Chargebacks and why they occur
A chargeback is a way for customers to get their money back if your product or service doesn’t meet their expectations. Any credit or debit card transaction, online or offline, has the potential to be reversed if a customer requests a chargeback.
Here's what small business owners need to know about how chargebacks work, how to minimise them, and how to dispute an unfair chargeback.
What is a chargeback?
A chargeback is a payment returned to a customer's account when they dispute a purchase on their credit or debit card. Chargebacks are processed by the credit card provider, which returns the money to the customer and reclaims the amount from the vendor. Chargebacks can be claimed for various reasons, including double charges for products or services, products that aren't delivered or are delivered damaged or defective, or unauthorised or fraudulent transactions on the card.
How do chargebacks work?
Chargebacks involve a series of steps:
The customer sends a chargeback request to the bank or institution that issued their credit card.
The bank reviews the disputed charge and decides whether it's a valid claim.
If the chargeback request is accepted, the bank passes it on to the credit card network - for example, Visa or Mastercard.
The credit card network puts a credit onto the customer's account and withdraws funds from the vendor's account.
If the vendor disputes the chargeback claim and the credit card company accepts their evidence, they may return the amount to the seller.
Who pays for a chargeback?
Your business is responsible for paying a chargeback if a transaction is fraudulent or goods or services don't meet expectations. You may also need to pay extra chargeback fees on top of the original payment amount.
What are the common causes of chargebacks?
Common reasons for chargebacks include delivery and shipping problems, faulty or damaged products, technical issues causing transaction errors, and missing refunds. Most customers will ask for a refund directly from your business first. Often banks will direct customers to approach you first before they'll consider a chargeback. The bank will then ask for a chargeback on behalf of your customer if you ignore or refuse a request the bank assesses as reasonable.
Shipping and delivery issues
If your customer doesn't receive their purchase at all or a delivery is delayed significantly, they may request a chargeback.
Faulty and/or poor products and services
If you supply faulty or low-quality products, products arrive damaged, your services don't match expectations, or your products don't line up with your description or photos, a chargeback can be a way for your customer to get their money back.
A common reason for chargeback requests is a disputed or unrecognised transaction, attributed to stolen credit card details or other forms of fraud.
Technical issues can lead to transactions going through more than once, errors with the purchase amount, or your customer being charged after cancelling a subscription.
Credit not processed
‘Credit not processed’ is the code for a promised refund that has yet to appear in your customer's account. Sometimes, customers will request a chargeback when this happens.
How do you dispute a chargeback?
You can dispute a chargeback request if you think your customer is being unfair or has misrepresented the issue. This process, called representment, involves submitting a rebuttal letter and supporting evidence to the customer's bank or credit card company. The bank will then review the details and decide whether to refund the customer or return the payment to your account.
Writing a rebuttal letter with supporting evidence
A strong rebuttal letter includes a clear explanation and supporting evidence. Start by addressing the reason for the chargeback – suspected fraud, delivery issue, or incorrect product, for example. Outline why the customer is wrong, and list the evidence you're providing to prove your claim. For example, if a customer says that their order wasn't delivered, explain that you believe it was delivered on X date, and present shipping information that supports your claim.
Always include basic documents like the invoice, the receipt, tracking information and your terms and conditions. If there is other relevant information – like communications from the customer, or bank statements showing a refund – include this too.
Here's what to include:
A copy of your order invoice
The order invoice shows the transaction details, including customer information, price, purchase date and product or service details.
Receipt of the transaction
The receipt shows when the transaction was processed and proves the customer was supplied with order details.
Tracking information (if applicable)
Tracking information from your shipping provider can help prove delivery was completed – particularly if the shipping company requested a signature or took a photo to verify delivery.
Copy of terms & conditions and return/refund policy
These details help to clarify your rules and lay out what the customer could expect from your product or service. For example, if a customer requests a chargeback because they cancelled a service but were still charged for the month, your terms and conditions may show that they needed to cancel before a specific date to prevent a final charge.
How to prevent chargebacks
You can prevent or reduce chargebacks by boosting the security of your payment processing, clarifying return and refund policies, and double-checking product descriptions and shipping.
Prioritise secure and reliable payment processing
Secure, reliable payment processing can help prevent double charges, reduce the risk of fraudulent transactions, and ensure that customers receive refunds promptly. If you encounter frequent chargebacks caused by payment issues, it could be time to change your payment provider.
Ensure your return and refund policies are clear
Return and refund policies that are clearly outlined help set customer expectations and ensure that you've got something to point to if a customer disputes a transaction.
Be clear with product descriptions and shipping expectations
If your product descriptions or photos are misleading or are missing crucial specifications or details, it's easy for customers to be disappointed with their purchase. The same goes for vague or inaccurate shipping estimates – if it's going to take three weeks for a product to arrive, make that clear.
Is a chargeback the same as a refund?
A chargeback isn't the same as a refund. The key difference is that a refund is issued by you, the vendor, while the customer's credit card company manages chargebacks. Customers request refunds directly from your business where chargebacks are requested through their bank or finance provider.
What are the rules for chargebacks?
Major credit card companies set the rules for chargebacks. In most cases, they'll grant a chargeback if goods or services aren't delivered as expected – whether that means quality or delivery issues – or if a transaction is fraudulent. They're also used if a company goes under before customers receive their goods or services.
Although different credit card providers have their own deadlines, most require that you apply for a chargeback within 120 days of a purchase, or 120 days of the service being provided. For example, if you buy tickets ahead of time for a concert, you will usually have 120 days from the day of the concert, not the date of purchase.
Are chargebacks always successful?
Chargebacks aren't always successful. The credit card provider may reject a request because they assess the complaint was unjustified, or the customer applied outside the provider’s chargeback timeframe. If your business disputes a chargeback by sending a rebuttal letter, there's a good chance you can have the chargeback reversed, so it's well worth the effort.
Smooth transactions and simpler chargebacks with MYOB
Chargebacks are always a risk if you take credit or debit card payments. However, you can minimise the issue by using reliable payment processing, providing accurate product and delivery information, and communicating terms and conditions to your customers. Of course, if you're a small business owner wanting to deliver great products or services, you'll likely do these things anyway.
MYOB accounting software can make the record-keeping part of the process simpler and clearer. When you record all transactions in MYOB, it's easy to go back and double-check dates and figures, find repeated payments, and gather evidence if you need to dispute a chargeback. It also simplifies processing a chargeback or payment reversal, so your records match your credit card transactions. It's a vital tool for small businesses navigating the complexities of online sales and customer disputes.
Want to take charge of chargebacks? Get your free trial today.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.