What is a Chargeback?


March 19, 2021

No one likes to have disputes with customers. Sadly, they are something you have to go through as a merchant. The worst disputes are those that can limit your revenue, and chargebacks are at the top of this list. Credit card chargebacks could even result in you losing your merchant account with your payment processor.

They could also result in hefty fines and losses for your business. Learning what a chargeback is and how to prevent it will save you from a lot of complications. You should also choose a payment processor that can walk you through keeping chargebacks and fraud cases low.

Here is what you should know about credit card chargebacks:

Chargebacks in a Nutshell

Chargebacks or payment disputes occur when cardholders ask their card-issuing banks to reverse a questionable transaction. They are meant to protect the consumer from fraud and predatory merchants. Once the chargeback process is initiated, the card-issuing bank will withhold the disputed cash from your business as it investigates the claim.

If the bank decides in your favor, the funds will be deposited back into your account. If the investigation favors the client, they will be refunded their cash. As you learn what a chargeback is, keep in mind that the chargeback process can be very time-consuming and long. Maintaining low chargeback rates should be a priority.

When Can Chargebacks Be Initiated?

Chargebacks are a last resort. Customers are supposed to first try reaching out to the merchant before initiating a chargeback. It is much easier for issues to be resolved with the merchant than to involve the banks in the lengthy chargeback process. There are many reasons for filing a chargeback, including:

  • If a transaction was fraudulent
  • If the customer experiences shipping, pricing, or delivery issues
  • If the customer receives subpar products or services from the merchant
  • If the customer doesn’t recognize the business name on their credit card report
  • If the customer didn’t get a refund after returning goods

Once the customer approaches you with a dispute, you should commit to resolving it. Chargebacks can be costly to merchants. The only time customers aren’t obligated to reach out to the merchant first is if they were victims of identity theft. They can contact the issuing bank directly to dispute transactions and prevent future losses.

However, customers might not understand what a chargeback is and how it works and could easily launch them against your business. As long as you keep improving the quality of your products and service delivery, you can steer clear of this risk.

The Financial Implications of a Chargeback

woman purchasing cosmetics with credit card

A credit card chargeback can have both short-term and long-term ramifications for businesses. Some of the fees involved in the chargeback process include the mandatory retrieval fee ($5-15 per incident) and the chargeback fees if the chargeback is approved ($20-50 per incident). A retrieval fee is charged when a customer or customer’s bank asks for a copy of a sales record to verify the transaction.

If your chargeback rates are higher than 1%, you could have to pay hefty fines and penalties and even end up losing your payment processing account. You could also find your business on the MATCH list, which reduces the number of payment processors you can work with.

Lastly, the funds in dispute are typically withheld until the dispute is settled. You could have to wait 60-75 days or longer for a dispute to be resolved. This will be a huge blow to your cash flow.

We Can Help Keep Your Chargeback Rates Low

Now that you know what a chargeback is and its implications, you should consider working with a payment processor that will help you reduce your chargeback rates. At T1 Payments, we use industry-leading chargeback protection tools – including Verifi and Ethoca – to help merchants limit their payment disputes. Contact us now to learn more about T1 Payments’ services.