In online business, it is important to understand the chargeback process and how it works in order to protect your revenue and reputation. There are many reasons why chargebacks occur, so it is wise to be familiar with how to prevent them and the role that payment service providers play in facilitating this. By gaining a comprehensive understanding of chargebacks, you can proactively safeguard your business against potential disruptions.

What are chargebacks?

A chargeback is essentially a reversal of a credit card transaction initiated by the cardholder’s bank or credit card provider following a purchase. It serves as a form of consumer protection, allowing cardholders to dispute a transaction and reclaim their money if they believe the transaction was unauthorized or the goods/services were not satisfactory. The customer can make a claim via their bank or financial institution, stating that the charge is fraudulent or unauthorized. While chargebacks are designed to protect consumers, they can pose significant challenges for online business owners, impacting revenue and operational efficiency.

Chargebacks vs refunds

While chargebacks and refunds both result in money being returned to the customer, they are distinct processes. A refund is initiated by the merchant, typically as a response to a customer request or a return of goods. Refunds are often straightforward, handled directly between the customer and the business, and usually reflect a cooperative resolution without incurring additional fees. 

A chargeback, on the other hand, is initiated by the cardholder’s bank, often without the merchant’s initial consent, and can occur if the customer feels their issue wasn’t resolved satisfactorily through direct communication with the merchant. Chargebacks can lead to additional fees for the merchant and potential damage to their relationship with payment processors.

Common reasons for chargebacks

Chargebacks can occur for various reasons, and understanding these can help you mitigate their frequency. Here are some examples:

  • Unauthorized subscription charges
  • Suspected fraudulent transactions
  • An item was damaged or not delivered
  • Expected refunds or credits were not received 
  • The item received differed from that which was advertised
  • Unrecognizable business names on credit card statements
  • Discrepancies or errors during the transaction process, such as double billing
  • The customer was generally dissatisfied and wished to dispute their purchase

How do chargebacks work? 

The chargeback process typically involves several key stages:

  1. The process begins when the cardholder initiates the chargeback with their bank, claiming that the charge is unauthorized or fraudulent. 
  2. The issuing bank reviews the complaint to determine its validity. If deemed valid, it initiates the chargeback and notifies the business of the dispute. 
  3. The business responds to the claim and has the opportunity to refute the chargeback by providing evidence refuting the cardholder’s claim, such as transaction records, delivery confirmations, or customer communications. 
  4. The bank reviews the evidence provided and decides how to proceed.
  5. If the bank sides with the cardholder, the chargeback is upheld, and the funds are returned to them. If the bank sides with the merchant, the chargeback is reversed, and the funds remain in place.

What is chargeback fraud?

Chargeback fraud, also known as ‘friendly fraud,’ is a deliberate misuse of the chargeback process by individuals seeking to obtain a refund while retaining the purchased goods or services. This fraudulent activity occurs when a customer disputes a legitimate payment transaction through their issuing bank or payment processor, leading to a chargeback. In such cases, the customer effectively acquires items from the company via the chargeback process while receiving back their funds, resulting in a loss for the business. This type of fraud can be particularly challenging to detect because the dispute might appear legitimate at first glance.

Managing chargeback fraud requires vigilance and robust evidence-gathering practices, which can be streamlined by partnering with a payment service provider like Zota that prioritizes security and risk management. By closely monitoring transaction and chargeback patterns, maintaining detailed records, and regularly updating security protocols, businesses can effectively contest fraudulent chargebacks and protect their revenue.

How to prevent chargebacks

To minimize the risk of chargebacks, businesses can implement several proactive measures. Clearly outlining return, refund, and shipping policies and ensuring that product descriptions are accurate and comprehensive can minimize the risk of disputes resulting from unrealistic customer expectations. Providing excellent customer service and resolving issues promptly is likely to boost customer satisfaction and loyalty, making them less likely to initiate chargebacks.

Payment gateways play a crucial role in chargeback management. Zota’s technology is equipped with robust fraud detection mechanisms to reduce the likelihood of chargebacks due to unauthorized transactions. We provide comprehensive transaction records, enabling you to quickly gather and submit evidence during a chargeback dispute. Our platform facilitates clear and timely communication with both customers and banks, using automated alerts to ensure you stay informed about potential disputes and can respond promptly. You even benefit from detailed analytics and reporting tools, helping you identify chargeback patterns and trends. This insight allows you to address underlying issues and implement strategies to reduce future occurrences. 

Understanding chargebacks and taking proactive steps to prevent and manage them is essential for online business owners. By familiarizing yourself with the intricacies of the chargeback process, leveraging the expertise of payment partners, and implementing preventive measures, you can minimize the impact of chargebacks on your online business and focus on delivering exceptional products and services to your customers.

Feel free to contact our team of payment experts for a more comprehensive understanding of chargebacks and how to optimize payment gateway technology to prevent them.