A Guide To Merchant Chargebacks: What They Are & Why They Matter

Bailey Jarrell


Whether you’ve been on the consumer or the merchant side, you have probably experienced or heard of a chargeback. The reasons for chargebacks and how they are conducted is often complicated, which is why we want to boil it down for you.

There are three reasons a consumer can deny a charge on their credit card, including dissatisfaction with their purchase, an unrecognized transaction on their credit card bill, or a disappointing experience overall. For a consumer who is in the right, a chargeback can be a protective measure to ensure their peace of mind. For the merchant, however, they won’t be paid for the product or service they provided to the customer. Although in some cases the customer has a legitimate grievance for their refund, some unscrupulous people use chargebacks to get free products and services. Despite the consumer’s ability to manipulate the system, business owners can dispute chargebacks.

You might be wondering if it’s possible for a significant amount of dishonest customers to exploit this process. The short answer is yes, and even if they aren’t intentionally attempting to cheat the system, many keep their eyes peeled for the smallest flaw with their experience to get their money back.

A Growing Problem

Over the past 5 years, the number of chargebacks requested by customers has almost doubled. While that means consumers now feel they have more control over the buying process, for merchants this trend represents a growing problem. Annually, merchants lose approximately 1.9% of their revenue to chargebacks. A $100 chargeback doesn’t just mean the loss of merchandise or a sale, the business could lose $250 in fines, fees, and customer acquisition costs while also taking a hit to their reputation.

The Chargeback Process

When a consumer disputes a charge on their credit card, it is the beginning of a process that involves the consumer, the bank that issued their credit card, the merchant and the merchant’s bank. While the consumer attempts to prove the transaction was fraudulent or the product or service was no good, the merchant has to submit a rebuttal letter to present evidence that shows the sale was legitimate, and proving the customer received a high-quality product or service. The type of evidence needed to be presented by the business depends on the customer’s reason for wanting their money back.

Challenging The Chargebacks

In the past, when a consumer filed for a chargeback, the merchant simply returned the money to the credit card company and took the loss. But chargebacks were becoming such a frequent occurrence that the issue became too big to ignore. Merchants have now begun to challenge many of chargebacks in an attempt to protect their bottom line and reputations. Consumers now have to prove a fraudulent transaction or that the products and services received were significantly inferior to what they were promised.

Through this process, your company is ensured more peace of mind and the consumer now has to go through a few more barriers.

How The Process Unfolds

If a consumer wants to protest a transaction, they can ask the merchant for a refund. If the merchant refuses, consumers have 60 to 120 days from when the purchase was made to contact their credit card company and submit a complaint to request a chargeback. The issuing bank will investigate the claim to determine its validity, and if the customer’s claim is invalid, the process ends there. If the claim is deemed valid, the customer is issued a refund right away and the bank goes after the merchant for the chargebacks.

The Merchant’s Right To Dispute

The merchant has a right to dispute chargebacks and must respond within 45 days to successfully negate the chargeback. The merchant’s bank then verifies the request and begins to conduct their own investigation. After the merchant forwards evidence to their bank to prove the sale was legitimate, their bank then completes their investigation and determines if the consumer is entitled to a refund. If so, they withdraw from the merchant’s account and forward it to the consumer’s credit card company. Merchants must act quickly and provide compelling evidence when disputing chargebacks. Additionally, it is a good idea for merchants to keep records and maintain a close eye on chargebacks. Be ready to dispute any chargebacks that appear invalid.

Why Merchants Dispute Chargebacks

Merchants have a right and a responsibility to dispute fraudulent credit card chargebacks. Not only can chargebacks cut into a business’ cash flow, but merchants may be required to pay fees and fines for having chargebacks. Plus, their per transaction fee for using their merchant account can be increased and if a merchant has too many chargebacks on their record, they are at risk of losing their merchant account and will be unable to accept credit card payments. Undoubtedly, chargebacks are not something that merchants should take lightly.

Chargebacks Seemingly Favor Consumers

Chargebacks are designed to protect both consumers and merchants. However, until recently it seemed like merchants weren’t afforded as many protections as consumers when it came to responding to chargebacks. Many merchants pointed out that even if they had a ‘no refund’ policy, consumers were empowered to file chargebacks by the Fair Credit Billing Act (link to fair credit billing act wikipedia). Still, business owners are advised to clearly display their sales policies, as well as let consumers know their sales rules. If chargebacks go through the arbitration process, those actions could be helpful for merchants disputing chargebacks even though banks seemingly favor consumers over merchants.

Preventing Chargebacks

To prevent chargebacks, merchants should make sure all transactions are properly documented as well as follow all credit card network rules to the letter. Learning and adhering to the regulations major credit card issuers put in place regarding the documentation that companies need to justify their defense can help protect merchants from friendly fraud and improper attempts at chargebacks. This secures their revenue and gives them the legitimate right to dispute all chargebacks. However, it is important to first know and understand the rules related to credit card transactions. We can help you manage some of the aforementioned duties, and are always here to help if you come across a challenging situation.

Some Key Rules For Credit Card Transactions

Merchants should always obtain proper customer verification. This includes ensuring the business name on the bill is legible, the card isn’t expired and the customer signs all receipts. The customer must also present proper identification with a signature that matches the one on the credit card.

Your business must have EMV readers and adhere to all current security standards. Sales staff should capture the customer’s signature digitally and ensure it matches the one on the customer’s credit card. Credit cards without a signature should not be accepted.

Most Common Reasons For Chargebacks

Although chargebacks are unavoidable for businesses that accept payments by credit card, the goal is to limit them. If you have followed the rules and have the proper paperwork to submit with your merchant chargeback dispute reversing fraudulent chargebacks should be easy. The most common reasons customers request chargebacks include:

  1. The merchandise that was ordered was never received.
  2. A processing error occurred.
  3. The credit card was not processed in a timely manner.
  4. The product or service did not meet the expectations of the consumer.
  5. The purchase was not made by the credit card owner. It was fraud.

Ultimately, merchants should strive to conduct their business in a manner that eliminates the probability of these types of chargebacks.

Know Your Merchant Rights

Merchants are not powerless when disputing a credit card chargeback, and the process is designed to protect both the consumer and the merchant. All merchants have to do is know their rights and understand the process for disputing chargebacks so they can protect themselves from fraud. Rev19 is here to answer any questions that you might have regarding chargebacks.  

At the end of the day, it is important to be aware that companies sometimes make mistakes and can simply correct their errors, while other situations require more involvement. Your first priority should always be to personally connect and resolve the issue with the customer. Beyond your own efforts, work with your processor to ensure a seamless customer experience and you will be positioned to handle challenges as they come.

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