What Are Chargebacks – And How to Respond to Them

Credit Card Chargebacks - What You Need to Know
Back in your college days, the excitement over running your own business was intoxicating––you have a chance to do make a difference and see your idea in action. You learned that if you come up with an idea, create a business plan, get some cash together, set some milestone dates—then you can get working and get your business up and running. In reality, most of what you learned in college doesn’t reconcile with the hard facts of the business world, and it certainly skipped a few vital details about running and maintaining a successful business.
For example, what are chargebacks? Did your business instructor break the bad news to you about this in college? Most likely, you first learned about it when you received a chargeback notification from one of your customer’s issuing banks. It may not be a pleasant welcome to the world of business, but it is the reality. Without any foreknowledge of this common business pitfall, it’s no wonder why so many merchants end up in the eleventh hour scrambling and responding ineffectively to chargebacks.
What Are Chargebacks?
Maybe you’ve received notification from an issuer about a chargeback, or you’ve been browsing our website and realized that you have a lot of questions about chargebacks. Not to worry, we’re here to help you out.
Chargebacks were set up by the U.S. Fair Billing Credit Act of 1974 to protect consumers from credit card fraud. The thinking was that this would give customers peace of mind when using their credit cards, instilling confidence that if their card were stolen or defrauded then they would not be held accountable for subsequent charges.
You receive notification of a chargeback after your customer contacts their credit card company to dispute a charge. The credit card company responds by reversing the charge and returning the funds you received for the payment to the customer. You are now on the losing end.
The pressure is now on you to prove that the charge on the customer’s card is in fact valid, and that the customer approved the charge. To do this properly, you need to provide solid proof that the customer initiated and authorized the charge.
Responding to Chargebacks
Stated bluntly, responding to chargebacks is not easy. When done incorrectly, this process can be expensive, exhausting of resources, and ineffective. (Something you didn’t learn in Business 101…)
To respond to chargebacks effectively, you need to understand the reasons why a customer may file a chargeback:

  • Confusion over the charge on the credit card statement. This is incredibly common and can be prevented by providing detailed billing descriptors about the substance of the transaction. For example, provide information about how and when the item was ordered, or even a more detailed description of the item, such as size or color.
  • Fraudulent charge due to credit card theft. The customer’s card was stolen and violated. Typically, the credit card company will identify this before the customer even finds out about the charge. This is the prime reason why chargebacks were first introduced.
  • The item was not received. Now with online and mobile sales, often items are simply dropped off at the customer’s address without a signature of receipt. This can result in the item being stolen or even left at the wrong address. It is best if you ensure that your delivery service requires a signature upon receipt of the item, as well as making sure that your authorization system prompts the customer to double-check and approve their delivery address.
  • The customer was charged multiple times for the order. This can simply be chalked up to human error. Often the charge wasn’t processed correctly the first time so it was run again, and then due to a communication error the customer was charged twice for the item.
  • A subscription was canceled but the charge continued. This can happen when the customer is not fully aware of the subscription cancellation policy and believes they have followed the guidelines, when in fact they haven’t. To prevent this from happening, make sure you have clearly documented your subscription cancellation policy as well as your refund/return policy on your website.
  • “Friendly” fraud or chargeback fraud. The customer is willingly stealing from you. Unfortunately, this is a very common reason for chargebacks. People are looking for ways to cheat the system, and one way they will do this is by knowingly committing chargeback fraud. This is such a prevalent problem for merchants and issuers that we urge you to learn more about “friendly” fraud.

There is one common thread that connects these chargeback reasons: knowledge. When you have the information that you need to determine the chargeback validity, you can then decide how to respond. Often the best response is to contact the customer directly, but to do this you need a solution in place such as CDRN, which allows you to quickly and easily contact your customer. If you do determine that the chargeback is valid, then you can take measures to ensure that it doesn’t happen again. This can be readily handled by setting up a solution to help you stop chargebacks before they happen.
We know you’re doing your best to run your business. We know that it can be challenging to deal with the unexpected. We don’t want chargebacks to be unexpected. The best thing you can do (and what they probably didn’t tell you in Business 101) is to take steps today to prevent chargebacks from happening tomorrow. Get the knowledge you need so you’re not left scrambling and stressing over chargebacks.