Chargebacks: What They Are, Why They Happen and How to Avoid Them

Running a successful business is a rewarding endeavor. But it isn’t easy—you’re often faced with unexpected challenges, including chargebacks. They can seem complicated and intimidating to tackle if you haven’t dealt with them before. If you’re looking for ways to prevent chargebacks or simply want a greater understanding of the topic, you’ve come to the right place.

Card networks, banks and all other parties involved in the payment processing ecosystem are always working to mitigate fraud and loss. The chargeback process is just one form of mitigation.

Many merchants, through no fault of their own, have no idea what a chargeback is, why they happen, what to do when they happen and how to avoid them. We wanted to take what we’ve learned based on our experience with retail point of sale systems and payment processing and share everything you need to know about credit card chargebacks. 

In this post, you’ll learn:

• What a chargeback is
• How the chargeback process works
• How to handle a chargeback
• Why chargebacks happen
• How to avoid chargebacks
• What happens if you lose a chargeback claim
• How Lightspeed helps with chargeback disputes

Let’s get started! 

What is a chargeback?

A credit card chargeback—also known as a payment reversal—is when a customer disputes a charge (or many charges) on their credit card after purchasing goods or services from your business. The chargeback itself is a MasterCard, Visa, Discover or American Express transaction that reverses the original sale.

It’s these major credit card brands that administer the chargeback process. The banks and payment processors are required to abide by the rules the credit card companies mandate.

Chargebacks are an unfortunate part of running a business. The chargeback process can become complicated and it can be frustrating to see card issuers withhold funds. However, working with a payment processor that will help you fight chargebacks and update you on the status of the claim can give you peace of mind.

To make it extra easy to understand how a chargeback plays out in real life, take a look at this example:

Before we go further, let’s answer some commonly asked questions. 

How do debit card chargebacks work?

In theory, the chargeback process is the same for debit cards and credit cards. However, credit cards are more widely protected from fraud. The timeline for reporting suspected fraud with a credit card is more flexible than for purchases made with debit cards. 

In the US, if debit cardholders wait more than 60 days to notify their card network of a missing card or suspected fraud, they may be liable for all unauthorized charges.

What is the difference between a dispute and a chargeback?

A dispute is an action taken by a cardholder to contest a transaction on their account. The chargeback process is initiated by the card issuer as a result of the dispute.

Are funds and chargebacks the same thing?

A chargeback isn’t the same thing as a refund. A refund is when a customer  isn’t satisfied with their merchandise or service or receives a faulty product, and reaches out directly to the merchant to get their money back. 

Most businesses have refund policies in place. If a customer requests a refund that falls within their policy, the business will return the money to the customer. 

Chargebacks, on the other hand, occur as a result of disputed charges that cardholders make through their card issuer. And instead of the business returning funds to the customer, the customer’s bank initiates the payment reversal.  

How the chargeback process works

Major card issuers have unique chargeback processes, but the general steps are similar. The payment processor you use may also have an impact on the process, depending on the amount of support they offer your business. 

1. In general, when a cardholder disputes a charge with their card issuer, the issuing bank (the cardholder’s bank) will then decide whether there is reasonable cause for the claim. If there are grounds for a dispute, the issuing bank will inform the acquiring bank (the merchant’s bank) of the claim and reverse the payment from the merchant’s account.
2. The merchant decides to either accept or appeal the chargeback. If they choose to fight the chargeback, they must provide evidence as to why the claim is not legitimate. 
3. The bank will review the evidence and side with either the merchant or the cardholder. If the merchant wins, the funds are returned to their account. 
4. The process can continue if either party takes further action to dispute the issuing bank’s decision. Often, pre-arbitration occurs after the presentation of new evidence that throws the initial decision into question. 
5. If neither the cardholder or merchant takes accountability during this period, the process moves into arbitration and the card issuer makes a final decision, which cannot be appealed by either party. 

How to handle a chargeback

It’s frustrating to deal with chargebacks, but it’s important to use all the resources at your disposal to take the right course of action. 

If the bank moves ahead with the cardholder’s chargeback dispute, the payment will be reversed and funds will be withheld from the merchant’s account. Merchants may also have to pay an additional chargeback fee per their payment processor’s policies. 

As a merchant, you can either decide to fight a chargeback or accept it. If you choose not to appeal the chargeback, read your payment processor’s policy to find out whether they implement a chargeback fee so you’re not surprised later. 

Businesses are more likely to fight claims for large transactions. That means it’s important to gather the necessary evidence to present to the bank, card network or both in order to disprove the claim. 

Depending on the reason code for the chargeback, the evidence you must present will vary. That evidence may include: 

• Receipts (delivery confirmation, order confirmation, sales, subscriptions)
• Transaction records 
• Evidence of communication with the cardholder
• Signed contracts
• Copies of your business’s refund policies 
• Photos of the merchandise

Should you find yourself fighting a chargeback, your payment processor is a valuable resource. They may be able to help you present the necessary evidence, and communicate with the card issuer on your behalf. 

