In an ideal world, every interaction with customers would be a bed of roses. But for some businesses, a chargeback request following a customer dispute can be one of those rare moments where something goes wrong. But what’s a chargeback, how do they work, and what are the best ways to protect yourself against chargeback fraud? Discover all that and more in our guide.
What is a chargeback?
A chargeback is a reversal of a card payment after a customer submits a request to their card issuer. Chargebacks are a consumer protection mandated by card schemes, such as Visa and Mastercard. Customers are entitled to submit a dispute to their card issuer and get their money back in certain circumstances, such as fraudulent charges. This will often occur following a legitimate payment dispute, but as we’ll cover later, chargeback requests can also be fraudulent. Chargebacks apply to both credit and debit card purchases.
Why do we have chargebacks?
Chargebacks are a way of giving consumers greater protection when they make a purchase. For example, it means that customers may not have to pay for an item that hasn’t been delivered, or is poor quality. It also gives customers the opportunity to claim money back following an unauthorised transaction.
How do chargebacks work?
A customer might decide to make a chargeback claim for many reasons; for example, they might look at their bank statement and spot an item of expenditure that they don’t recognise. The customer would refer the transaction to their card issuer, such as a bank, who in turn passes the chargeback dispute to the acquirer, such as Tyl. The acquirer then notifies the merchant, who will be debited for the chargeback if upheld, but will have the opportunity to provide evidence to defend the chargeback. The evidence required by the card issuer may include invoices and receipts or e-receipts that show the transaction was valid.
If insufficient evidence is provided, then you as the merchant would have to accept the chargeback debit. If you provide evidence, the bank will make a decision on whether the customer should receive their money back within an agreed timescale. You have the right to dispute the bank’s decision – a process sometimes known as arbitration. Note that each card scheme will have different arbitration processes.
Sometimes chargeback requests are made innocently in error, or it could be a legitimate request (we’ll cover some examples later). Unfortunately, there are also some instances where someone may try to make a fraudulent claim by receiving goods, then attempting to recover funds for the item(s) by claiming they hadn’t received the delivery; this is known as ‘friendly fraud’.
Is a chargeback the same as a refund?
While it’s easy to confuse a chargeback with a refund, the two aren’t quite the same. The difference is that a refund is initiated by the business on behalf of a customer, whereas a chargeback is requested by the customer.
What are the most common reasons for chargeback requests?
A chargeback is often a last resort for a customer after they’ve unsuccessfully tried to get a refund first. Even so, there are a number of instances where a customer might make a chargeback request. For example:
- They haven’t received the products or services they paid for.
- The goods they purchased are defective – read our guide to refunds for more on this.
- They were charged the wrong amount or the charge was duplicated.
- They were charged when they had already cancelled a subscription.
- They didn’t receive the goods they purchased because the company went out of business.
What is chargeback fraud?
Chargeback fraud is where someone makes a purchase and then contacts their card issuer to request a chargeback without a valid reason. The intent is to claim money without justification. If you’re taking payments over the telephone, sending a payment link through our secure virtual terminal may help you reduce the risk of chargeback fraud. Read our fraud prevention guide for more tips on the best ways to keep you and your customers secure. You can read more about other ways to enhance payment security, such as 3D Secure authentication checks, later in this guide.
There are also instances where purchases are made on stolen cards, and the victim requests a chargeback in good faith following fraudulent activity.
Can you stop chargebacks?
There is no simple way to stop chargebacks. While there is no specific law that gives consumers chargeback rights, in reality, chargebacks are applied according to a set of rules agreed by participating card issuers, such as AMEX, MasterCard and VISA. However, as we’ll explore next, there are some basic precautions you can take to reduce the chances that you’re on the receiving end of a chargeback claim.
How can my business prevent chargebacks?
In truth, the chances of someone filing a chargeback request may depend on the type of business you operate and the way you sell products or services. So we’ve put together some potential ways of reducing chargebacks in different contexts.
Card present chargebacks
Fortunately, since the introduction of EMV technology in 1994 and subsequent Chip and PIN payments – read more in our NFC blog – ‘card present fraud’ has dramatically reduced. This chip technology has made it nearly impossible for criminals to use counterfeit cards and it has also reduced the risk of mass retail data hacks. However, that is not to say you should take no action to prevent fraudulent chargebacks, and many fraudsters have switched their attention to e-commerce fraud.
If you’re a face-to-face seller, you are more likely to experience duplication chargebacks –where a payment is taken more times than is necessary – and overcharge chargebacks, where a larger payment than necessary is charged, for example £500 instead of £50. To reduce the chances of these chargebacks:
Check for errors. When keying an amount on the terminal it’s important to double-check it’s correct and get the cardholder to check and agree the amount before accepting payment. This may reduce the likelihood of accidentally overcharging a customer, as the customer may flag if the amount is incorrect.
Keep void receipts. If the payment fails, you should keep a copy of the void receipt and issue one to the cardholder. This means that in the event of a chargeback, you can demonstrate you have voided additional payments and returned them to the cardholder.
Card not present chargebacks
In a card not present context, fraudsters can look to take advantage of the fact that you are not able to physically check the card or meet the cardholder. One of their primary aims is to use stolen cards to obtain goods of value for resale. While you don’t want to stop any legitimate payments, it is important to manage the fraud risk of all payments in a cardholder not present environment. Transactions processed non-securely would not only result in a potential loss of stock, but would also leave the merchant liable for any chargebacks raised. As such, the potential risk exposure can be double the value of the original transaction.
Authentication checks. Utilise 3D Secure authentication checks if you sell through a website. If the card issuer (the bank) confirms that a card is enrolled in 3D Secure and the cardholder authentication is successful, the liability for the transaction shifts from you, the merchant, to the card issuer. Read more about Strong Customer Authentication (SCA) .
Additional verification checks. Consider additional checks such as the Address Verification Service (AVS), which validates a customer’s billing address, and Card Verification Code (CVC) to reduce the risk of fraudulent transactions.
Tracked delivery. If you’re a distanced goods seller, use a reputable courier or delivery service. You may be at risk of chargebacks if products arrive in poor condition, or do not arrive at all, so consider using a tracked delivery service, perhaps with signature upon delivery.
Other ways to reduce chargebacks
Pre-authorised payments By taking pre-authorised payments in certain sectors – such as hotels and car hire – you may have more time to review whether a customer’s details are legitimate, and flag any concerns with your bank before the full payment is taken.
Accurate product descriptions. Is your product or service exactly what it says on the tin? Having clear copy that describes your items accurately could set realistic expectations and reduce the chances of a chargeback request.
A refund policy. If you have a business website, publishing a clear returns policy could ensure your customers fully understand their rights and only make valid chargeback claims.
A payment gateway. If you take payments online, having a secure payment gateway could give you and your customers some confidence that only genuine transactions will be processed.
Tyl fees and eligibility criteria apply.
This has been prepared by Tyl by NatWest for informational purposes only and should not be treated as advice or a recommendation. There may be other considerations relevant to you and your business so you should undertake your own independent research.
Tyl by NatWest makes no representation, warranty, undertaking or assurance (express or implied) with respect to the adequacy, accuracy, completeness, or reasonableness of the information provided.
Tyl by NatWest accepts no liability for any direct, indirect, or consequential losses (in contract, tort or otherwise) arising from the use of the information contained herein. However, this shall not restrict, exclude, or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.