you’re also charged a fee by your merchant services provider to investigate and resolve the chargeback. These fees usually cost a minimum of $25 per incident, and they can quickly add up. But if the bank rules in your favor, they’ll send the disputed funds back to you.

FURTHER READING: Learn more about how to create a clear return policy for your retail store.

Reasons For Chargebacks

Chargebacks can occur for any number of different reasons. Some of the most common reasons include:


Fraud chargebacks | Shopify Retail blog

Image: Javelin Strategy

According to the Identity Theft Resource Center, credit card fraud was the most common form of identity theft, with 133,015 reports in 2017 and more than 32% of Americans complained about credit card fraud in 2016.

In other words, someone gets charged for something from your store but never actually purchased anything from you, which is fraud. A point-of-sale (POS) system that accepts secure payment technologies like EMV chip cards can help protect your business from this.

But there’s is also what’s called “friendly fraud,” which is when the customer deliberately steals from the retailer by claiming the legitimate charges are fraudulent. It’s estimated that friendly fraud will cost merchants as much as $25 billion by 2020.

Customer Dissatisfaction

Sometimes a customer simply isn’t happy with their purchase, so they might request a chargeback without contacting you first. If the customer had simply contacted you first, you could’ve tried to resolve the issue without getting the banks involved.

To help minimize these occurrences, make sure your return policy is clearly stated in-store, online, and even on receipts. Also, try to keep the lines of communication open with your customers so that you can work together to solve product or customer service issues as they arise.

Technical Issues

Maybe it was an expired credit or debit card, a website glitch, or the customer simply clicking something in the checkout process that they didn’t intend to. For whatever technical reason, they feel they were incorrectly charged and a chargeback may be issued. To combat this kind of problem, make sure you have a reliable ecommerce solution that facilitates a hassle-free checkout process.

Shipping Issues

A customer could also initiate a chargeback when they bought something but claim they never received it in the mail. Always have tracking numbers ready and make sure your shipping system is as streamlined as possible to decrease the chances of this happening.

The Consequences of Chargebacks

Chargebacks are meant to help protect customers from unauthorized transactions and create a sense of security, but they can sometimes mean big headaches especially for small businesses. If the consumer files a chargeback and keeps the merchandise, the retailer not only loses that money, but also any money they could have made off that product in the future.

In addition, fines exceeding $10,000 can be levied against businesses where monthly chargeback rates go over a certain number. Too many fines and the retailer may be labeled as “high risk” by credit card companies, and even lose credit card processing privileges or be hit with higher chargeback fees and penalties.

For consumers, there can also be negative consequences other than losing their money. If they file a chargeback and the bank discovers it’s a case of friendly fraud, they might even close that credit account which will negatively affect their credit score.

How To Respond To Chargebacks

You should respond to a chargeback as quickly as possible since delayed action on your part can result in a chargeback loss. Research the purchase and contact the customer. Sometimes all they want is to have someone hear their complaint, and often the situation can be resolved in your favor.

Verify that you’ve received authorization for the proper dollar value of the order, and get authorization for each package shipped out from the store/warehouse.

If the chargeback is already filed, your best plan of action is to get together as much information as possible, write up a detailed account about how one purchases your product or service, and submit all of this to the acquiring bank — which will have sent you the chargeback letter.

It’s vital that you know the chargeback’s reason code so you can properly craft your response. It’s just what it sounds like — the reason they’re fighting the charges, which can range from fraud and non-delivery of services to processing errors — and the codes for each problem differ between card networks.

Chargeback reasons | Shopify Retail blog

Image: Chargeback

Fraud, or “no authorization” chargebacks, account for 56% of all chargebacks, so providing evidence that the cardholder was aware of and authorized the transaction being disputed is imperative. Any evidence that proves this — AVS (address verification system) matches, CVV confirmations, signed receipts or contracts — is critical for your response.

Also be sure to include the case number or case ID assigned to a chargeback on every page of your response. After you submit a rebuttal, the situation is out of your hands while the processor’s acquiring bank reviews the information. It’s the customer’s issuing bank that makes the final decision about whether it will process the chargeback, and it will inform the customer of its decision.

Finally, if you realize you made a mistake — maybe you incorrectly keyed in the number or wrote it down wrong on a telephone order — accept responsibility and the chargeback. You want to keep your well-deserved favorable reputation with the financial institution and your customers.

How To Protect Your Business From Chargebacks

While you can never completely avoid chargebacks, there are steps that retailers can take to reduce their frequency. Detecting fraud is the easiest way to avoid transactions that could potentially lead to chargebacks.

Compare the receipt signature with the signature on the back of the credit card for each transaction to make sure that they match up. Check the expiration date on any credit or debit cards. Also, ask for another form of ID.

Make sure you clearly describe your products and service policies — especially if you sell online — so that the customer is more likely to assume liability for unsatisfactory purchases. As we mentioned earlier, set a clear return policy so that if a consumer is unhappy with their purchase, you can avoid a chargeback by processing it as a return instead.

Keep accurate records of customers' credit card transaction dates, amounts, and authorization information, etc. in case you need them to fight them in a chargeback, and also keep all your receipts.

Finally, clearly display your contact information both on credit card receipts and online and encourage customers to call you with questions before automatically filing a chargeback.

Combatting Chargebacks Moving Forward

While retailers are never going to love chargebacks, consumers need this level of protection, which you know as a consumer of goods yourself. Chargeback rules encourage fair and honest return policies and discourage the selling sub-par products.

However, consumers do occasionally abuse the system and retailers literally have to pay the price — and then some. Hopefully, with increased education about chargebacks for both retailers and merchants, the number of fraudulent chargeback claims will decrease in the future.