A chargeback happens when a customer disputes a card charge with their bank instead of with you, and the bank reverses the payment. You lose the sale, you usually pay a chargeback fee, and someone on your team spends time gathering evidence. Too many chargebacks can put your merchant account at risk. The encouraging part is that most chargebacks are preventable, and the ones that are not can often be won with good records.

How the process works

  1. The cardholder contacts their card-issuing bank and disputes a charge.
  2. The issuing bank reviews the claim and, if it fits a dispute reason recognized by the card network, initiates a chargeback. The funds are pulled back from your account.
  3. Your processor notifies you and explains the reason code and what documentation would help.
  4. You can accept the chargeback or respond with evidence. Responding is called representment.
  5. The issuing bank reviews your evidence and decides. In some cases further stages are possible, sometimes with additional fees.

Why chargebacks happen

Card networks use their own reason codes, but nearly all disputes fall into a few groups:

  • Fraud: the cardholder says they did not make the purchase, often because a stolen card was used.
  • Authorization problems: the transaction was processed without a valid approval, or after a decline.
  • Processing errors: a duplicate charge, an incorrect amount or a refund that was promised but never processed.
  • Customer disputes: the customer says the item never arrived, was not as described, or a subscription was canceled but still billed.
  • Friendly fraud: the customer made the purchase but does not recognize the charge, forgot about it, or regrets it, and disputes it instead of contacting you.

Prevention at checkout

  • Use the chip or contactless tap whenever the card is present. These transactions are much harder to counterfeit and shift liability for certain fraud away from you.
  • For phone and online orders, use address verification and the card security code, and pay attention to mismatches.
  • Be cautious with unusually large first orders, rushed shipping to a different address, or several cards tried in a row.
  • Never process a sale after a decline by keying it in again or splitting it into smaller charges.

Prevention after the sale

  • Make sure your billing descriptor, the name that appears on the customer's statement, is recognizable. If customers know you by a trade name, use it, and include a phone number where possible.
  • Post your refund, return and cancellation policies clearly, and include them on receipts and invoices.
  • Send receipts by email or text, and send confirmations for orders, shipments and recurring charges.
  • Make it easy to cancel a subscription, and stop billing promptly when someone does.
  • Use tracking and delivery confirmation for shipped goods, and signature confirmation for higher-value orders.
  • Answer the phone and respond to emails quickly. A customer who can reach you will usually ask for a refund instead of calling their bank.
  • When a customer is unhappy and you are going to refund anyway, refund promptly. A refund costs less than a chargeback.

Winning the disputes you cannot prevent

Good documentation wins disputes. Keep records organized so you can pull them quickly:

  • Signed contracts, work orders or estimates.
  • Itemized receipts and invoices.
  • Proof of delivery or completed service, including photos where appropriate.
  • Emails, texts and notes from conversations with the customer.
  • The customer's acceptance of your terms and policies at checkout.

Respond specifically to the reason code. If the dispute says the item was not received, proof of delivery matters most. If it says the service was not as described, show what was agreed and what was delivered. A short, organized response with the right documents is more persuasive than a long one.

Subscriptions, deposits and service work

Some business models attract more disputes than others, and a few extra steps help a lot.

  • Recurring billing: tell customers clearly at signup how often they will be charged and how to cancel, and send a reminder before a free trial converts or an annual renewal is charged.
  • Deposits and prepayments: put in writing what the deposit covers, when the remaining balance is due and whether the deposit is refundable.
  • Service and repair work: get a signed estimate before starting, and a signature or written approval when the job is complete.
  • Events and reservations: make cancellation and rescheduling terms easy to find before the customer pays.

In each case the goal is the same. If a customer later questions a charge, both the customer and the bank should be able to see that the terms were clear and that you followed them.

Watch your ratio

Card networks monitor how many chargebacks a merchant receives compared with its number of transactions. Merchants above certain thresholds can be placed in monitoring programs with additional fees and requirements, and in serious cases can lose the ability to accept cards. The thresholds are set by each network and change over time. Track your own chargebacks monthly, and if they start to climb, look for a pattern: one product, one employee, one sales channel or one kind of customer.

Support when it counts

At BrightStar, chargeback notices come with a person who can explain them. We help you understand the reason code, gather the right documents and respond on time, and we help you set up checkout and billing practices that keep disputes rare. If you would like a second opinion on your current setup, send us a statement. We match or beat your current rate in writing, and through the BrightStar Impact Network a share of our profit on your account supports a local cause you choose.

Published · BrightStar Merchant Services