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What Is a Chargeback?

What Is a Chargeback?
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Providing a simple chargeback definition isn’t easy because there are multiple types of chargebacks that can be filed. While they all share the same desired outcome, they differ in intent.

But first, what is a chargeback? A chargeback is a reversal of a prior transaction that results in the reimbursement of a customer’s funds. It was originally invented as part of The Fair Credit Billing Act of 1974 to protect consumers from fraud. Essentially, if a customer’s credit card is stolen, he can chargeback any transactions made by the fraudster and have the transactions removed from his billing statement.

It sounds simple enough, and customers are usually reimbursed early on in the process. However, a number of steps take place on the back end of any chargeback dispute. One reason is that there are numerous parties involved in every credit card transaction. Another reason is that the liability and authenticity of the transactions are often investigated — which brings us back to our first statement about the various types of chargebacks that business owners should be aware of.

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True Chargebacks

A true chargeback is exactly what The Fair Credit Billing Act was designed for. In this scenario, a consumer might have her cardholder information stolen online or her physical credit card stolen while going about her daily activities. Upon noticing unauthorized transactions on her credit card statement, she would call her credit card issuing bank and file a claim.

Often, a true chargeback is easy enough to verify. The transactions could have been processed in a foreign country or feature items that were shipped to a different address than the cardholder’s billing address. Liability for the reversed transactions is determined through the eight-step chargeback process.

Chargeback Fraud

Now consider this: A consumer files a chargeback claiming he never made a series of purchases on his credit card statement that he did make. This is an example of chargeback fraud. It’s a manipulative means of receiving a reimbursement without having to return the items. Chargeback fraud is essentially the same thing as shoplifting.

Friendly Chargebacks

A friendly chargeback falls between a true chargeback and chargeback fraud. In this scenario, a consumer files a chargeback believing that the purchase is fraudulent when it's not. This is simply a mistake on the cardholder’s part and could be the result of any of the following causes:

  • The inability to recognize a purchase
  • A family member or friend’s use of the card
  • Misunderstanding a business’s return policy

Bonus Type: Bank-Initiated Chargebacks

If your head is already spinning, we apologize for sharing one more chargeback type with you: bank-initiated. These chargebacks are the result of a chip card transaction wherein the card is swiped via a magnetic stripe credit card reader. These chargebacks are issued by banks on behalf of consumers, even when no dispute is filed.

EMV chip cards boast proven fraud-reduction results, but they only effectively curb fraud when processed through an EMV-ready device. If you’re swiping chip cards — either due to outdated technology or non-certified EMV equipment — you could receive a chargeback for any or all of those transactions, resulting in a potentially serious loss in revenue.

How to Protect Your Business From Chargeback Fraud

You might be wondering why these different chargeback types matter to you. After all, isn’t the culprit ultimately responsible for the cost? Sadly, fraudsters who aren’t caught can’t be held responsible, which means that your business could pay the price in lost goods and revenue. Plus, too many chargebacks filed against your business could result in sudden merchant account termination.

Hands down, the best way to defend your business from chargebacks is to use an EMV credit card terminal. Even if it’s a fraudster who signs for the transaction, your business is not liable for the transaction because you did your due diligence to obtain the authorization.

In the instance of true fraud, the issuing bank might take the hit depending on how the chargeback process works itself out (each scenario is different). If a cardholder is committing chargeback fraud, the EMV terminal will also remove your liability and hopefully result in the issuing bank reversing the claim. If a friendly chargeback is issued, some Virtual Terminals can store digital signatures that prove the cardholder simply forgot about the transaction or wasn’t aware of it. This is preferable to spending time searching through boxes and file cabinets of receipts in the event of a dispute. Ultimately, an EMV terminal absolves you of blame (and financial loss) in every scenario.

In contrast, a signature won’t defend you from a bank-initiated chargeback. The best way to avoid these disputes is to upgrade to EMV-compliant technology. Afterall, bank-initiated chargebacks are simply an incentive to get businesses to transition to EMV-ready technology.

Don’t be discouraged if you take a lot of card-not-present transactions. These transactions are riskier, which is why matching your customers' address, ZIP and CVV is the best way to fight a card-not-present chargeback.

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Has your business ever received a chargeback? What did the process entail for you? We’d love to hear about your experiences with chargebacks in the comments section below.

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Christina Lavingia

Christina Lavingia delights in crafting content that helps business owners fight fraud, reduce risk and process payments with ease.

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