What is a chargeback and how does it work?

All you need to know about credit card Chargeback, from key concepts to answering the most frequently asked questions.

Understanding Chargeback in the Market

Every merchant experiences a chargeback every so often. It’s not a pleasant experience, but it’s part of doing business, both online and in person. Credit card chargebacks and debit chargebacks have been in existence for many years, but with ecommerce there are more opportunities for disputes. To get ahead of the game, here are the key chargeback definitions you should know.

What is a Chargeback?

A chargeback is the act of a customer filing for the return of their funds directly with the bank. When a buyer makes a purchase, they pay the required amount of money for the transaction. But, on occasion, the customer will request the money back from the merchant. This can happen for several reasons, the top three being payment processing error, fraud, and commercial disagreement.

Credit card chargeback is considered a consumer protection. In Brazil, for example, chargeback is supported by the consumer protection code, a code that will ensure the product is returned to the customer if any problem or a fraud is detected. A merchant who has a great refund process avoids chargebacks by ensuring that the customer does not feel the need to make a chargeback.

How Does a Chargeback Work?

After a purchase has been made, the customer will contact the bank and ask for the money back. Before the chargeback request becomes official, it must fulfill the criteria established by the bank. The chargeback request can happen for a number of reasons, yet it is the responsibility of the issuing bank to inform the merchant of the request alongside a reason code. One possible problem at this point in the procedure is that the reason code might not always be accurate. When the chargeback refers to commercial disagreement or auto-fraud, it can be disputed so as to help the merchant recoup the money.

Reason Code

In order to track chargebacks and understand them, the bank assigns reason codes. These codes are not universal. It is estimated that there are more than 65 different reason codes for chargebacks. These codes provide insights into why disputes happen in the first place

Monitoring frequent codes and taking action on the most cited reasons will help merchants keep a low risk score and reduce monetary loss due to chargeback.

Chargeback Fraud and Ratios – What Merchants Need to Know

What is a Chargeback Rate?

Chargeback rate is the percentage determined between the volume of confirmed transactions and the number of contested transactions.

High chargeback rates mean a high percentage of money lost due to a high volume of chargeback requests from customers. 

A high rate is undesirable for yet another reason- credit card schemes have their own monitoring programs. Visa and Mastercard apply penalties to merchants who have rates above 1%. These fees are collected from the acquiring bank and pass on to the merchant.

How do you Calculate Your Chargeback rate?

# of chargebacks current month

# of transactions current month

Chargeback Rate

What is a Normal Chargeback Rate in Your Industry?

There is no normal chargeback rate. It is generally considered that businesses should aim to stay below one percent. Still some industries experience higher chargeback transactions.

Chargeback Rejection – Why it Happens and What to do About it

Market Behavior – Where are the Highest Chargeback Rates?

Due to varying government compliance standards, some markets have higher chargeback rates than others. Buyers in Latin America have more local paying options, which means there are more ways for customers to commit fraud.

The Consumer Protection Code makes things more complex, since this code, ensures customer purchases are protected from fraudulent companies. While many buyers are honest in their chargebacks, a rising number are not. The Consumer Protection Code makes it easier for dishonest buyers to issue paybacks penalty-free.

How to Avoid or Prevent Chargebacks or Chargeback Fraud

Establish measures within the purchasing process to avoid chargebacks representments. Some effective practices include tracking order activity. Is the order practical easy to track? Monitoring activity allows a merchant to know whether a purchase has been carried out, which is a good indicator that chargebacks are requested in good faith. Other ways to prevent fraud include running risk assessments and using a payment processor who can help safeguard purchasing. In Brazil, the use of the "boleto" is a great chargeback deterrent.

Interacting with the customer is also a good way to prevent chargebacks. Follow-ups by email with order status, reminders, and post-purchase satisfaction inquiries are good ways to ensure that the customer has access to the merchant when they are dissatisfied with their purchase.

Regardless, merchants would do well to keep an eye on chargeback activity. Identifying patterns can help identify areas of improvement or that need attention.

What are Chargeback Disputes?

The consumer contests a transaction and the bank issues a chargeback

The consumer contests a transaction and the bank issues a chargeback.

The merchant or the payment processor receives the chargeback and it can be accepted or disputed

The merchant or the payment processor receives the chargeback and it can be accepted or disputed.

To dispute it, all the evidence is collected and sent to the bank

To dispute it, all the evidence is collected and sent to the bank.

The bank along with the credit card schemes have 140 days to decide who wins the dispute

The bank along with the credit card schemes have 140 days to decide who wins the dispute.

If the dispute is won the money come back to the merchant

If the dispute is won the money returns to the merchant.

The commonly asked questions about Chargeback:

What percentage of chargebacks are "friendly fraud?"
  • A friendly fraud means that rather than return an item, the customer just files a chargeback. They are lazy, not malicious. The percentage can change depending on the industry.
Can a Chargeback be reversed?
  • Anything is possible! Communicating with the buyer is the best thing a merchant can do to reverse a chargeback. They should also have all records and act promptly to get ahead of the situation. The chargeback can´t be cancelled, but can be reversed and the merchant can recover the money.
Is there chargeback insurance?
  • Yes! Many companies now offer this, and it protects against fraudulent credit cards, faked shipping information, forged signatures and more. Merchants can be reimbursed for the product lost and maybe more.