If you are a small business owner, freelancer, or side hustler selling goods or services, receiving a chargeback is possible.
In fact, it is never a matter of if you will ever receive the ‘Chargeback Notification’ but when you will receive it. Every business owner dreads these emails; they can tie up your money and hurt your cash flow.
Plus, chargebacks are not always from genuine customer complaints, and many times, they can be fraudulent or even due to the customer’s lousy memory. Regardless, most times, you, as the seller, have little control over it.
However, it helps to understand what it entails and what you can do when it happens. This article tells you everything you need to know, including what to expect if you lose a chargeback.
What Is a Chargeback
No! A chargeback is not a refund. Although both are technically a result of a purchase dispute, there is an enormous difference. A refund is paid back directly from the merchant, while chargebacks (or payment disputes) are filled and handled by the customer’s bank or credit card issuer.
Therefore, for a refund, the customer contacts the business (merchant) and asks for money back, while for a chargeback, the customer requests their bank to take money back from the merchant’s account forcibly.
What Next After You Lose a Chargeback?
Although it is not a fun undertaking for the merchant, the merchant gets a chance to contest the customer’s claim, and an investigation follows.
However, if the bank feels that the customer’s claim is valid, money is refunded directly from the merchant’s account back to the customer. In most cases, you, as the merchant, have little say in this.
In fact, most times, you will not know about the credit in your funds until you get an email notification.
The chargeback system is skewed in favor of the customer for many reasons.
- The system aims to protect the customer’s feelings.
- The system acts as a deterrent to merchants who sell substandard products.
- It ensures that the market (and the merchants) stays transparent.
- The system protects consumers from the effect of criminal fraud.
Can I Appeal After I Lose a Chargeback?
If you lose the initial chargeback claim, you may appeal directly to your service provider. To do this, you must be able to prove your case with irrefutable evidence.
First, ask your merchant service provider to give you the full details of the chargeback. Study the details carefully to know the best way to present your appeal.
Then write a letter to your merchant service provider, including all the case details and available evidence. For example, if a customer claims non-delivery, include a signed delivery note to the customer’s requested address or proof of shipment to the customer's address.
Your provider will investigate your appeal, and if they find you are right, they will initiate negotiation to reverse the chargeback.
However, keep in mind that this process can be tedious, and in most cases, the chances of winning are usually negligible.
What Can You Do to Prevent Chargebacks?
Unfortunately, there is nothing much you can do to prevent chargebacks as a merchant. As mentioned, merchants do not have many protections against chargebacks, as the system is designed to protect the customer.
However, it is recommended that every business have their refund policy displayed on their premises and website, as this may come in handy when appealing a chargeback.
Also, it is advisable to ensure that you adhere to every card provider’s set policies and guidelines. You can find these policies online or on the specific card issuer website. For example, here is Discover’s chargeback rulebook.
Here are some of the standard rules that every merchant is expected to follow;
- Always ensure that the card is not expired.
- Always ensure that the credit card has a signature on the back.
- Always ensure that you obtain proper verification from the customer. Make sure the customer signs the receipt.
- Always follow proper PCI rules.
- Ensure the employee handling the card transaction is adequately educated on card protocol.
The Initial Chargeback Investigation Process
As previously mentioned, the process starts once a customer makes a refund claim with their bank or their credit card issuer. The bank or issuer is then expected to examine the details of the claim and make an impartial decision regarding the liability.
The system has well laid down rules and guidelines to help banks and issuers carry out the investigation. Here is how the process goes;
1. The customer calls the bank and makes a complaint.
For the bank, the process starts when they receive a complaint call from the customer. The customer might claim:
- Unauthorized payment
- A failed delivery
- Faulty product
- Substandard product
The Federal Trade Commission (FTC) gives the card issuer a maximum of 30 days to acknowledge receipt of the customer's claim.
2. The bank or card issuer gathers evidence.
The bank or card issuer is then to examine all the available information on the transaction to determine liability. There are available automatic programs to carry out this process, e.g., Visa Merchant Purchase Inquiry.
There are various pieces of evidence that the bank can use. E.g.;
- Transactional timestamps
- IP address
- Geolocation data
- Behavioral indicators
- Customer account activity, etc
On some occasions, the bank will send the merchant an inquiry requesting further information.
3. The bank or card issuer examines the data before making a verdict.
The bank has the mandate to thoroughly examine the said transaction data and decide whether the customer's claim is reasonable.
The bank then accepts or rejects the customer's claim based on the evidence. If the bank accepts the claim, then it files a chargeback on behave of the customer.
So, in summary, not much happens after you lose a chargeback. The chargeback system is skewed to favor the customer, and most times, the merchant has little say in what happens in the entire process.
However, you may appeal the chargeback with your merchant service provider if you feel you have a high chance of winning the case. On the other hand, you can follow the tips mentioned above to help you lower the chances of receiving chargebacks too often.
Michael launched Wealth of Geeks to make personal finance fun. He has worked in personal finance for over 20 years, helping families reduce taxes, increase their income, and save for retirement. Michael is passionate about personal finance, side hustles, and all things geeky.