Chargeback

A Chargeback is a reversal of a credit-card transaction, as viewed from the perspective of the merchant. It usually occurs when a consumer files a complaint with their bank or credit/debit card provider. This usually happens when a consumer discovers fraudulent transactions on their statement.

The bank will investigate complaints, and will "take back" the value of the original transaction, together with an additional fee (from $0 to $50 USD, depending on the bank/provider used) directly from the merchants account, unless the merchant can prove the transaction was legitimate.

Sometimes the consumer complaint is untrue, and their refund claim gets denied. In these situations, the merchant will sometimes still be charged processing fees.

The merchant looses the goods or services sold, the payment, the fees for processing the payment, any currency conversion commissions, and the chargeback penalty. For obvious reasons, many merchants take steps to avoid chargebacks - such as not accepting suspicious transactions. This may spawn collateral damage, where the merchant additionally looses legitimate sales by incorrectly blocking legitimate transactions.

Honest customers foot the bill for all fraud. Merchants understand the percentage of fraud that takes place, and increase their prices to cover this cost.

Banks and credit card companies make profit from fraud. They retain their fees and commissions from the fraud itself, they levy fees for each chargeback, they make commissions (twice) if currency conversions are involved, they "hold" merchant remittance for 30 to 90 days to cover possible fraud (and profit from short term investment of this), and they usually increase the commissions they charge on all transactions to any business they consider "risky", and any who suffer unusually large numbers of chargebacks.

There are other forms of credit reversals that may also be referred to as chargebacks listed below.

A retreival request is a pre-chargeback and a request for information (RFI). This may also attract a fee. Some providers charge $10, and others do not refund this.

Reasons for chargeback

There are many different reasons why a merchant might receive a chargeback. Most are initiated by the cardholder, who may contact his card issuing bank regarding an inconsistency in his monthly credit card statement. This begins the dispute process that may eventually lead to a chargeback, and a reinstatement of credit to the cardholder's account.

One of the most common reasons for a chargeback is known as a fraudulent transaction. A credit card is used without the consent or proper authorization of the card holder. In most cases, a merchant is responsible for charges fraudulently imposed on a customer.

Chargebacks are often the result of a customer dispute over credit. This type of chargeback is usually described as credit not processed. A customer may have returned merchandise to a merchant in return for credit, but credit was never posted to the account. In this example, the merchant is responsible for issuing credit to its customer, and would be charged back.

Other types of chargebacks are related to technical problems between the merchant and the issuing bank, whereby a customer was charged twice for a single transaction (duplicate processing) or other various mistakes. Yet other chargebacks are related to the authorization process of a credit card transaction, for example, if a transaction is declined by its issuing bank and the account is still charged.

Another reason for chargebacks are when a customer does not receive the item they paid for. In this case, a chargeback is initiated and the payment to the merchant is reversed.

List of reasons for a chargeback:

• Card holder requests a copy of the transaction receipt.
• Card holder did not authorize the transaction.
• Non-matching account number.
• Transaction was processed more than once.
• Transaction receipt was not imprinted.
• Refund not processed.
• No authorization.
• Customer never received merchandise/services.
• Card not used within valid expiration date.
• Services not rendered.
• Error in transaction amount.
• Transaction receipt is incorrect, incomplete, or illegible.
• Transaction processed for incorrect amount.
• Product different from what was described or promised.
• Counterfeit transaction.
• Transaction not processed within Visa or MasterCard time frames.
• Failure to obtain card-holder signature.
• Signature on the card was blank.
• Signature on receipt different from card.
• Card-holder claims merchant changed transaction amount without permission.
• Merchant knowingly participated in a fraudulent transaction.
• Incorrect Transaction Date.
• Card-holder claims invalid mail or telephone order transaction.
• Card-holder was denied ability to return item.
• Transaction was not canceled successfully.
• Card-holder not satisfied with quality of product or services.
• Debit-cardholder's bank initially approves a transaction, but subsequently returns the charge due to non-sufficient funds, an account closure, or the bank "locking" the card due to a subsequent unauthorized use, loss or theft of the card, or multiple unsuccessful attempts to use it at an ATM.

Handling chargebacks

A merchant is billed for chargebacks as they occur, along with other fees and settlements associated with credit card acceptance. Because a merchant may be charged back in error, and because chargebacks may often involve complicated customer disputes, a chargeback may be appealed by the merchant. This process varies by credit card. If the chargeback is found to have been in error, a merchant will be granted a reversal.

Thieves occasionally abuse the chargeback system. For example, in a "Friendly Fraud", an unscrupulous customer will make a purchase over the Internet with his own credit card and then issue a chargeback once the product or service is received. In such cases merchants can have difficulty recovering payment.

Chargeback processing (handling) is complex as a result of frequent rule changes by the major credit card companies (MasterCard, Visa, American Express, etc.). There is an emerging market for business software that simplifies the chargeback process as well as separate chargeback processing services.

It is possible for the chargeback and associated fee to cause an overdraft or leave insufficient funds to cover a subsequent withdrawal or debit from the merchant's account that received the chargeback. This could cause pending checks to be returned due to non-sufficient funds. Unless the merchant detects the chargeback in time to cover pending debits, a snowballing effect of penalties assessed could result.

Credit card companies require that for internet purchases, when the items are delivered, the cardholder must sign in their name and other names like roommates or family members do not count. Without the cardholder's own signature, it is not counted as delivered.

Address verification also provides protection by partially verifying the cardholder's address, however the cardholder's signature is most important.

Other types of chargebacks

Accounts may also incur credit reversals in other forms, such as these:

• ATM reversal - An ATM deposit envelope is found to have less funds than represented (if any) and a chargeback is made to correct the error. This could result due to a counting error or intentional fraud by the account holder, or the envelope or its contents could have been lost or stolen. If an overdraft results and is too huge or cannot be covered in a quite short period of time, the bank will sue or press criminal charges, unless the account holder has been the victim of the latter scenario, identity theft, or other fraud, and files a sworn police report.
• Bank error correction - A bank error credits the account with more funds than intended and makes a chargeback to correct the error. If an overdraft results and it cannot be covered in time, the bank could sue or press criminal charges.
• Direct deposit chargeback - A direct deposit is made to the wrong account holder or in a greater amount than intended and a chargeback is made to correct the error.
• Returned check deposit - The account holder deposits a check or money order and the deposited item is returned due to NSF, a closed account, or being discovered to be counterfeit, stolen, altered, or forged. This could occur due to a deposited item that he knows to be bad, or he could be a victim of a bad check or a counterfeit check scam. If an overdraft results and it is too huge or cannot be covered in a short period of time, the bank could sue or even press criminal charges.

References

• PayPal user agreement. Section 4.5 lists chargeback info. Section 8 lists chareback fees. [[1]]
• WorldPay chargeback information. [[2]]

See also

• Chargeback insurance
• Credit card
• Credit card fraud
• CVV2
• Fraud
• Merchant account