Chargebacks from customers who have a legitimate reason to be unhappy can typically be resolved with open and fair communication. If you receive a legitimate chargeback, talking to the customer and finding a compromise should be your first response.

Reasons why chargebacks happen

Chargebacks were originally initiated as a means of providing consumer protection from fraud. Today, there are several other reasons why chargebacks occur. Here are the most common:

• Fraud: When a purchase was made on a credit card without the authorization or consent of the cardholder. This is the most common reason for a chargeback.
• Merchandise was not received: When the buyer never received their order (like in Sophie’s example).
• Duplicate processing: When the buyer gets billed more than once for their order.
• Credit not processed: When a buyer makes a return but doesn’t receive a refund.
• Not as described: When the buyer claims the merchandise is damaged or defective, or what they received is a misrepresentation of the terms of the sale.

Chargebacks can have a negative impact on your business and can impact profitability, but luckily there are ways to reduce and avoid them. Most chargeback prevention practices start at the point of sale.

How to avoid chargebacks

When the card is present (typically in-store):

• If the authorization request was declined, don’t repeat the authorization request. A non-authorized transaction can easily return as a chargeback.
• If you receive a referral message in response to the authorization, call your payment processor. When this happens, the card issuer typically wants more information about the cardholder. If you’re in the middle of a rush, simply ask the customer to use a different payment method.
• If you manually key-in an amount and credit card, retain an imprint of the card on the receipt. To be PCI compliant, you need to securely store sensitive information like this and destroy it when you no longer need it (typically 90 days after the transaction).
• Ensure cardholders are clearly aware of your return, refund or service cancellation policies, specifically for subscription-based companies. Ideally, these should be clearly visible and printed on your receipts. The cardholder should have no “reasonable grounds” to claim they did not know your policies.
• Always process credits in a timely fashion. 
• If a product is back-ordered or delivery is delayed, always communicate that with your customers.
• Ship merchandise and deposit the authorization at the same time. If customers are charged for an item they have not received, they tend to be more prone to dispute it.
• Respond to requests to cancel recurring payments immediately.
• If your business sells high-value items, or you often have big orders, get a signed contract. Include your return, refund or cancellation policies in the contract. If possible, try to get a copy of your customer’s ID that matches the details on the credit card.
• Ensure your billing descriptor is easily recognizable by your customers.
• Be wary of suspicious, potentially fraudulent transactions. Look out for these red flags:
  • Is the customer hesitating or avoiding giving you their personal information?
  • Are the billing and shipping addresses different?
  • Is there pressure to ship the “urgent” order immediately?
  • If the order is out of the ordinary, trust your instincts and investigate further.

When the card isn’t present (typically online):

Transactions where the card isn’t present are inherently riskier because the buyer is not physically with you, which makes it challenging to verify their identity.

True fraud and friendly fraud are more difficult to beat than chargebacks from customers with a legitimate reason to be disgruntled. True fraud is when a fraudster uses a card without the card owner’s knowledge. When the legitimate cardholder becomes aware of the transaction, they’ll ask for a chargeback and your business will suffer the loss—both the merchandise and the money.

Friendly fraud occurs when a legitimate customer abuses the chargeback process for their own gain. You can prevent this by keeping a record of your transactions to help you challenge chargebacks.

The best way to reduce card-not-present chargebacks is to identify suspicious transactions before they happen. Consider the following:

• Treat first-time customers with caution, especially if it’s a big order.
• Watch out for card testing. This is when fraudsters try using cards from various banks to see which ones work.
• Treat buyers who are overly concerned with shipping details with caution. Fraudsters commonly worry about shipping because they’re afraid the real cardholder will detect a fraudulent transaction on their card before the goods leave the warehouse.
• Multiple orders to the same shipping address, all using different cards. Always check for corresponding shipping and billing addresses as a rule.
• Be wary when the billing and shipping addresses don’t match. This might indicate that a fraudster has either shared a working card number with others, or that they’re shipping merchandise to several locations using a stolen card.
• Raise the alarm if you receive several orders with slightly different credit card numbers. A fraudster may have purchased a list of credit card numbers and is systematically testing them.
• Continuous order attempts with gradually decreasing value. Issuing banks have sophisticated fraud controls that decline suspicious transactions above a certain value. Multiple order attempts with decreasing values might indicate a fraudster trying to figure out what the issuing bank’s threshold is.
• If a customer has problems providing personal information, especially on phone orders, this should raise suspicion.
• Incorrect credit card expiry date. If a transaction is repeatedly declined because of incorrect card expiration dates, that could indicate that a fraudster is trying to guess. This is a clear indication that they do not have the original card in their possession. Same applies to CVV numbers.
• The use of deaf relay systems or other voice assistance services should be treated with caution. Sadly, these tools are commonly used by fraudsters to disguise their identity.
• The buyer is indifferent to high shipping prices. A fraudster is primarily concerned with shipping goods as fast as possible and trying to avoid detection. High shipping prices don’t deter them, because they’re not paying for them.
• International orders must always receive additional scrutiny. Fraudsters know that it’s almost impossible for law enforcement to catch them if they are outside the country where the purchase is made.
• In-store pickup can be a card-not-present fraud flag. Always check for valid ID that corresponds with the cardholder’s information before you fulfill the order pickup.

