All you need to know about Chargeback

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You read your bank statement and see a sum you don’t recognize – but do not fear. Once you’ve made sure that it was for an unauthorized transaction there are certain protections in place to ensure the return of your money. That’s where chargeback comes to the rescue. In its simplest form, it results in the reversal of transferred funds. Known as a payment dispute, chargeback is when a cardholder asks the card-issuing bank to reverse the payment and return their money. In such cases, disputed funds are held from the business until the issue is resolved. It’s a tedious process with plenty of documentation involved, however funds are eventually returned to the bank holder if the bank rules in their favor.

In recent years, customers have become more vocal about their consumer rights and this has seen a 20% increase in chargebacks, according to stats by ClearSale. Chargebacks cost merchants $11.2 billion in 2015, $19 billion in 2017 – a number that keeps rising. Merchants complain that consumers are taking advantage of the regulations and using chargebacks as though they were a refund system, straddling them with additional fees they wouldn’t have to pay in the case of an ordinary refund.

Merchants complain that they now need protection against the very system created to protect consumers. But that has not always been the case, and there was a time when there were no customer protections in place.

History in the USA

The first reported case of identity theft took place in the United States in 1899 when a livestock farmer received a credit card from a transportation company. These cards, at the time, were handed out so that passengers could ride private carriages on credit and pay later. Thinking he wouldn’t need such an extravagance, he threw away the card he received, only to find out the hard way what can happen when someone steals your identity. He was charged $27 – over $700 in today’s value – for rides he did not take. Unfortunately, he was forced to pay the bill and it wasn’t until the 1970s that regulations finally came into place in the United States aimed at protecting consumers from such injustices.

With credit cards becoming more widespread and fraud more rampant, two acts came into place: the Fair Credit Billing Act (1974) and the Electronic Fund Transfer Act (1978). The first addressed fears of consumers worried that merchants would inflate prices or tack on transaction fees to their cards and the second Act provided debit card fraud protection to limit liability in cases of fraud however stopped short at stipulating repayment of any money withdrawn from a person’s account. These were the first regulations with the Fair Credit Billing Act being the first to create what is now known as chargeback.

Four decades later, there were seven data breaches from 2013 to 2015 which affected six billion consumers whose personal information was exposed as well as billions others who were hacked with criminals using their information in counterfeit transactions. Recognizing that the chargeback system wasn’t working the Visa Claims Resolution (VCR), a new dispute process, was rolled out in 2017 and Mastercard is implementing its own Dispute Resolution Initiative in 2020.

Reasons for a chargeback

Chargebacks are similar to refunds in that a dissatisfied customer receives a reversal of a purchase, however there are differences between the two as chargebacks are due to illegitimate charges, scamming and credit card theft, whereas refunds are for damaged goods, substandard quality, wrong items and late delivery, etc.

The main reasons given for chargebacks are the following:

  1. A stolen credit card was used to make the purchase (30 %)
  2. The purchase never arrived due to loss or scamming (26 %)
  3. The retailer shipped the wrong product (16 %)
  4. The product fell below customer expectations (4 %)
  5. The product didn’t match the website description (4 %)
  6. The order was double billed or there were other clerical errors (3 %)

A 2019 study by Midigator found that fraud-related disputes accounted for most chargebacks in 2017 and 2018, however the report added the reasons which a cardholder’s bank assigns for chargebacks don’t always give the most accurate depiction of reality as they go merely on information given by the cardholder which may be skewed.

Cases where a cardholder uses the chargeback process incorrectly are called ‘friendly fraud’, but there is nothing friendly about it as it causes huge headaches for businesses. Midigator’s study found that 70.85 % of disputes were categorized as unauthorized transactions, however 77.25 % of these were found to be friendly fraud. For instance, a customer may dispute a charge with the credit card company, however their disputes are not genuine eg claiming to not have received an item when they had, claiming not to know who charged them or that their card was stolen when it wasn’t, etc. Such falsified information, were it to take place in a bricks-and-mortar shop, would be considered shoplifting.

Not having protection for consumers however could result in even more tragic circumstances for consumers who may be preyed upon or have their identity stolen, scammed or tricked out of fortunes.

How to initiate a chargeback

Initiating a chargeback is easy to apply for, but it kicks off a tedious process. For this reason, other avenues should be tried before resorting to this. In genuine cases when a chargeback should be given, the consumer should do the following:

Contact the merchandiser

Give the merchandiser the opportunity to rectify the problem. For instance, if you lost a package in the mail or received damaged goods, give the store owner a chance to make amends. It’s cheaper for merchants to give you a refund rather than have to pay a sizable fee in the case of a chargeback dispute. If you have no customer service contact details or can’t come to a solution with the merchandiser, then – and only then – move onto the next step.

Visit your credit cardholder

File a dispute with the issuer of your credit card. Explain the problem and the reason you are challenging it. This will be forwarded to the merchant who can either refund the transaction or prove that the transaction was legitimate. The merchant will need to respond within 30 days and will lose the dispute if no response is forthcoming. The credit card company may return your money while the chargeback process is still underway though that is at the discretion of different credit card holders.

A note worth bearing in mind at this stage is that there may be repercussions should you file a complaint. For instance, the merchandiser may ban you from shopping at their store. Sony warns Playstation users in advance that this is what they’ll do. Furthermore, if it is found that you are engaging in friendly fraud, your bank may also take action against you.

Start the process one at a time

The actual process for starting a chargeback is different for each credit card company whether it be American Express, Bank of America, Capital One, Chase, Citibank, and Discover. When filing a dispute, make it as detailed as possible. Include details of all dealings you have had with the merchandiser regarding this particular purchase including all emails.

In the worst case scenarios, double refund chargebacks result in customers getting refunds at the same time as their bank initiates chargebacks only to pay for one item and receive return payment for two. But as they say ‘easy come, easy go’ and sooner or later this mistake will be found and the money will disappear as magically as it poofed into your account in the first place.

Once a file is made

The chargeback process is an uphill battle. Once a claim is filed, the bank issuer investigates the claim to identify the transaction. In cases where the consumer appears to have a legitimate claim, the cardholder overturns the transaction and forwards the claim to the merchant who can review it and decide whether it is worthwhile to appeal the information.

Appeal

The merchant may decide to fight back, refute the consumer’s claim and uphold the original state of the purchase. The merchant will need to bring forth compelling evidence to refute the cardholder’s claim. The case will be reviewed and if the bank issues a verdict in the merchant’s favor, funds will be returned to the merchant.

Online claims

Chargeback claims can be processed entirely online. In some cases, it is as easy for consumers as clicking on a “dispute” button next to the amount of the purchase on their credit cards. It is so easy, in fact, that business owners complain that it is easier for people to make claims for refunds than to approach merchants first to find a solution.

Consumers have 120-180 days in which to file a chargeback on a credit card purchase, however merchants have around 30 days to respond. The 2018 Visa Claims Resolution Initiative further reduced the window for merchants to respond to Visa chargebacks from 45 to 30 days and cardholders and credit card issuers have 30 days to respond to rebuttals. Business owners complain that the short time frame does not give them enough time to address the claims.

Tips for consumers

  • Be informed of all the ways in which you may be scammed or your identity may be stolen to avoid, as much the possible, the drama of having to file a chargeback claim in the first place.
  • Keep all paperwork when making transactions
  • Visit the merchandiser before making your claim to try and resolve this between the two of you
  • Make sure the company you don’t recognize in the transaction isn’t a company you’ve dealt with under a different name
  • You have more consumer protections when you use a credit card for purchases
  • Be warned that some companies have been known to ban consumers who file chargebacks.