What is a Chargeback?
A chargeback is a financial mechanism that allows cardholders to dispute a transaction made using credit or debit cards and request a payment reversal. It protects consumers from fraud, non-delivery of goods, or defective services. Introduced initially as a consumer safeguard, chargebacks shift the financial risk from the consumer to the card issuer and merchant, promoting trust in card-based transactions.
When a customer disputes a payment, the card issuer investigates the claim, providing security when the merchant fails to address the problem adequately. While chargebacks can benefit consumers, they can also present financial and administrative challenges for businesses if improperly managed.
How Does Chargeback Work?
Initiating the Claim
The cardholder contacts their card issuer, reporting the transaction issue. To substantiate their claim, they must provide evidence, such as receipts, emails, or screenshots.
Investigation by the Issuer
The card issuer reviews the claim and contacts the merchant for their response. During this stage, the merchant can provide evidence, such as proof of delivery or service provided.
Resolution Process
If the issuer finds the customer’s claim valid, it reverses the transaction, returning the money to the cardholder’s account. However, the chargeback may be rejected if the merchant successfully disputes the claim.
Appeals and Escalations
If the consumer is unsatisfied with the outcome, they can escalate the matter to the Financial Ombudsman Service for further review. Depending on the case’s complexity, the entire process can take several weeks or months.
Consumers are advised to file chargeback claims within 120 days of the transaction date or when the issue was discovered. Delayed claims may reduce the chances of success, as card issuers have specific timeframes for dispute resolution.
Reasons to Use a Chargeback
- Non-receipt of goods or services: If a product is not delivered or a service is not rendered, the consumer can dispute the payment through chargeback.
- Fraudulent transactions: Chargebacks protect cardholders from unauthorised transactions, such as identity theft or stolen card details.
- Goods not as described: When the received product differs from the description provided at the time of purchase or is defective, the cardholder can request a chargeback.
- Merchant unresponsiveness: If a business fails to respond to or resolve customer complaints, chargeback offers a way to recover the payment.
Chargeback vs Section 75
Although both chargebacks and Section 75 protect consumers, they differ significantly:
Legal vs. Voluntary Protection
Section 75 is a legal protection under the Consumer Credit Act, holding the card issuer jointly liable with the merchant for credit card transactions between £100 and £30,000. Chargeback, however, is a voluntary scheme, not backed by law, and applies to both credit and debit cards.
Application Scope
Section 75 is limited to credit card payments, while chargebacks can be used for credit and debit card transactions, including smaller purchases.
Best Use Cases
Section 75 is ideal for high-value transactions, especially when the merchant fails to deliver. Chargeback is better suited for resolving lower-value disputes or when debit cards are used.
Understanding these distinctions helps consumers decide which process to follow based on their specific transaction issues.
How to File a Chargeback?
To file a chargeback, follow these steps:
- Contact the card issuer: Report the issue through phone, online banking, or the card issuer’s app. Provide details like the date, amount, and merchant name.
- Submit supporting documents: Attach evidence such as order confirmations, emails with the merchant, or photos showing defective goods.
- Follow-up during the investigation: Stay updated with the issuer and respond promptly if additional information is required.
- Review the outcome: If the chargeback is approved, the payment will be reversed. If it is rejected, ask for a reason and explore further options, such as appealing to the Financial Ombudsman Service.
Possible Challenges with Chargebacks
Chargebacks offer essential protection, but they also come with several challenges that can complicate the process for both consumers and businesses:
Merchant Disputes
Merchants can contest a chargeback claim if they believe it is unjustified. They must provide evidence, such as proof of delivery, customer communication records, or signed service agreements. Disputed claims often lead to additional investigations by the card issuer, delaying the resolution and increasing the administrative burden for all parties. Sometimes, the merchant may overturn the chargeback, returning the funds to their account.
Rejected Claims
If the card issuer denies the consumer’s chargeback request, the customer may need to escalate the issue to the Financial Ombudsman Service or pursue other dispute resolution methods. However, there is no guarantee that these escalations will result in a favourable outcome. A rejected claim can leave the consumer without recourse, particularly if the merchant is uncooperative or unwilling to offer a refund directly.
Time Limitations
Chargebacks are subject to strict timeframes. Most card issuers require claims to be filed within 120 days of the transaction or the discovery of the issue. Delays in identifying problems—such as unnoticed fraudulent charges—can limit the opportunity to dispute the payment. Consumers must act promptly to ensure their claim is considered, as missing the deadline will typically result in the claim being denied.
