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What Is Chargeback, And How Does It Work?

By: Admin Super

Chargebacks occur when a customer successfully disputes an item on their account statement or transaction report. Asides from Debits or Credit Cards, services like Payday Depot can be charged back for several reasons.

Some of these reasons will consider later in this article. But for now, let’s understand how chargeback works.

How does chargeback work?

The chargeback procedure is as follows:

A credit card is employed when making a purchase from your company.
The payment processing business processes the transaction and sends you the cash.
The customer challenges the charge and requests a chargeback with their credit card company.
Chargebacks are initiated by the issuing bank (credit card issuer).
The issuing bank then contacts your bank, the merchant bank, to oppose the chargeback. Your bank may grant the customer’s dispute and withdraw the money from your account, returning it to them.
If the issuing bank receives paperwork disputing the chargeback, it must assess the evidence and decide whether or not the chargeback is valid.
If the issuing bank agrees with the customer, the monies are restored to your account.
Suppose the bank sides with you, the merchant, the consumer is contacted and must pay the charge or enter arbitration. With arbitration, the credit card corporation (Visa, MasterCard, American Express, etc.) reviews the occurrence and finalizes.

Although customers start most chargebacks, corporations can also initiate the process. In this instance, you would contact your credit card processor or acquiring bank. It would then call the customer’s credit card processing network to transfer funds from your merchant to their card.

Reasons for chargebacks

Chargebacks are a problem for small business owners on both an operational and financial level. Despite the drop in chargebacks in recent years, firms reviewed lost 4.4 percent of revenue to chargebacks in 2019. Merchant revenue lost to chargebacks totaled a hefty $19 billion in 2017.

It’s critical to understand why customers start chargebacks – and how to prevent and contest them. The following are some common reasons for customers to initiate chargebacks:

Friendly Fraud

A client may file a chargeback for various other reasons — even if the charge appears to be legitimate. These instances have been dubbed “friendly fraud” since they violate chargebacks’ fundamental principles as a consumer protection measure. The following are some examples of chargebacks that could be classified as friendly fraud:

Avoiding the return procedure: For whatever reason, a customer may choose to forego the return process. But instead, file a chargeback to obtain reimbursement for the transaction. A consumer may feel that the return process is too complicated. They may claim they don’t understand it, or the return policy’s time restriction has expired.
Unsatisfied with product or service: If a client is dissatisfied with the product or service they received, they may initiate a chargeback. Rather than dealing with the merchant directly.
Similarly, if a customer receives a damaged or defective product, they may file a dispute. This chargeback instance could be classified as “eluding the return process.”

Conclusion

Chargebacks are a serious issue for small business owners. Thus, you should take steps to prevent it. These steps may include following credit card acceptance guidelines, creating clear, visible business policies, etc. As the famous saying goes, prevention is better than cure!