What are Chargebacks and How to Reduce Them?

Purchase disputes, which occur when a customer objects to paying for some or all of a purchase charged to their account, can be expensive. The process of investigating them can be time intensive and costly for merchants. Plus, if the dispute is successful, the payment network (e.g., Visa® or Mastercard®) charges a fee for the administrative expenses incurred when investigating and processing the customer’s refund, a process known as a chargeback. If you have a significant number of chargebacks in a short time, your payment processor may charge you additional fees and penalties.

Why chargebacks happen

Purchase disputes can result from a number of situations, including simple mistakes, misunderstandings or outright fraud. If there is difficulty reaching a resolution, the dispute may also be reviewed by the payment networks to determine whether the merchant or the customer ultimately receives the funds.

Here is a closer look at some common scenarios that result in chargebacks:

Fraudulent or unauthorized charges

This is among the most common reasons for a chargeback. “Now that chip cards have started to replace the old less-secure magnetic-stripe cards, fraud-related chargebacks are usually from online or other card-not-present (CNP) transactions,” says Joe Lamar, Merchant Services product executive at Bank of America.

However, in addition to regular fraud, there is also “friendly fraud,” in which a consumer disputes the purchase despite authorizing and perhaps even receiving it. For example, Jay lent his brother his credit card to purchase a $20 pair of socks. His brother bought the socks along with a $50 hooded sweatshirt. When Jay looked at his credit card statement, he didn’t recognize the charge for the sweatshirt, so he called his bank and disputed the purchase.

Unrecognized charges

This typically happens when a store has a different name from the company brand name. A store called ABC Pastry Shop that sells pastries, for example, uses the name Bakery Express on its receipts. When Daniel sees a charge from Bakery Express, a company he has never heard of, he suspects fraud and files a dispute.

Duplicate or incorrect charges

This could occur when a cashier rings up a purchase twice, for example. Kiran went to his local department store and purchased a pair of work boots using his debit card. A few days later, when Kiran was reviewing his bank account, he noticed there were two charges for the exact amount he paid for the work boots. That error resulted in a chargeback.

Issues with the purchased goods

In this scenario, the purchased goods or services were damaged, defective, not as originally described or not delivered at all. For example, Anna ordered a brand-name video game controller from an online retailer, described as red, transparent and wireless. When she received the controller, it was a standard gray wired controller. Anna tried to contact the seller but was unable to reach them, so she filed a dispute.

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