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June 11th, 2019

What Is Meant By Chargebacks? To What Extent They Affect Any Business?

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At first chargeback may appear to be synonymous to word ‘refund.’ Nevertheless, the points of difference between these two terms are though fundamental but potential of deteriorating a merchant’s market reputation. And hence, it is not in the interest of any business to overlook chargebacks.

What Do You Mean By Chargeback?

Chargebacks differ from refunds due to the fact that latter are worked out between the consumer and the merchant, without involving any third party. On the contrary, chargeback necessarily involves the cardholder’s bank to dispute a card transaction.

Chargebacks protect the consumers making purchases with their cards from any kind of fraud. Unauthorized transactions and any kind of card transactions in which the service or product has been not delivered are subject to chargebacks by the cardholder’s bank.

In other words, a chargeback ensures the return of amount to the cardholder that was earlier withdrawn from his account for an unwanted transaction by merchant

Claim Refund First

Firstly, it is important to understand that cardholder should initiate the process of chargeback only when his demand for a direct refund from the merchant has been denied. Escalating the process by skipping the first step of refund is considered as cyber shoplifting. Cardholder is exempted from the rule only if they are a victim of identity theft.

This sequence is practiced because of the following reasons:

  • Consequences of chargebacks are not only serious but far-reaching too for both the parties but lot more for the merchants.
  • Possibilities of consumers or cardholders taking undue advantage of their power of chargebacks cannot be ruled out completely. This attempt on the part of cardholder is dubbed as ‘friendly fraud.’ Consumers typically try their hands at friendly fraud when:
  • They experience buyer’s remorse
  • They forget about it
  • They didn’t follow the return policy in terms of time limit
  • They were not available as per the delivery schedule
  • They have ill intentions of keeping the product for free

Cardholders should draw an encouragement to ask for a direct refund first from the fact that while chargebacks take time, refunds are almost instantaneous.

What Are The Legal Grounds For Chargebacks?

A cardholder is entitled to a chargeback under various circumstances such as:

Fraudulent or unauthorized transaction

As discussed earlier, this is the only case that qualifies and is acceptable even after skipping the refund step. It is exceptionally accepted because modern hackers are highly inventive in their ways to steal identity.

Faulty product or substandard service

This reminds us of why chargebacks were even invented. To protect consumers’ interest it was important that they were empowered to demand their rights from the merchants who sell products and services which are inferior to what was promised in the advertisements.

Inappropriate charges

Technical errors and machine mistakes are common and formidable but in case of a mistake it should be corrected as soon as realized and not denied when requested for a direct refund by the cardholder.

Steps Included In Chargeback Process

The process is lengthy and complex and this is why it is best to avoid reaching this point. But when reached, the following steps should be followed:

  • The consumer or cardholder files a claim to the card issuer or bank.
  • The bank in turn establishes validity of claim filed.
  • When found valid, the bank takes action.
  • Now it is turn of merchant’s bank to be notified for chargeback.
  • Merchant’s bank can dispute the chargeback on behalf of merchant, if there are some grounds to do so, or else merchant is notified by his bank.
  • The merchant has a choice of either accepting the chargeback or contesting its validity.
  • If merchant’s bank finds proper evidences to refute the chargeback, then only bank carries out the dispute.
  • Subject to result of the dispute, amount of money is either returned to the consumer or it is deposited in the merchant account if decision is in favor of merchant.

Consequences Of Chargeback

For the merchant

Merchants are liable to pay various kinds of fees associated with a chargeback and these are levied upon merchant irrespective of the outcomes of the chargeback. Also, when monthly chargeback rates go over the predefined limits, merchants are made to pay excessive fines that are huge for any business.

Even resolved chargebacks where merchant is not proven guilty impair the business health. Too many of chargebacks and business is put into high risk category for which they might be charged differently for merchant account services or the merchant account might get terminated.

Moreover, it goes without saying that disputing the chargeback cases is quite a hassle and exhausting for any merchant. The time and energy spent on these can be better utilized for productive business operations.

For the consumer

Though not as terrible as in the case of merchant the consequences are still serious for cardholders too. Friendly fraud can leave negative impact on their credit score. Additionally they might have to pay fees when denied chargeback claim.

It is also seen that consumers who make fun of the system by fabricating such issues lose their credibility and are rejected help when they are actually in trouble.

Hope you have understood by far that chargeback is not just a refund but it has a lot more to it. In order to have prosperous commercial relations between consumer and merchant it is mandatory to have mutual respect for interests of both the involved parties.


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