If you have a fee on your statement for a chargeback, you may wonder “what is a chargeback?” Companies created chargebacks to increase buyer confidence in using credit cards. A chargeback allows consumers to dispute a charge on their bill without contacting the merchant first. While convenient for customers, this becomes a colossal headache for merchants that must deal with chargebacks.

The number of chargebacks has increased every year, especially since the coronavirus created a spike in disputes from 2020 through 2021. In fact, 68% of merchants report an increase in their chargeback rates since the pandemic hit. Based on consumer behavior, someone who disputes one charge is highly likely to dispute another one. For every uncontested friendly fraud case, 50““““% of cardholders will commit the crime again in less than two months. Therefore, it is unlikely that the number of chargebacks will return to pre-pandemic levels.

What is a chargeback and can a merchant dispute it?

A chargeback is a process that a cardholder uses to dispute a charge that is on their credit or debit card bill. This can be for something that they purchased and received or a fraudulent transaction. The cardholder will dispute the charge by contacting their credit card issuer or bank and providing information about the reason for their dispute.

The bank will charge the transaction amount back to the merchant and return the funds to the cardholder. Chargebacks do not require the merchant’s approval. When the cardholder disputes a transaction, the bank reviews the charge, and if the reason the cardholder gives for the dispute is valid, the bank gives a provisional credit to the customer’s account while they resolve the chargeback claim.

Merchants can dispute the chargebacks, but it is very difficult to prove that the chargeback is fraudulent. It may end up costing them more in time and legal fees if they dispute the chargeback.

History of chargebacks

Chargebacks began as a direct response to the widespread credit card abuse by fraudsters who used stolen credit card information. There was not much that the cardholder could do. Banks created chargebacks for credit cards in 1974 in the Fair Credit Billing Amendment to the Truth in Lending Act. Credit and debit card chargebacks were first implemented by the Electronic Funds Transfer Act of 1978. These two acts outlined the protective chargeback measures that consumers use today.

Prior to the Fair Credit Billing Amendment, cardholders had no recourse when fraudsters used their stolen or lost cards. Once merchants had been paid, the cardholders were out the money. Chargebacks enabled consumers to get refunds from banks on transactions that they felt were not valid.

How is a chargeback started?

Consumers can file a chargeback without consulting the merchant by simply contacting their bank and requesting to dispute the transaction. However, it is not a good practice to file a chargeback without consulting the merchant and sometimes it is unlawful. It is best to reconcile with the merchant first.

Once a chargeback is filed, the bank gives the cardholder a provisional credit for the transaction amount while they further investigate the cardholder’s claim. The bank will ask the cardholder to describe the problems that they encountered with the merchant and the steps that were taken to resolve the issue.

Why do customers file chargebacks?

There are many reasons that customers file chargebacks. They often dispute a charge that they don’t recognize. Other times, customers will file a chargeback when they are dissatisfied with their purchase. Sometimes customers will try to use the chargeback process to get something for free.

The major card networks established codes to assign to each chargeback reason. The chargeback codes clearly identify the reason that the cardholder requested the chargeback.

When can a cardholder legitimately file a chargeback?

Cardholders should not use a chargeback just because they don’t like the item they bought. The only situation when a cardholder should contact their bank first for a chargeback is when there has been true fraud. When a cardholder has been the victim of identity or card theft, then a chargeback is legitimate. It is also the ethical route merchants and banks must take.

Customers may file chargebacks if they don’t receive their product or service, if the product was damaged, or if they were sent the incorrect item. Another reason for the dispute is being double-charged for an item. These problems can usually be resolved faster and easier when the customer contacts the merchant.

Unfortunately, it is very difficult for a merchant to distinguish a legitimate chargeback from a fraudulent one. This makes it difficult for merchants to contest the chargeback. According to BusinessWire, 31% of merchants had difficulty contesting illegitimate claims.

How can merchants protect themselves?

Some merchants have turned to load-balancing to spread the number of transactions across a few different merchant accounts, but this creates its own problems. It also may not be within the card brand rules. A better method of protection is to monitor the account.

NMA provides its members with an in-house Underwriting and Risk department that monitors account risk through the life of a merchant identification number. The department conducts reviews and analyses of the merchant accounts with other banks and tracks those relationships.

Besides risk monitoring, NMA has partnered with Fraud Wrangler, a risk mitigation solution to meet the merchant’s needs. It is composed of 3DS, risk alerts, chargeback interception, and post-termination refunds. Fraud Wrangler was designed to keep merchant accounts healthy longer.

About NMA

NMA is a merchant advocacy group dedicated to reducing or eliminating the unnecessary fees associated with accepting credit card payments. Since 2004, NMA’s payment processing solutions have been delivering tailored solutions, best-in-class customer service, and high-quality service offerings for businesses across multiple industries. Whether it’s high-risk or low-risk, brick-and-mortar or e-commerce, NMA will create the best processing experience for your company. For more information, visit us at our website, or call (866) 509-7199.