Debitoor's accounting dictionary

Chargeback - What is a chargeback?

A chargeback occurs when a finalised charge made to a credit card is reversed and returned to the cardholder

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A chargeback involves the return of funds to a credit card after the payment has already gone through. Initiation of the chargeback is often made by the cardholder, who does so by disputing a charge to the credit card company, causing them to pursue a chargeback.

For the cardholder, the funds involved in the disputed charge are deducted from the business that made the charge and are returned to their card. Essentially, chargebacks are a type of refund. However, there is a distinct difference between a refund and a chargeback. A refund is provided by a business, whereas a chargeback is requested by the customer to the participating bank.

A chargeback does not necessarily have to involve a credit card. Chargebacks can also be made with bank accounts. In any case, a chargeback involves multiple financial entities as funds are transferred between accounts.

Why chargebacks occur

The purpose of making chargebacks possible is to provide protection to the cardholder. The option to request a chargeback means an added layer of security when it comes to the cardholder’s money.

The prospect of a chargeback is also meant to encourage businesses to provide products and/or services of higher standards - preventing chargebacks.

However, chargebacks are not only caused by potential fraudulent charges. A chargeback can occur due to:

  • a customer returning a product
  • expressing dissatisfaction with the quality of goods or services provided
  • a charge for goods/services never received by the customer
  • an accidental double charge by the supplier
  • a charge caused by a technical issue

Any of these may be grounds for a chargeback. The downside to chargebacks for the customer is that they often take some time to process. This can especially be the case if there is suspected fraud involved as the banks will often conduct some investigation.

What businesses can do about chargebacks

Chargebacks are not popular with businesses. This is because they directly affect a business’s revenues by deducting the amount, and can additionally cause complications if a business experiences a high number of chargebacks. Chargebacks also usually involve a fee and, again, multiple chargebacks may result in fines for the business.

Businesses prefer to issue refunds if they’re aware of an issue with a sale, instead of waiting for the customer to request a chargeback. However, a customer may prefer a chargeback instead of dealing with the seller, especially if they’ve had a negative experience.

Disputing a chargeback

There are situations in which a customer may attempt to take advantage of a seller by requesting a chargeback even if they received the product/service as promised. If a business can show that the customer is potentially not being truthful about the situation, they can dispute the chargeback.

Preventing chargebacks

Businesses can take some basic steps to help prevent or reduce the occurrence of chargebacks.

  • Practise good customer service. If a customer has a positive experience with your business, it is more likely that they will pursue a refund in the case of a product returned, for example. Good customer service is essential, also for word of mouth.

  • Clearly state your business name on transactions. Making charges under a name different from what your customer is familiar with regarding your business can be confusing. Ensure your charges come from the same business name.

  • Track your shipments. If you’re shipping products to customers, add tracking and get proof of delivery so that customers cannot claim a shipment was never delivered, for example.

  • Use online payment options. Instead of entering information yourself by hand, allow customers to enter their own details and accept the payment online. This provides more trail and prevents accusations of mistakes towards the business.

While chargebacks might be unavoidable, these are some important and useful options for helping prevent or reduce their appearance in the running of your business.

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