Definition of chargebacks
Simply put, a chargeback is a refund initiated by a credit card holder. In a typical refund, the merchant issues a chargeback with their point of sale (POS) terminal. In a chargeback, the consumer does it with their bank. Most of the time, merchants will not know it is even happening.
How a chargeback works
- A cardholder sees a charge on their credit card and feels it is not a valid charge (more on this below).
- The cardholder contacts their bank and requests a chargeback
- The bank takes the charge off the cardholders credit card
- The initial purchase amount and a chargeback fee are withdrawn from the merchant’s bank account. The chargeback fee is typically around $25.
Why credit card chargebacks exist
Chargebacks exist to protect consumers which is a key reason credit cards are so popular. Credit cards are convenient, they give you rewards, and they protect consumers. Around 90% of adults in North America own credit cards. All credit cards allow consumers to do a chargeback.
Common reasons for chargebacks
- Duplicate processing: the charge is on the credit card twice.
- Customer claims services do not occur.
- Cancelled recurring transaction: the consumer claims they asked to stop the recurring transaction/subscription.
- Merchandise/service not as described
- Defective merchandise
- Customer claims merchandise not received
In the end, this is where the customer is always right (mostly). It is really important to set expectations as a merchant. Setting expectations on your refund policy will help you with reducing chargebacks. There are a number of things you can do to reduce the number of chargebacks. The better you set expectations, the less likely you will see chargebacks.
