A chargeback—also called a “reversal”—is the return of credit card funds used to make a purchase to the buyer. A chargeback can occur if a consumer disputes a purchase made using their credit card, claiming that it was fraudulent or made without their knowledge or permission.
When a buyer disputes a purchase, the credit card company involved reverses the charge, reimbursing the buyer in full and debiting the business’ account. Chargebacks can reduce a business's income and lead to penalties if they occur too frequently.
Learn more:The Merchant’s Guide to Credit Card Chargeback
Reasons for the reversal
Most chargebacks are initiated due to fraud, but sometimes the consumer initiates a claim after receiving an item. In that case, it’s not a true fraudulent transaction so businesses refer to it as “friendly fraud.” Either way, it costs companies money.
When a credit card company issues a chargeback, they indicate the reason for the reversal, which can fall into one of four general categories:
- Fraud: the purchase was not made with the buyer’s knowledge or consent. This is the most common reason for a chargeback.
- Quality: the buyer never received the item they paid for.
- Clerical: the buyer was billed more than once for the same item, or a return was made and refund due.
- Technical: the buyer does not have the funds in their account to cover the cost or due to a bank error.
Chargeback dispute
Of course, a business can also dispute a chargeback if they believe the customer has misrepresented the situation. This could occur when the buyer indicates an item was not received but the merchant has proof of delivery, for example.
Fortunately, there are steps businesses can take to reduce the chance of a chargeback:
- Proof of shipment or delivery:To avoid claims of non-receipt, get tracking information from delivery companies to prove items made it to their destination.
- Claims of fraud:Fraudulent transactions do occur, but sometimes buyers simply forget that they made a purchase from you, or they don’t recognize the business name on their credit card statement. So gather as much information as possible from buyers, including the CCV on the back of their card, and their address. And make sure the business name appears on credit card transactions matches how your customers know you.
- Avoid manual processing:To reduce the possibility of a clerical error, like charging the customer more than once or entering an invalid credit card number (which isn’t discovered until later), don’t type in information manually.
- Make it easy to reach you:To encourage customers to call you with questions before automatically requesting a chargeback, add your phone number to your credit card transactions. When customers see, “Luxury Lighting 800-123-4567” next to the charge, they may be more likely to call you for more information first.
Chargebacks were originally initiated as a means of providing consumer protection from fraud.