What credit card chargebacks are and how to prevent them

When your business receives a chargeback, it often means losing the cost of a sale—and sometimes even paying an additional fee. While chargebacks can happen for several reasons, the bottom line is that they can cost your business time and money to resolve.

The good news is there are ways your business can reduce the number of chargebacks it receives. Here’s a closer look at common reasons for chargebacks, how to prevent them and what to do if you get one in the future. 

What you’ll learn:

• A chargeback is a credit or debit card transaction reversal that is initiated by the customer’s financial institution or card issuer after the customer disputes a charge.

• Along with customer disputes, chargebacks can happen due to merchant errors and in cases of fraud.

• Chargebacks can lead to lost revenue and productivity, additional fees and potential reputational damage to a business.

• Businesses can help prevent chargebacks by creating clear policies and billing descriptors, properly managing subscriptions and offering excellent customer service.

Chargebacks happen when customers dispute transactions with their financial institution or card issuer—whether they suspect fraudulent card payments or that products or services they paid for were not delivered. If the claim is determined to be valid, a chargeback is initiated to reverse the charge and return funds to the customer. 

Chargebacks can occur for both credit and debit card transactions. They’re not the same as voided charges, which happen before a transaction is authorized. Chargebacks are also different from typical refunds, which are usually initiated by the business due to issues with the product or service. If a transaction has been fully processed, payment has gone through and the dispute with the transaction is found to be valid, the card issuer or financial institution—not the merchant—initiates the chargeback.

Chargebacks typically happen for a few reasons, including customer disputes, merchant errors, chargeback fraud and friendly fraud. Here’s a closer look at each of these common reasons.

Customer disputes are one of the most popular reasons for chargebacks. These disputes often occur for legitimate reasons when customers are dissatisfied or confused about a transaction. Typical examples of customer disputes include:

• Missing product or incomplete service: Shipping delays, delivery issues or not fulfilling an order correctly can lead to a chargeback.

• Product not as described: Sometimes a customer requests a chargeback after receiving a product that’s a different color, size or quality than they expected.

• Damaged or defective product: Customer disputes are also common when an item arrives broken or doesn’t work properly.

• Unrecognized subscription service charges: Sometimes, unaware they’ve signed up for recurring payments, customers wish to cancel after seeing the charge. 

The customer may try to resolve the issue with the merchant first, but if they’re unsatisfied with how the merchant attempts to settle the dispute, they may then reach out to their card issuer to initiate a chargeback.

Everyone makes mistakes—even businesses. With chargebacks, though, errors on the merchant’s behalf can be costly and are typically preventable. Common types of merchant errors include:

• Double billing or incorrect amount charged: If the merchant accidentally bills the customer for the same item twice or charges more than the agreed-upon price, a chargeback could be initiated.

• Failure to issue a refund: If a refund isn’t processed properly or in a timely manner, the customer could request a chargeback.

• Confusion over billing descriptors: Customers may not recognize your business’s billing descriptor that appears on their statement—especially if your “doing business as” (DBA) name differs from your legal business name.

Chargeback fraud occurs intentionally when a customer disputes a legitimate charge despite receiving the product or service as expected. Some common examples are: 

• Falsely claiming an order was never delivered 

• Disputing a charge for a purchase they knowingly made, claiming they never authorized the transaction

Some types of merchants are more susceptible to chargeback fraud. These include online retailers, who often find it challenging to verify transactions. Subscription-based providers can also be more at risk, as customers may claim they forgot they signed up for a recurring charge or never authorized the subscription in the first place.

Friendly fraud is a type of chargeback fraud that often occurs when a customer disputes a valid charge out of confusion or misunderstanding. It can be accidental or intentional, and it might happen for a few reasons:

• Forgotten purchases: The customer might have forgotten about the purchase or not recognize the charge on their statement. 

• Buyer’s remorse: The customer might experience buyer’s remorse, but if they missed the refund deadline or just don’t want to return the item for a refund, they may dispute the charge with their financial institution. 

• Family member purchases: If the cardholder allows a family member to use their card and the family member uses the card for a purchase the cardholder wasn’t aware of, the cardholder may later dispute the transaction that individual made.

Chargebacks can result in both direct and indirect costs to your business. Here’s a breakdown of the different types of costs generally associated with chargebacks:

• Lost revenue: A chargeback results in lost revenue, since the original transaction amount is taken back from the business and returned to the customer—even if the business delivered the product or service as the customer expected.

• Chargeback fees: To cover processing costs, financial institutions usually charge a fee for every chargeback. The amount can vary, but it typically ranges from $20 to $100 per chargeback. 

• Inventory loss: If customers receive an item and get a chargeback without returning the item, your business loses both the product and the payment.

• Operational costs: It takes time and resources to process and manage chargebacks. Staff typically need to collect documentation, respond to disputes and monitor the progress of the chargeback—all of which can take attention away from normal business operations.

• Reputational damage: If a business receives multiple chargebacks, its relationships with financial institutions and payment networks may suffer. Too many chargebacks can signal customer service issues, product problems or even fraud risks.

Your business can take steps to help avoid and reduce chargebacks—and doing so can be crucial to protecting your revenue and reputation. 

Here are a few chargeback prevention tips to keep in mind:

• Communicate clearly and consistently. Make sure customers understand your return policies, shipping and delivery processes, product descriptions, pricing and more. 

• Use accurate billing descriptors. To help avoid confusion and friendly fraud, make sure the name on customers’ statements matches what they’d recognize or expect. 

• Properly manage subscriptions. Allow customers to easily cancel subscriptions before the renewal date. Send reminders in advance about auto-renewals, and make sure customers understand when free trial periods come to an end.

• Provide excellent customer service. Along with clearly communicating your return, refund and cancellation policies, offer top-notch service to your customers. Train staff to resolve issues quickly, process refunds promptly, offer multiple contact options for customer support and be as accessible as possible to tackle complaints before they lead to chargebacks.

Chargebacks can be an inevitable part of doing business, regardless of how much effort you put into preventing them. Here’s what your business can do to dispute a chargeback claim quickly and strategically:

• Review the dispute. Your financial institution or payment processor will notify you of the chargeback, including details about the reason, the amount and the deadline to respond. 

• Evaluate the claim. After receiving the chargeback notice, evaluate the validity of the claim. Did the customer receive the order? Did the order have damage or not meet expectations? 

• Gather evidence. If you decide to dispute the chargeback, the next step is to collect evidence proving the charge was valid. Evidence can include customer correspondence, order numbers, receipts and shipping confirmations—anything that helps demonstrate your business successfully processed the transaction.

• Submit your response by the deadline. Your financial institution will review your response to the chargeback and issue its decision.

Chargebacks occur when a customer disputes a charge with their bank, resulting in the payment being reversed—often costing the business revenue and productivity. While not all chargebacks are avoidable, businesses can take steps to reduce them by communicating clearly with customers and providing great service. If a chargeback does happen, be sure to act fast, gather documentation and respond by the deadline to protect your bottom line.

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