Documentation Requirements
To succeed in a chargeback claim, consumers must provide comprehensive documentation, including proof of purchase, communication with the merchant, and evidence of the issue. Without proper records, the issuer may reject the claim, reducing the consumer’s chances of getting their money back. Maintaining all relevant receipts and correspondence is essential until the chargeback process is complete.
Fraud-Related Complications
Fraudulent chargebacks, or “friendly fraud,” occur when consumers claim disputes for valid purchases to avoid paying. This practice complicates genuine cases and increases scrutiny for future claims. Banks may become more cautious in approving chargebacks if a consumer is flagged for filing frequent disputes, adding another layer of difficulty.
Merchant Perspective: How Chargebacks Impact Businesses
From the merchant’s perspective, chargebacks can result in several challenges:
Financial Losses
Chargebacks directly cut into a business’s profits by reversing legitimate sales. Unlike a return, where goods can be resold, chargebacks usually result in lost revenue and unrecoverable goods or services. Merchants are often left disadvantaged since the product or service is not returned and must still reimburse the customer’s payment. For service-based businesses, such as travel or subscriptions, chargebacks can be particularly devastating, as previously consumed services cannot be reclaimed.
Chargeback Fees
Payment processors impose fees for each chargeback dispute filed against a merchant. These fees vary depending on the processor and the merchant’s chargeback history, but they often range between £15 to £100 per dispute. In some cases, merchants with higher chargeback rates may face additional penalties, such as higher transaction fees or security deposit requirements. These financial burdens increase operational costs and discourage small businesses from absorbing multiple chargebacks without severe financial planning.
Increased Operational Costs
Handling chargebacks involves more than just financial losses—it consumes time and internal resources. Businesses must allocate staff to manage disputes, gather documentation, and communicate with payment providers to contest claims. For companies with frequent disputes, the need for specialised software and automated systems to track and manage chargebacks adds to operational costs. Managing these processes efficiently is crucial to prevent disputes from escalating into more significant financial or reputational issues.
Reputational Risks
Merchants with high chargeback rates risk damaging their relationships with payment processors, banks, and card networks. This can result in their business being reclassified as high-risk, which may lead to increased transaction fees or stricter compliance requirements. Sometimes, payment processors may terminate their contract with a merchant if chargeback rates exceed allowable thresholds. Additionally, customers may lose trust in businesses with frequent disputes, affecting future sales and brand reputation.
Prevention Strategies
- Clear Return and Refund Policies: Well-defined refund policies ensure customers understand their options, reducing unnecessary chargeback disputes. Communicating these policies on the website and receipts builds transparency and trust.
- Secure Payment Gateways: Fraud is a leading cause of chargebacks, and using secure payment systems helps prevent unauthorised transactions. Implementing fraud detection tools like address verification and CVV matching can minimise risk.
- Customer Service Training: Empowering customer service teams to resolve issues promptly helps prevent minor complaints from escalating into chargebacks. Providing quick refunds or exchanges ensures customers are satisfied without disputes.
- Proactive Monitoring: Merchants can also use chargeback management tools to detect patterns and address issues early, reducing the risk of disputes. Regularly reviewing chargeback reports allows businesses to spot trends and make process improvements.
Impact on Customer-Bank Relationships
Excessive or inappropriate use of chargebacks can strain the relationship between the consumer and their bank. Banks and card issuers track chargeback behaviour, and frequent claims may raise concerns about potential misuse. Although chargebacks are intended to protect customers, banks must also ensure that customers are not engaging in “friendly fraud” — when a consumer initiates a chargeback despite receiving the goods or services as promised.
If a cardholder repeatedly files chargebacks without valid reasons, the bank may take several actions. First, they could flag the customer’s account for review, especially if the claims involve large sums or happen frequently. The bank might limit the consumer’s access to future chargebacks or impose stricter verification processes for claims. In extreme cases, this behaviour could lead to the closure of the consumer’s account if the bank determines that the chargebacks are unjustified.
Furthermore, banks may consider frequent chargebacks a sign of poor financial management or potential fraud, which can affect the customer’s creditworthiness or eligibility for future financial products. Therefore, while chargebacks offer protection, consumers must use them responsibly to maintain a positive relationship with their bank.
Chargebacks in International Transactions
Chargebacks can become more complex when dealing with international purchases due to different laws and regulations across countries. International merchants and customers often operate under varying consumer protection laws, impacting the chargeback process and resolution timeframes. While card networks like Visa, Mastercard, and American Express have global chargeback policies, local banking regulations or merchant agreements may influence how disputes are handled.
