What is a chargeback? A guide for sellers

27 March 2017

Business Insight

Chargebacks are an unfortunate fact of life when accepting payment by card. Anyone selling online might have a chargeback at some point.

It can be an unpleasant surprise the first time it happens, especially if you don’t understand why it occurred or feel it’s unfair.

This guide will help you understand the rules about chargebacks so you can limit how many you receive.


What is a chargeback?

Chargebacks were developed to protect customers when paying by card from a distance. A chargeback occurs when a customer contests a payment and requests a refund directly from her bank because there has been fraudulent activity or her consumer rights have not been respected. This includes cases when the item or service bought does not meet expectations.

The cardholder’s bank then requests the refund of the money from the merchant’s bank. The merchant’s account is debited and a fee is generally applied to cover the administrative costs of this process.

Sometimes the cardholder’s bank will instead ask for information or documents before proceeding to a chargeback and the merchant’s bank will contact the merchant for this information.


What are the reasons for a chargeback?

Consumers can request chargebacks for various reasons. It could be because of an issue with the payment, such as it being unauthorised or if the customer was billed twice. It could also be that the product was damaged, not as expected or didn’t arrive.

The customer should contact the seller first and try to resolve the issue before contacting the bank and it is up to the bank whether they agree to the claim. In reality, some customers directly ask for a chargeback without contacting the merchant or before receiving a response from the merchant.

If the customer paid using 3-D Secure she cannot request a chargeback for an unauthorised payment. During 3-D Secure payments the customer’s bank verifies her identity in some way, such as by sending a code by SMS, so it is assumed that the card is in her possession.


What is the minimum amount for a chargeback?

Some banks allow chargebacks for amounts as low as one euro. Unfortunately the processing fee which comes with a chargeback does not generally vary depending on the amount. This means that if your chargeback fee is thirty euros, for example, a dispute over one euro could actually cost you, the seller, 31 euros.


Why does a seller often pay a fee with a chargeback?

The chargeback process takes some time and involves two banks. First the buyer has to contact her bank to start the process and then the bank has to contact your bank to request information or take the money directly. The fee therefore covers the administrative costs associated with this process while also discouraging sellers from multiplying chargebacks.

Of course, chargebacks are not in the interest of the seller or the bank. In an ideal world customers would all be satisfied and have no reason to request a chargeback. It is therefore in everyone’s best interest to avoid them by satisfying customers.


How can sellers avoid chargebacks?

While you can’t necessarily avoid all chargebacks, you can take certain measures to reduce the probability of having them.

Some chargebacks can be avoided by providing excellent customer service. If products are exactly as described, tracking is provided, delivery times are respected and payments are processed correctly, customers are less likely to have cause to make a chargeback. You can also be as clear as possible about your return policy and make it easy to contact you.

As mentioned above, as a merchant you can avoid chargebacks due to unauthorised payments by using 3-D Secure.


Avoiding chargebacks - Lemon Way


How long does the customer have to request a chargeback?

The time limit for requesting a chargeback varies depending on the reason. The maximum time will generally be 120 days from the latest date the customer expected to receive the product or service or 120 days from the date the customer discovered the product or service would not be delivered or learned of another problem with the payment. It cannot exceed 540 days from the date of the transaction processing.


Can a merchant dispute a chargeback?

The merchant’s bank might ask the merchant about the claim for the chargeback and offer the merchant the opportunity to provide proof to refute it.

In many cases, however, the bank will just take the money and issue a fee. The merchant can still request her bank to dispute the charge but the final decision is up to the cardholder’s bank.

Even if the merchant provides proof that the chargeback reason is not valid, she might still find that the customer’s bank does not agree to reverse the chargeback. This can be for various reasons, such as the documents being received late. In some cases, merchants only have five days for their documents to reach the customer’s bank and receiving them late can be a reason for a refusal.

As the merchant usually still pays a fee regardless of whether the chargeback gets reversed, some sellers prefer to contact the customer directly to resolve the problem instead of relying on the banks.