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What Is a Chargeback and How Can You Protect Your Business?

What Is a Chargeback and How Can You Protect Your Business?

Chargebacks are unfortunate but unavoidable when you run any business. In 2018 alone, merchants received chargebacks on 3.26% of their customer transactions, according to a recent study by MidiGator. It might seem like a small number, but chargebacks come with more consequences than revenue loss alone. Fees, loss of products, increased processing costs, and even merchant account termination are all potential consequences of chargebacks and can have a significant impact on your business’s finances.

So how can you protect your business from chargeback consequences? By understanding what chargebacks are, the chargeback process, and how to dispute transactions effectively, you can take control of any chargeback situation, and ensure that your business stays safe.

Chargeback Definition

A chargeback is a transaction reversal which occurs after a merchant has charged a customer. It’s similar to a refund in that the customer is requesting a return of their funds. However, it’s important to understand the distinction between chargebacks vs refund requests. During a refund request, the customer reaches out to the merchant, explains the issues, and asks for their money back. To initiate a chargeback, the customer instead contacts their bank to file a dispute, who forcibly removes the funds from the merchant’s account, thereby reversing the payment.

Why Were Chargebacks Created?

From a merchant perspective, chargebacks sound awful and biased, which may leave you wondering why they exist at all. Credit card chargebacks originated in the 1970s when the idea of paying with plastic was still relatively new, and the potential risks were high. Early adopters worried about their cards being stolen and used to purchase goods, with the financial loss landing in their pockets.

In 1974, Congress passed the Fair Credit Billing Act, which, among other provisions, created the chargeback process. Chargebacks were designed to protect consumers from fraud by ensuring that they wouldn’t be liable for charges made on their cards by thieves. In turn, merchants benefited from this new way of paying, which encouraged customers to spend more at their stores.

Parties Involved in Chargebacks

Unlike a refund, a chargeback involves more than the merchant and the customer. Here is a short list of the other institutions involved when a customer chooses to dispute a credit card charge:

  • The customer’s credit card company or bank: This is who the customer calls to begin the dispute process. They usually create a written statement of the complaint and contact the merchant.

  • The merchant’s bank: This is the account from which the customer’s bank will pull back the disputed funds.

  • The payment gateway and processor: The merchant’s payment processor provides methods for accepting credit cards, such as a card reader or virtual terminal, and manages credit or debit card transactions. You can think of a payment gateway as a middle man, directing funds from the customer’s bank to the merchant’s account and monitoring activity appropriately.

How SumUp Protects Its Merchants from Chargebacks

SumUp stands with our small business partners throughout the chargeback process. When a bank chargeback is issued, SumUp covers the initial loss, so you are able to stay focused on your business even during a dispute. You’ll see the charge in your SumUp account, but it will not be immediately pulled from your commercial bank account.

As soon as we’re alerted, we'll notify you and request important documents to help prove the transaction was valid. We’ll keep you appraised of time limits for providing information, so you can calmly and efficiently respond. Then we handle presenting your evidence to the parties involved.

If you win the dispute, SumUp will reimburse the funds to your SumUp account, excluding a $10 chargeback fee from our payments provider (this fee is not from SumUp, but is required by our provider partners). Reimbursement occurs 60 days after the date of reversal for the chargeback. If the dispute is lost, the chargeback will be applied to your commercial bank account, plus the payment provider’s fee.

In addition to providing support during a chargeback incident, SumUp also provides secure payment pathways to reduce your risk of payment disputes. Our virtual terminal and credit card processing software are PCI-compliant and our transactions are fully encrypted to protect your customers’ data. Even our EMV card readers help prevent fraud with the highest level of payment security.

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The SumUp Air Lite Card Reader enables small businesses to accept credit, debit and contactless payments with a single device.

Common Reasons for Chargebacks

Fraudulent charges were the original reason chargebacks were created. Today, they are still the most common grounds for disputed charges, comprising upwards of 71% of disputes. When a consumer notices unauthorized charges on their account, they are encouraged to immediately reach out to their bank or credit card issuer to freeze their account, dispute the charge, and stop the fraudster.

Ideally, suspicion of fraud should be the only time a chargeback occurs. For all other disagreements, a customer should reach out directly to the merchant to resolve the issue. However, since non-fraud chargebacks make up more than a quarter of disputes, here are a few other reasons customers initiate a chargeback:

  • There was a billing error. Perhaps the customer was overcharged, or charged twice by accident.

  • The customer was dissatisfied with the quality of the goods or services provided by the merchant.

  • Retail goods from the merchant were never delivered or arrived broken or damaged.

Understanding Chargeback Fraud & Friendly Fraud

Chargeback fraud is often called “friendly” fraud, but it’s less like a friendly game of soccer, and more like taking friendly fire. Friendly fraud occurs when a customer knowingly makes a purchase and then disputes the credit card charge, claiming an item was defective or never delivered, or that the charge was unauthorized. These fraudsters usually target high-ticket items, with the intent to receive compensation AND keep a product that actually arrived and works well.

To stop “friendly” fraudsters in their tracks, here are a few other important tips:

  • Get as much information from the customer as possible. When processing a credit card, make sure to get the Card Verification Value (CVV) number from the customer, and check that it matches the card you’re given. Take down billing information and addresses—anything that can help prove you had a valid and authorized interaction.

    • Getting a CVV number is even more important for over-the-phone and card-not-present transactions, which have a significantly higher risk for fraud.

  • Track your shipments, and save copies of signed receipts for all delivered goods. If you do receive a friendly fraud complaint, this can help prove that the fraudster did, in fact, receive their goods.

How to Shield Your Business from Chargebacks

While you can’t make chargebacks disappear altogether, you can reduce your risk of chargebacks with a few tried-and-true methods. To reduce fraud-related chargebacks, you should always use a secure method to accept credit cards, such as SumUp’s virtual terminal.

You’ll also want to follow payment processing best practices. For example, EMV cards should always be dipped, not swiped. Magstripes are much easier to duplicate than credit card chips. Since 2015, the EMV liability shift has stipulated that merchants who swipe cards instead of dipping them may be held liable in cases of fraud.

To reduce the frequency of other chargeback complaints, try these proven methods:

  • Use an easily recognizable business name on all transactions. Customers often suspect fraud when they don’t know who the transaction on their statement is from.

  • Make it easy for customers to request a refund. Refunds aren’t the goal, but they cost much less time, stress and money than chargebacks, and can help you maintain a positive relationship with your customers-- meaning more possibilities for future revenue! You can do this by:

    • Having a clear refund policy in-store and online.

    • Providing a contact number on billing statements.

  • Provide high-quality customer service at all times. Excellent communication and a positive buying experience make the customer more likely to reach out to you in the event of an issue, instead of going to their bank.

Combat Chargebacks with Confidence

We hope you’ve found this guide to chargebacks helpful, and that you use these tools to reduce your risk and protect your business during any transaction disputes. For more information on payments security, be sure to check out our posts on Detecting Credit Card Fraud and Why We Request Documents.


Lindsey McGee