How To Minimise Chargebacks

Jennifer Blake Posted on September 25, 2020

What are chargebacks?

From the outside, a chargeback can seem just like a traditional refund. But there is one big difference: rather than coming from the buyer’s contact with the seller, the bank is forcibly taking money from a seller’s account. 

There are many reasons that chargebacks exist. They are there to keep customers feeling secure and keep them loyal to the credit card companies that act in their best interests. Chargebacks are also a significant deterrent to dishonest sellers that are looking to make quick money off sub-par products or services. It is in a merchant’s best interests to be upfront about the quality of the products and general nature of what consumers should expect. 

In more serious situations, chargebacks also help cardholders that have become the victim of genuine criminal fraud, as the stolen money is traceable and therefore returnable. 

In the 1970s, when credit cards were emerging as a new payment option, there was widespread fear that people could lose their cards and be the victims of fraud. Additionally, there was a worry that merchants could use people’s credit cards outside of agreed funds and exploit them. In response, credit card companies began using chargebacks to retrieve funds for sub-par products and services, giving card users the confidence that their money was safe even if it was already in the seller’s bank account. Essentially, chargebacks are the customer’s safety net. 

How do chargebacks work?

  1. A customer purchases something on a credit card. An unhappy customer speaks to their bank and asks for a refund. They must give a valid reason for the request. 
  2. Reasons are allocated reason codes, e.g. ‘good or services not as described’. Each reason code has a set of rules like time limits and the documentation required. 
  3. The credit card company takes action. They will investigate the claim and make sure the complaint has genuine merit. 
  4. If the cardholder has a valid claim, the money will be taken from the merchant’s bank account and put back into the cardholder's account. The merchant is notified. The consumer, however, has no obligation to return the purchased product.
  5. The merchant has an opportunity to dispute the claim, and possibly get the money back if the customer took it wrongly. 
  6. If the merchant’s bank has access to compelling evidence that would invalidate the chargeback, it will act on the merchant’s behalf. Otherwise, the merchant’s bank will pass the chargeback along to the customer.
  7. The original credit card company (working on behalf of the customer) reviews the evidence and makes a final decision. If the merchant has sufficient evidence, the money will be put in the cardholder’s account to go back into the merchant’s account. If the chargeback were wrongful, the merchant would not receive remuneration for admin or chargeback fees. 

If chargeback rates for particular merchants remain higher than usual, merchants could run the risk of having their bank account terminated. Similarly, cardholders that file several wrongful chargeback claims can risk being ineligible for chargebacks in future. Chargebacks should be a last resort; the first step should always be for customers to speak to the merchants. 

How to avoid chargebacks

To reduce the devastating losses that come from several successful chargebacks against your business, here are few things to keep in mind. Merchants should do their utmost to provide high-quality products or services and should set and keep to reasonable delivery deadlines. Merchants should ensure they have great customer services processes and policies in place. Policies should include a returns policy and opportunities for customers to communicate with merchants to express disappointment or unhappiness.