Chargebacks happen when a cardholder disputes a merchant charge. The issuing bank then debits the merchant’s account for the amount of the transaction. Even if a chargeback is reversed, the merchant is charged a fee by the issuer and may face additional fines and penalties. Merchants who receive too many chargebacks increase their chargeback ratio, which could result in even more fines, fees and penalties as well as the loss of processing privileges.
There are a variety of reasons that cardholder disputes occur, including:
- Cardholder does not recognize transaction
- Fraud – Card Absent Environment
- Not as described or defective merchandise
- Service not provided or merchandise not received
On average cardholders are given 120 days by issuers from the date of the charge on their billing statement to initiate a dispute and in some other cases a cardholder can take up to 540 days (18 months). Once the merchant is notified of the dispute, it has several options in which it can respond. It may choose to issue a refund, fight the chargeback or do nothing and let the chargeback process.
To prevent and manage chargebacks, merchants should first employ the following best practices and processes:
- Improve the process
. Automation of credit card processing rules and the dispute process can help streamline workflow and eliminate human error. - Clear billing. Confusing billing descriptors are a top offender for unnecessary chargebacks. Merchants should include clear website and telephone (or other contact information) number on billing statements so cardholders can easily recognize purchases.
- Prioritize. Merchants need a “fight or flight” process for determining when and how to fight chargebacks. This includes weighing the costs of fighting the chargeback against how much a “win” would be worth.
- Fix operations. Looking at operations is a good first step to reduce chargebacks. Addressing quality control issues, misleading product marketing or other causes can cut down on unnecessary chargebacks.