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What is a chargeback?

When a customer disputes a debit or credit card transaction, the card issuer must determine whether to provide that cardholder with a refund for the transaction amount—also known as a chargeback.

Due to the costs and time involved with the process of chargebacks, they are a growing concern for both merchants and issuers—especially as the number of chargebacks soars with the explosion of ecommerce. In fact, the cost of chargebacks is expected to reach more than $1 billion by 2023, up from $690 million in 2020, according to an Ethoca-commissioned Aite Group study.

The overall chargeback process is complex and time-consuming. Unless the issuer can quickly determine that the transaction dispute is invalid, it will initiate a chargeback. Here’s a closer look at some of the causes of chargebacks.

The most common reasons for chargebacks

Here are three common reasons customers dispute card transactions:

  • Fraud—Someone unauthorised to use the card made the disputed charge.

  • “Friendly Fraud”—When someone disputes a charge they think is fraudulent but actually isn’t. The most common reason for friendly fraud is transaction confusion—when the cardholder doesn’t recognise a charge on their statement that they or someone else in their household actually made.

  • Service issues—Although consumers would ideally contact merchants directly when they have service issues, such as shipping delays or receiving damaged product, some people simply dispute the purchase transaction in order to get a statement credit.

What is the true cost of chargebacks to merchants?

Merchants are often responsible for the chargeback costs—including both refunding the purchase and any associated fees. Here’s a look at the impact chargebacks have on merchants: 

  • Lost revenue, as merchants generally are obligated to refund the customer’s purchase when a chargeback is granted. 

  • Paying the chargeback fee to the card processor. Even if the merchant files a chargeback dispute and the issuer decides not to grant the customer a chargeback, the merchant is still obligated to pay this fee. In some cases, the chargeback fee can be greater than the value of the transaction being refunded—meaning it’s more than a double-whammy to their bottom line. Mastercard estimates that merchants incur $15 to $70 in operational costs for every card dispute. 

  • Sometimes, the merchant is unable to reclaim the good or service that the chargeback was provided for. That can happen in cases of fraud, digital goods or if the customer doesn’t or isn’t able to return it.

What is the process of chargebacks?

This guide to the chargeback process can walk you step by step through the chargeback process, but here’s a high-level overview:

1. Customer disputes a charge.

2. Card issuer determines whether the dispute is valid.

3. Customer receives a provisional credit for full transaction amount being disputed.

4. Card network collects dispute information. 

5. Acquiring bank notifies the merchant about the dispute. 

6. Merchant decides whether to dispute chargeback. If it does, it collects compelling evidence. 

7. Acquiring bank reviews the evidence and makes a recommendation to the issuer of whether to approve or deny the chargeback.

8. The issuer makes the final call and notifies the cardholder of its decision. If it approves the chargeback, the customer keeps the provisional credit. If it denies it, the provisional credit is deducted from the customer’s account.

How can merchants and issuers prevent chargebacks?

  • Ultimately, it’s in both merchants’ and issuers’ best interest to do all they can to prevent disputes and chargebacks. 

  • Today, merchants and issuers have access to collaborative solutions allowing them to communicate and share information in real-time and to stop chargebacks before the costly chargeback process is initiated. 

  • Ethoca offers two solutions that can help merchants and issuers work together and greatly reduce the volume and, in turn, costs associated with chargebacks:

  • Ethoca Alerts, for example, allows issuers to alert merchants in real-time when a payment dispute has been made—so the merchant can potentially take steps to stop fraud (if the dispute is fraud-related) or prevent that dispute from becoming a chargeback. It also gives the merchant time to reduce other related costs, such as stopping the shipment or delivery of goods—costs that are usually unavoidable if the merchant doesn’t learn about the dispute until days or weeks have passed. 

  • Ethoca Consumer Clarity gives merchants a way to greatly reduce transaction confusion by putting a clear merchant name, logo and rich transaction details right in the digital banking apps that consumers use to review their transaction history, as well as with the issuer’s call center representatives.

  • Together, these solutions can allow merchants and issuers to save the vast amounts of time and money spent on chargebacks.