What Are Chargebacks, and How Does Chargeback Protection Work?

In the simplest terms, chargebacks are the return of funds to a customer. They exist for consumer protection, because they ensure that a cardholder’s money is safe if he or she has been the victim of fraud. The Fair Credit Billing Act (1974) is often citedas the genesisof chargebacks, as it was created to protect consumers from unfair billing practices. Other laws that afford credit card holders in the United States with reversal rights are the Electronic Fund Transfer Act (1978) and the Truth in Lending Act (1987).Chargebacks occur when a bank voids a (supposedly fraudulent) credit card transaction, withdraws funds from the charging party’s bank account, and applies credit to the victim’s statement. Credit card holders are able to file complaints regarding fraudulent transactions on their statement, and these complaints are followed by an investigation conducted by the issuing bank. If foul play is discovered, the cardholder will be fully refunded. Therefore, the biggest difference between a chargeback and a traditional refund is the role of banks as intermediaries, as they are responsible for returning the misplaced funds (instead of the merchant who mislead the consumer).But chargebacks often times affect legitimate businesses and may be instigated by consumers unhappy with a service or who forgot to cancel a reoccurring subscription, even if they originally signed up for it. Read more below for information about how well-meaningbusinesses can protect themselves from chargebacks and their consequences.

In order to secure a chargeback, cardholders should act quickly and not be shy when approaching a bank. If they have been the victims of fraud, a cardholder’s best bet is to stress that from the get-go, because letting the bank know what they’re looking for will make their job a lot easier and expedite the refund process. In the somewhat unlikely event that the bank refuses to issue a chargeback, it is important to not get discouraged and to avoid giving up. In this situation, cardholders are advised to file a complaint under “claims and defenses.” Chargebacks can also help consumers whose credit cards have been overcharged due to human errors (as a result of manual processing) or who received a defective/substandard product. However, in this situation, the consumer should contact the merchant first, because filling illegitimate chargebacks after online purchases constitutes cyber shoplifting.To protect themselves from these types of “friendly fraud,” merchants and business might seek the help of companies that offer chargeback protection or insurance. (Note: These are different services; the SwipeSum comparison processcan help you navigate which is right for you!) Although the degree to which these companies might reduce the cost of a chargeback always varies, more and more companies are seeking their business to avoid unnecessary losses. The effect of multiple chargebacks can be catastrophic to businesses. Aside from the obvious harm to their reputation, their accounts could be frozen or terminated, or they might be subjected to a criminal investigation. There are often fees added by processors per chargeback, usually around $25 (plus, of course, the lost revenue). Therefore, merchants may have numerous precautionary measures in place to avoid chargeback disputes. One of the most basic steps to prevent illegitimate chargebacks is maintaining a record of all credit card orders. If a consumer tries to move forward with an unwarranted chargeback, even the most basic documentation would go a long way towards proving a company’s case. Signed receipts are absolutely essential. Responsible merchants save their receipts from in-person purchases and make sure that the buyer always signs them. Communication with the buyer after the transaction is also important, and this includes everything from requesting delivery confirmation to emailing surveys about the quality of the product that was bought. If chargebacks are an issue facing your business, you have options — and we can help. Email info@swipesum.com or talk to your local SwipeSum Team member to find out more!