Chargebacks on a Credit Card Affect Businesses and Customers

Chargebacks on Credit Card Purchases Cost Billions Annually in Lost Revenue

Although you may not have ever heard the term “chargeback,” you might be familiar with the concept.

A chargeback is essentially a refund performed at the bank level. After completing a transaction, a dissatisfied cardholder’s bank forcibly withdraws money from a seller’s account and returns it to the cardholder.

Chargebacks were originally devised as a form of consumer protection. However, many consumers use chargebacks as a way to take advantage of e-retailers, often without even knowing that they’re doing it.

Why Request a Chargeback?

There are numerous reasons why cardholders sometimes request a chargeback:

  • Even after attempting to contact a seller with questions about a purchase, the customer received no reply and got frustrated.
  • The item the customer received was broken, or it was not as it was described.
  • The customer wanted to return the item, but felt like the seller’s return policy was too complicated/took too long.
  • The customer might simply call the bank to inquire about a charge, and the bank may issue them a chargeback without the cardholder even realizing.

Chargebacks were intended as a last resort; a fail-safe method to ensure that cardholders are not defrauded by unscrupulous merchants. However, current research points to the fact that most chargebacks are filed prematurely.

For the Sake of Convenience

The data collected suggests that 49% of all chargebacks filed were done so without the consumer’s full knowledge. In cases such as these, customers might have simply asked the bank to look into the transaction or cancel a subscription of their behalf, with the bank misinterpreting their request as a full-fledged dispute.

Additionally, 81% of customers surveyed claimed that they contacted their bank before exhausting other options for dealing directly with the seller. Though this doesn’t seem like a particularly big deal, there is a name for this behavior—it’s called friendly fraud.

“Friendly fraud” is when cardholders request chargebacks without first giving a genuine attempt to contact the merchant or living up to other terms of service. It’s not necessarily criminal, but it is a violation of a contractual agreement.

Although some consumers might believe it will be easier to file a chargeback than to contact the merchant, the vast majority of cases could be more quickly resolved if the customer contacts the merchant first.

The Chargeback Process:

  1. The cardholder contacts his or her bank to file a chargeback on credit card purchases.
  2. The merchant is informed of the chargeback by the acquiring bank.
  3. The merchant initiates the representment process, combing through transaction information and records regarding the sale.
  4. The acquiring bank then sends the representment information to the cardholder’s bank for review.
  5. If the representment evidence is convincing, then the sale is upheld. Otherwise, the charge is overturned.
  6. If the charge is overturned, but the seller has more evidence, the process could go back for a second round of representment.

Overall, the entire process from the initial chargeback filing to the bank’s decision can take several months. It’s best to keep chargebacks as only a last-ditch option when every other possibility for resolving a question or concern directly through the merchant has already failed.

Dealing with the merchant whenever possible is also safer. Besides the delay of the process, there could be additional consequences for cardholders who lose chargeback disputes.

Consequences for Cardholders

By filing a chargeback, cardholders implicitly claim that they have already exhausted every other means of resolving the matter directly through the merchant. Therefore, cardholders who lose chargeback disputes could be flagged as potential fraudsters, and the bank might then bill the cardholder for the fees associated.

This could even result in the bank closing the cardholder’s account, which would not only be very inconvenient, but would also damage the cardholder’s credit score. Why are the stakes so high? It’s a result of rampant cases of friendly fraud in recent years.

Friendly fraud is growing at a rate of 41% annually, and suspicion regarding chargebacks and friendly fraud has even driven some merchants to take drastic action. Sony, for example, became infamous among gamers for banning users who filed chargebacks. While this is a bit of an overreaction, the impulse is understandable.

Consequences for Merchants

Chargebacks currently cost merchants upwards of $40 billion annually. Although in many cases chargebacks are not the merchants’ fault, they will still be on hook for lost revenue, lost merchandise and chargeback fees for each dispute they lose. These higher costs force merchants to raise prices, ultimately costing the consumers more.

Additionally, each merchant’s chargeback cases are tracked by their acquiring bank, win or lose. Any time a merchant’s number of disputed transactions surpasses 1% of their total transactions, credit networks like Visa and MasterCard could assign them a “high risk” designation.

Some high-risk merchants are responsible for extra fees, sales restrictions and costly regular policy reviews. Others, however, will simply have their accounts terminated, effectively dooming the business.

A Better Way

Ultimately, it’s a pretty basic point—if you like a particular brand or store, filing a chargeback against them will hurt them, and can hurt you as well. Always try to work out questions or disputes with a merchant as a first course of action.

If you are not able to arrive at an acceptable result through old-fashioned customer service, consider looking for a third party mediator, like eConsumer Services®. We are able to work with you and the merchant to achieve a mutually-agreeable resolution. Chargebacks should be a means of last resort in all cases, so consider other options before going to the bank, for both the merchant’s sake and for yours.

If you’d like assistance disputing a transaction or getting your money back, file a claim with eConsumer Services® today.