chargebacks 101

What is a chargeback?

Chargebacks are a consumer protection tool where people can ask their bank or credit card company to reverse a payment that was unauthorized or fraudulent. Chargebacks are only meant for situations like:

A family member or close friend used the card without the cardholder’s permission.
The card was stolen
The customer never received what they paid for and the merchant won’t respond to them
The customer received the wrong item but the merchant won’t let them return it and there is no return or refund policy available to the customer
There are automatic subscription payments and there is no way to end the subscription

There are many reason codes to classify a chargeback, but they all have one thing in common: the payment was unauthorized or fraudulent.

Fraud goes both ways

While the chargeback system is an excellent tool against credit card thieves and fraudulent merchants, illegitimate chargebacks initiated by customers are fraud too. Known as first-party fraud or “friendly fraud,” illegitimate chargebacks are on the rise and small businesses are hurting as a result.

Chargebacks are NOT intended for the following situations:

The customer paid for something and then changed their mind or had buyer’s remorse.
It’s easier to get a refund through a chargeback than going through the merchant.
The customer missed the window for returns or refunds under the merchant’s policy.
The customer signed a contract with the merchant that prohibits a refund so they get around it through a chargeback.

Customers who initiate chargebacks when they shouldn’t usually don’t know the consequences and often think of it as a victimless crime. But businesses lose billions of dollars each year to illegitimate chargebacks. While big companies and high-volume sellers can absorb the losses as a cost of doing business, small businesses suffer deeper damage.

The system is designed against merchants

When a customer initiates a chargeback, it is almost certain to be granted regardless of the circumstances. The burden is on the merchant to dispute the chargeback and prove that the money rightfully belongs with them. Overall, merchants have a low success rate when it comes to chargebacks because the process is opaque, technical, and variable. Sometimes, the process can be emotional as there may be a sense of betrayal or violation, especially between a service provider and a client.

Initiating a chargeback as a customer is easy. Customers have up to 6 months in some cases to reverse a card payment, while merchants often only have days to respond to the chargeback notice. This gives merchants very little turnaround time to compile evidence, summarize their argument in a professional manner, and ensure the packet meets the specifications in the chargeback notice.

Merchants have the burden of proving the chargeback was improper. On top of everything else, merchants are hit with chargeback fees from the payment processors, which they may or may not get back even if they win the dispute. Too many chargebacks may also negatively impact the merchant’s reputation with the payment processor and lead to higher fees and other penalties.

Ultimately, the system needs major adjustments, but in the meantime, a merchant’s best bet is to do what they can to avoid chargebacks in the first place, dispute chargebacks only when they are likely to win, and ensure they have a reliable system to dispute the chargebacks correctly and efficiently.

How do chargeback disputes work?

When a customer initiates a chargeback, the merchant will receive a notice in the mail and will have the option to accept the chargeback or dispute it. The dispute process is called representment. It’s an internal process between the customer’s bank or credit card company and the merchant’s bank (or whatever bank the merchant’s payment processor uses).

If a merchant chooses to dispute the chargeback, they must submit a dispute packet with evidence that shows the merchant is entitled to the payment. The packet must include a rebuttal letter summarizing the merchant’s evidence and argument in a professional manner. The packet should meet any other specifications listed in the chargeback notice.

The merchant submits the dispute packet to their own bank. The merchant’s bank reviews it and sends it to the customer’s bank or credit card company, who then decides if the chargeback should stand (let the customer keep the money) or be reversed (let the merchant keep the money).

If the customer’s bank decides that the chargeback should stand, then the merchant can again decide to accept or dispute the chargeback a second time. Disputing the chargeback a second time will elevate the dispute to another level: arbitration. Arbitration is a legally binding way to resolve disputes. But the merchant and customer are not parties to the arbitration. Instead, the parties are the banks of the merchant and customer, and the final decision-maker is the credit card company.

Most merchants don’t let the dispute go to arbitration because the loser will have to pay a high fee (like $600 to over $1,000) so there is increased risk of losing even more money.

How much does it cost to dispute a chargeback?

The chargeback notice might say something like “fees in excess of $500 may apply.” Some people see that and automatically give up the chance to fight for their money back. But that is not the cost of disputing the chargeback. Those high fees listed in the notice only apply if the dispute gets to the arbitration level described above.

There is no additional cost to dispute a chargeback if you do it yourself. Merchants are charged the chargeback fee from their payment processor whether they dispute the chargeback or not. The chargeback fee may or may not be refunded if they win the dispute. Chargeback fees vary by payment processor but typically range from $20-100. Some payment processors do not have chargeback fees.

How can Chargeback Recoup help?

Chargeback Recoup knows how the system works and knows what the payment processors want to see. If we think you have a high likelihood of winning, we’ll further increase your chances of success by preparing the dispute packet accurately and professionally and submitting the packet in a timely manner.

Chargeback Recoup does not represent you in the dispute process. We submit the packet for you but only you will get the decision and any further communications from the bank.

Chargeback Recoup takes the stress out of the process so you can focus on other things knowing that you have the highest likelihood of success to get your money back.

Reach out ASAP after receiving a chargeback notice, as there may only be a few days before the deadline to submit the dispute packet. Email support@chargebackrecoup.com.

The dispute packet must be carefully prepared according to the instructions in the notice and must be submitted in a timely manner, sometimes within days of receiving the chargeback notice.

Chargeback Recoup takes the stress out of chargeback disputes by preparing and submitting the packet on your behalf.