In addition to those tips for avoiding chargebacks, follow these preventative measures:

• Write accurate and detailed descriptions for each product on your online store. Give customers the information they need to make an educated purchase and know exactly what to expect. 
• Clearly denote information regarding order processing, shipping and delivery timeframes. Make sure the customer is kept up to date by providing tracking numbers (if possible) and advising of any potential delays due to back-orders or transportation issues. 
• Build a relationship by providing good customer service before and after the purchase. This means answering phone calls, emails and social media posts as soon as you can. Use chatbots or automated responses if you need to. Just don’t leave the customer hanging or in the dark. 
• Prominently display customer-support contact information. The more ways a dissatisfied customer can contact you (by phone, email, social media and snail mail), the better. A customer without a clear path to resolving an issue is more likely to initiate a chargeback. Pave the way.
• Don’t make it hard or complicated for customers to get a refund. Issuing a refund is cheaper and far less time-consuming than defending a chargeback.
• Choose a billing descriptor that will be easily recognized by the customer when it shows up on their credit card statement. Use your store name and include your business phone number. This way, the customer can reach out to you for questions rather than resort to a chargeback. 
• Same applies with receipts: make sure they are clear, descriptive and legible.

Did you know? Lightspeed Payments offers 24/7 support and unlimited fraud monitoring. Your business is protected around the clock.

What happens if you lose a chargeback claim

If you lose your chargeback claim, your payment processor will advise you on the best course of action.

• Sometimes an issuing bank will respond with pre-arbitration. This means you have the opportunity to appeal the decision on the chargeback. You will, however, need to provide additional evidence to support the transaction and prove that it was legitimate.
• The card brands also offer arbitration as the final option. Arbitration is expensive (normally around $500 per transaction). Most businesses will not pursue arbitration as a final resolution. There are however times when it is required, especially for very large transactions.

How Lightspeed helps with chargeback disputes

Each major card brand has a unique chargeback process. While chargebacks typically take between 30 and 90 days to get resolved, it can take up to 120 days in some cases.

If you are a Lightspeed Payments customer and receive a chargeback, Lightspeed works with you to evaluate the situation and determine what evidence you need to resolve the situation.

Chargebacks are ultimately your responsibility, however, Lightspeed makes the chargeback process as pain-free as possible by dealing with the banks and processors on your behalf, and advising you on how to resolve the issue. Here’s what the chargeback process looks like when you use Lightspeed:

Day 1: The cardholder claims that a transaction at your business isn’t valid.

Day 2: Lightspeed pays for the chargeback and its associated fees on your behalf to the cardholder’s bank, and either withhold the chargeback amount from your next settlement or debits your account.

Lightspeed immediately contacts you by email and phone to advise you and ask whether or not you want to challenge the chargeback (chargebacks for any amount lower than $20 are often not worth challenging). If you decide to challenge the chargeback, Lightspeed advises you on which evidence you should provide. Our experts collect this evidence with your help and then send it to the cardholder’s bank for review.

• For Visa, you have 30 calendar days* to provide evidence.
• For Discover, you have 45 calendar days* to provide evidence.
• For Amex, you have 20 calendar days* to provide evidence.
• For MasterCard, you have 30 calendar days* to provide evidence.
• If you don’t provide evidence within the prescribed time, the card networks will assume that you have accepted the chargeback. After this point, there is no recourse for you to appeal.

*These timeframes are likely to change over time.

Within the next 30 days: If the issuing bank (the cardholder’s bank) finds that the initial charge was legitimate, you will be given back the money for the transaction. If the issuing bank finds that the initial charge was not legitimate, you will not get back the money for the transaction.

Important: Regardless if you win or lose, chargeback fees are non-refundable. These fees are imposed by the cardholder’s bank in order to process the chargeback request.

Face chargebacks with confidence

Now you’re equipped with the information you need to handle a chargeback if it arises. Whether you choose to dispute the chargeback or accept it, you’ll know the steps to take for either course of action. 

You’re in a position to update your policies and inform your staff so they can be your eyes and ears when you’re not there. Make your return policies crystal clear on your website, receipts, and in any online communications with customers. 

Want to learn more about Lightspeed Payments and how it helps make processing transactions easier? Talk to our team of experts today.