For instance, a consumer purchasing from a foreign merchant may experience delays in the chargeback process, as communication between the card issuer and the merchant’s bank could involve multiple legal jurisdictions. Additionally, merchants operating in different countries may have contracts that limit their liability for chargebacks, especially when cross-border transactions are involved.
However, international consumers still benefit from global card networks’ chargeback protection. In most cases, the card issuer will work with the merchant’s bank to recover the funds, though consumers should expect longer wait times for resolution than for domestic purchases. To avoid unnecessary disputes, customers should be aware of potential complications and review the merchant’s refund and cancellation policies before international transactions.
Chargebacks for Recurring Payments
Recurring payments, such as those for subscription services or memberships, are also subject to chargeback rules. Many consumers need help cancelling these services but continue to be charged, often due to confusion about cancellation procedures or ongoing contractual obligations. In such cases, a chargeback can be used to dispute unauthorised or incorrect charges.
When filing a chargeback for a recurring payment, the consumer must provide proof of cancellation, such as emails, screenshots, or confirmation receipts from the service provider. The card issuer will review the provided documentation and verify that the customer took the necessary steps to cancel the subscription. If the merchant continues to charge the card despite clear evidence of cancellation, the chargeback is more likely to succeed.
However, consumers should be mindful of the terms and conditions they agree to when signing up for subscription services. Some subscriptions come with minimum contract periods or specific cancellation windows; adhering to these terms could strengthen a chargeback claim. It is essential for consumers to carefully read the service agreement and ensure they follow the correct steps to avoid ongoing charges. Monitoring automatic payments regularly can help identify unwanted charges early, allowing consumers to address them before they escalate into chargebacks.
Tips for Avoiding Chargeback Abuse
While chargebacks offer valuable protection, they are not a tool to be used lightly. Misusing chargebacks can harm merchants and potentially affect the consumer’s banking status. Here are several ways to avoid chargeback abuse:
Communicate with the Merchant First
Before filing a chargeback, always resolve the issue directly with the seller. Most merchants will be willing to provide refunds or exchanges if there is a legitimate problem with the transaction. The consumer can often avoid the lengthy and complicated chargeback process by contacting the merchant.
Keep Detailed Transaction Records
Documentation is essential in resolving disputes. Consumers should save order confirmations, receipts, email exchanges, and screenshots related to the purchase. These records help support the consumer’s case if a chargeback is necessary and clarify what was agreed upon during the transaction.
Understand Refund Policies
Before initiating a chargeback, consumers should review the merchant’s refund and return policies. Many disputes arise from misunderstandings about these policies, such as restocking fees or return windows. Understanding the terms of purchase helps avoid unnecessary chargebacks.
Use Chargebacks Responsibly
Filing frequent or unjustified chargebacks may result in bank or payment provider restrictions. Consumers should avoid using chargebacks as a substitute for working with the merchant or for minor grievances that can be resolved more amicably.
By following these tips, consumers can protect their rights without contributing to unnecessary chargeback claims, which can damage their relationships with merchants and financial institutions alike.
FAQs
Is chargeback a refund?
A chargeback is similar to a refund, but there are differences. A refund comes directly from the merchant, while a chargeback involves the consumer’s bank reversing the payment through a dispute process. Chargebacks occur when consumers are dissatisfied with the merchant’s resolution or when fraud or non-delivery is involved.
Who pays for chargebacks?
Merchants are responsible for the financial cost of chargebacks. This includes refunding the purchase amount and paying chargeback fees imposed by their payment processor. Additionally, merchants may lose inventory or incur penalties if they experience frequent chargebacks.
Who wins chargebacks?
If the customer’s dispute is upheld, the card issuer refunds the purchase amount to the consumer. If the chargeback claim is denied, the funds remain with or are returned to the merchant. The outcome depends on the evidence the customer and the merchant provided during the investigation process.
Who loses money in a chargeback?
Merchants bear most of the financial burden in chargebacks. They lose the value of the sale and are often charged additional processing fees. In some cases, merchants must also invest in dispute management tools to prevent further losses from chargeback fraud.
Is chargeback free?
For consumers, filing a chargeback is typically free. However, merchants incur fees for each chargeback dispute, regardless of whether or not the customer’s claim is valid. These fees can vary depending on the payment processor and the outcome of the investigation.
Who is eligible for a chargeback?
Chargebacks are available to consumers in various scenarios, including:
- Fraudulent or unauthorised transactions on the customer’s account.
- Non-delivery of goods or services.
- Products or services that are not as described or are defective.
- Billing errors, such as duplicate charges.
Consumers are encouraged to file disputes within the set timeframes, usually 120 days from the transaction, to maximise the chances of success.
