Understanding Chargebacks

Banking institutions provide credit cards to their customers and these banks are known as ‘issuing banks.’ Issuing banks use ‘chargebacks’ as a protection against fraudulent transactions. With this mechanism in place, a cardholder can file a dispute, claiming transaction to be illegal or fraud.

Case 1: Cardholder complaint is proved true

In this case, the issuing bank takes away the money (involved in a transaction that has been proved to be fraudulent) from merchant’s account. An additional fee for processing chargebacks is also levied on the merchant. This fee can be anywhere between 0 to 100 dollars. The exact amount of the fee levied depends upon the issuing back a merchant is dealing with.

Case 2: Cardholder complaint is proved false

Although the issuing bank does not request a refund (for a transaction that has been proved to be genuine) from the merchant in this case, additional chargeback processing fees are still levied.

Clearly, chargebacks are something that merchants, whether they’re using low or high risk merchant accounts, should be avoiding. Besides a complete refund against the products sold or services offered and a processing fee, merchants may also need to pay currency conversion fees on some occasions to make it worse. Overall commissions earned by credit card issuing banks at the expanse of merchant’s bank balance can be even higher if the business has been classified as ‘high risk.’

Laws and regulations in force empower a credit card holder to file a dispute in 24 months. That said – the sales volumes realized by a high risk merchant in actuality, are reversible for that period. While the purpose of this post is not to discourage you from being avoiding high risk businesses (because that’s’ where most profits on the internet are), it’s absolutely necessary to choose high risk merchant accounts carefully and fully understand service providers’ terms and policies related to chargebacks. Any slipup in this regard can cause financial hurdles at the most unexpected hour. So, don’t sweat it but don’t sleep on it either.

Besides fraudulent transactions (Case A; unless proven otherwise) where it’s merchant’s who’s held fully responsible for the problem, here’re some common reasons for chargebacks:

Case B:  Credit Not Processed

Such issues usually popup when the credit for a customer is not processed against a valid money back guarrantee after he or she returns the products or expresses dissatisfaction over the service offered. In this case, merchants may or may not get involved with chargebacks.

Case C: Product Not Delivered

Nowadays, it’s one of the most common reasons for frequent chargebacks in high risk businesses that operate on the internet. The merchant has to make up for a customer’s loss just as it is done in cases discussed above.

Case D: Technical Issues

Technical problems too are common causes of chargebacks. On some occasions, a customer is charged ‘twice’ or even ‘thrice’ when the order is actually placed only once. Such problems usually occur when the information is not transferred correctly between an insuring bank or payment gateway and the merchant.

If you’re in ‘high risk’ business or intend to start one in near future, you’d have to make use of high risk merchant accounts for sure. This short guide should help you make an informed decision at that time.