A chargeback happens when money is returned to a debit or credit card after a customer successfully disputes a charge on the bill.

It is a form of customer protection.

The most common reasons for chargebacks are:

● Item not received

Cardholders claim that the product they paid for hasn't been delivered. Or when the customer isn't satisfied because a product or service differs from what was described.

● Credit not processed

The customer claims that the credit hasn't been posted on their account after they returned the product to the merchant and requested their money back.

● Technical problems

The problem occurs, for instance, when the customer's card is accidentally charged twice for the same transaction because of some technical issues. Or, despite the transaction being declined, the card is charged.

● Fraudulent transaction

A credit card is used without the cardholder's authorization, or fraudulent activity happens due to identity theft.

The chargeback process

A few parties are involved in the chargeback process: a cardholder(customer), issuing bank, card network (such as Visa, MasterCard, or American Express), merchant, acquiring bank, payment gateway, and merchant account.

Keep in mind that a traditional refund is when a customer contacts the merchant directly, while the chargeback is when a customer asks the bank to “remove” funds from the merchant’s account and give it back to the cardholder.

The procedure generally starts when the bank issues a code for the dispute. That chargeback is sent to the card organization as well as the acquirer. Subsequently, the merchant's bank withholds the funds being referred to while the client gets a refund.

Gather the evidence

As a merchant, you must promptly gather and upload relevant documents (i.e., receipts, shipping proofs, logs, and all that prove the transaction is legitimate) in the chargeback representment form sent ultimately to the acquirer.

In the next step, it is sent off to the issuer, who decides who the winner is.

Once the transaction is proven fraudulent, the original transaction value is refunded to the cardholder. And what about the merchant?

If the merchant cannot prove that the transaction is legitimate, the bank will take back the original value from their account and additionally charge the merchant an extra fee. The merchant won't pay any refund when the customer's complaint is proven untrue.

What if the merchant wins, and the customer is unhappy with the result?

A customer can decide to file for pre-arbitration. Such a procedure results in an additional chargeback for the merchant, and the loser needs to pay a 250 euro fee.

If one of the parties is still unsatisfied with the decision, they can file for the final arbitration stage, which comes with a 500 euro penalty to the loser.

Please note that the more chargebacks per transaction for the merchant, the higher the chargeback ratio is, which means the merchant has to pay more penalties.

When a merchant account receives too many chargebacks, it can even be labeled fraudulent, thus affecting the business's bottom line.