Understanding Chargebacks: What Every Merchant Needs to Know
Understanding Chargebacks: What Every Merchant Needs to Know
Chargebacks are an unavoidable part of doing business in today's credit-driven world. Designed to protect consumers, chargebacks allow cardholders to dispute transactions they believe are unauthorized, fraudulent, or problematic. But for merchants, chargebacks can lead to lost revenue, additional fees, and potentially even penalties if not properly managed.
This article outlines what chargebacks are, why they occur, and—most importantly—how you as a merchant can prevent and respond to them effectively.
What Is a Chargeback?
A chargeback is a transaction reversal initiated by a cardholder through their issuing bank, typically when they believe a transaction was unauthorized or not properly fulfilled. It’s a consumer protection tool, allowing cardholders to dispute charges when something goes wrong.
Common Reasons for Chargebacks
Customers may file chargebacks for reasons such as:
Sometimes, chargebacks happen due to simple misunderstandings or “friendly fraud,” where the customer forgets a purchase or regrets it later.
How Merchants Should Respond
When a chargeback is filed, funds are pulled from your account and credited to the customer temporarily. You have the right to contest the chargeback by submitting compelling evidence, such as:
Signed receipts or agreements
Proof of delivery
Correspondence with the customer
Refund or return policy documentation
Act quickly—deadlines for response are firm, and missing one usually means losing the dispute by default.
Chargeback Timeline
Cardholders generally have 45 to 180 days from the transaction date to file a chargeback, depending on their card issuer and the nature of the complaint.
Once filed, the dispute goes through a mediation process between:
If no resolution is reached, the dispute can escalate to arbitration under the credit card network’s rules (e.g., Visa, Mastercard). The decision at this stage is final.
Merchant Impact
Chargebacks affect your bottom line in more ways than one:
Lost revenue from the sale
Chargeback processing fees
Higher risk scores or penalties for frequent disputes
Too many chargebacks can even threaten your ability to process card payments.
Best Practices to Prevent Chargebacks
Prevention is your best defense. Here are actionable tips to minimize chargebacks:
Communicate proactively: Reach out if there's a delay or issue. Offer refunds when necessary to avoid disputes.
Display clear policies: Return, cancellation, and shipping policies should be easy to find—online and in-store.
Use a recognizable billing descriptor: Make sure your business name and phone number appear clearly on customer statements.
Verify addresses and CVV codes: Use AVS and CVV2 to detect potential fraud.
Avoid processing payments too early: Especially for custom or delayed orders—wait until shipping.
Confirm suspicious or large orders: Especially if they’re for overnight delivery or international shipping.
Always get proof of delivery: A signature or shipping log is essential if a customer claims non-receipt.
Respond promptly to recurring billing cancellations.
Process authorizations and refunds daily.
Never accept expired or declined cards.
Act Fast When Disputes Arise
Chargeback windows are short. Failing to respond in time means forfeiting your right to contest the chargeback—even if you have the evidence to win.
Are There Any Chargeback Fee's Assessed to the Merchant?
- Yes, Fractal assesses a $25.00 chargeback fee for each chargeback the merchant gets. As the merchant, you would see this fee on your monthly Merchant Statement.
Final Thoughts
Chargebacks are designed to protect consumers, but they can put merchants at risk if not managed proactively. By tightening up your policies, communicating clearly with customers, and following best practices, you can significantly reduce your chargeback exposure.
Stay informed, act swiftly, and prioritize customer satisfaction—it’s the best way to keep your business secure and profitable.