What is Chargeback Process and How Does it Work?

A chargeback is a refund processed by a card issuer when a customer disputes a transaction on their credit or debit card statement. The card issuer then contacts the merchant and requests a refund on behalf of the cardholder. If the merchant does not agree to issue a refund, the card issuer may reverse the charges, resulting in a loss for the merchant.

The chargeback process is designed to protect consumers from fraudulent or unauthorized charges, but it can also be used to dispute legitimate transactions. For example, a cardholder might initiate a chargeback if they are unsatisfied with a purchase, if they did not receive the goods or services they paid for, or if they believe the merchant violated the terms of service.

There are several reasons why a merchant might dispute or appeal a chargeback, including providing additional documentation to prove that the transaction was valid. However, the card issuer’s decision is typically final, and merchants can lose a significant amount of money if they continue to fight chargebacks without justification.

As more consumers adopt debit and credit cards, chargebacks have become a growing problem for merchants. In 2017, there was a 44% increase in global chargebacks, totaling $31 billion in losses for merchants.1

The major card networks (Visa, Mastercard, American Express, and Discover) all have their own rules and regulations regarding chargebacks, but the process generally follows these steps:

1. Cardholder initiates a chargeback with their card issuer.
2. Card issuer contacts the merchant and requests a refund on behalf of the cardholder.
3. Merchant has the option to dispute the chargeback or accept the refund.
4. If the merchant disputes the chargeback, they must provide documentation to prove that the transaction was legitimate.
5. The card issuer reviews the documentation and makes a final decision.
6. If the card issuer rules in favor of the cardholder, the merchant will lose the amount of the refund plus any associated fees.

Chargebacks can be costly and time-consuming for merchants, so it’s important to take steps to prevent them. For example, merchants can improve their chargeback prevention by clearly displaying their refund policy, verifying customer information, and shipping goods or services promptly. Additionally, merchants should keep detailed records of all transactions in case a chargeback is initiated.