What is a Chargeback?

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In the highly competitive worlds of retail and business, "chargebacks" are something every business owner wants to avoid. Most of the time, a chargeback takes place when a customer notices an unwelcome or fraudulent charge on their credit card account and calls their card issuer to explain the situation and ask for their money bank. The term "chargeback" describes how a retailer or businesses is denied funds while a transaction is under investigation. When a transaction is disputed, the charge is "taken back" by the card issuer until its validity can be confirmed or denied.

How Do Chargebacks Happen?

According to Chase Bank, chargebacks usually happen after one of the following scenarios:

  • A customer never receives the service or product they paid for
  • A customer doesn't recognize a charge on their account
  • A customer receives a product that is damaged or unlike what they ordered
  • Credit card fraud has taken place and a customer's card was used without their consent
  • No authorization code was received by the issuing bank during a purchase, resulting in a technical glitch

Although the circumstances behind each chargeback vary, the main driver behind most chargebacks is a consumer refusing to pay for a charge posted to their credit card account.

How Do Chargebacks Affect the Customer?

In the real world, chargebacks work in the consumer's favor. By allowing customers to deny or refuse responsibility for charges on their credit cards, card issuers protect them from fraudulent transactions and accidental charges, or paying for faulty or damaged items.

If the consumer's case seems reasonable, the amount of the chargeback is usually credited to their account by the card issuer while the issue is investigated. This way, the consumer is protected from paying the charge – and any resulting interest – while the details of the chargeback are hashed out and a final decision is made.

How Do Chargebacks Affect Businesses?

While a chargeback is under investigation, funds for the credit are debited from the business merchant account. Unfortunately, this means that retailers and businesses whom the chargeback is placed against must wait for their funds whether the chargeback is accepted or not.

When a business denies their responsibility for a chargeback, they need to submit proper documentation and challenge it as soon as they receive notice. If they are successful, the business will ultimately receive the funds for the item or service their customer disputed. Likewise, unsuccessful chargeback challenges will result in a loss equal to the transaction being contested.

How Businesses Can Prevent Chargebacks

Since chargebacks are often the result of fraud, it's nearly impossible for businesses to avoid them altogether. However, there are some strategies businesses can use to drastically reduce the number of chargebacks they receive on a monthly or annual basis.

Here are some best practices for businesses to try when it comes to avoiding chargebacks and the losses that come with them:

  • Avoid altering sales drafts whenever possible
  • Get a pre-authorization for full charges before the final transaction takes place
  • Never split up a transaction in order to get a lower amount authorized
  • Always request another form of payment if a customer's credit card is declined
  • Retail stores should make sure their company return policy is printed on receipts
  • Always process refunds back to the original credit card a purchase was made with – and never to an alternate card

Final Thoughts

While chargebacks protect consumers from predatory businesses and fraud, they can cost businesses time and money the vast majority would rather not spare. To avoid chargebacks whenever possible, it's best to create an in-house policy for employees to follow when dealing with transactions at the time of sale, and make sure they follow it.

Because when it comes to chargebacks, "an ounce of prevention is worth a pound of cure."

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