What is a chargeback and how does it work?

All you need to know about credit card Chargeback, passing through concepts and answering the most frequently asked questions.

Understanding Chargeback in the Market

Every merchant has the experience of 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 to 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 and that can happen for different reasons, the top three are payment processing error, fraud, and commercial disagreement.

Credit card chargeback is considered consumer protection and in Brazil, for example, is defended by the consumer protection code that will ensure the product return to the customer if any problem or fraud is detected. A merchant who has a great refund process is avoiding chargebacks since the customer would 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. This can happen for a number of reasons, and it is up to the issuer bank to issue the chargeback already with a reason code. The problem is that sometimes this code does not reflect reality. When the chargeback refers to commercial disagreement or auto fraud they can be disputed which can help the merchant to recoup the money. It is worth noting that not every customer request actually becomes a chargeback, it will only become one if it passes all bank criteria.

Reason Code

In order to track chargebacks and understand them, the bank assigns reason codes and these codes are not universal. There are estimated to be more than 65 different reason codes for chargebacks. The codes provide insight 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 between the volume of confirmed transactions and contested transactions.

High chargeback rates mean a high percentage of money lost due to high chargeback reporting from its customers.

A high rate is undesirable for another reason, too - 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 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, only 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.

Making things more complex is the Consumer Protection Code, which ensures customer purchases are protected against fraudulent companies. While many buyers are honest in their chargebacks, a rising number are not, and the Consumer Protection Code makes it easier for dishonest buyers to issue paybacks penalty-free.

How to Void or Prevent Chargebacks or Chargeback Fraud

Establish measures within the purchasing process to avoid chargebacks. Some effective practices include tracking order activity. Is the order practical, and is it easy to track its progress? Monitoring activity allows a merchant to know whether a purchase has been carried out, therefore if chargebacks are called for in good faith. Other ways to prevent fraud include running risk assessments, and to utilize a payment processor who can help safeguard purchasing, or in Brazil, the use of the boleto is a great chargeback deterrent.

Interacting with the customer is a good way to prevent chargebacks. Follow-ups by email with order status, reminders, and post-purchase satisfaction inquiries are good ways to ensure 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 point to 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 come back to the merchant.

The commonly asked questions about Chargeback:

What percentage of chargebacks are "friendly fraud?"
  • 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 canceled but can be reversed and the merchant can recover the money.
Is there chargeback insurance?
  • Yes! Many companies offer this now, 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.