Could someone tell me how chargebacks work ? I never had one done so i wanted to know.I know you have to pay a fee but do you also have to pay back the amount the person purchased ? For instance if someone buys something for $500.00 and they do a chargeback do i have to pay the $500.00 plus the chargeback fee ?

Yes, you would have to pay back the money and the fee if the credit company found you guilty of whatever you were being accused of (usually happens).

Actually you get charged whether you were at fault or not. If you dispute it successfully you will get to keep the customer's money but you're still out $25.

I had some moron customer do 2 chargebacks for $12 each, then he admitted it was a mistake, called Capital One and they said there's no way to cancel them. Now we are out $50, and our only option is to try to get the customer to pay us another $50.

This is a really weak point in the credit card system.

Gleen is correct. The chargeback fee will apply. It is not a penalty fee but rather a service fee for processing the chargeback.

The reason why you have to pay for the sales amount as well is because a chargeback is basically a "forced refund." The customer is stating that you did not deliver as promised or that the transaction wasn't authorized by them (i.e. stolen card, "non-possession" of card).

There are actually a whole bunch of different "reason codes" that can be assigned to a given chargeback but the above two are among the most common.

Gleen is correct. The chargeback fee will apply. It is not a penalty fee but rather a service fee for processing the chargeback.


Whilst the chargeback fee is a "service fee", the credit card industry is often criticized for "inflating" these service fees. Many argue that $25 is excessive for assessing chargebacks, especially when the banks do very little when investigating them.

IMO, the banks issuing the credit cards are inviting customers to do chargebacks first. I've seen many cases where a customer doesn't recognize a charge on their card, calls their bank and teh banks starts investigating - of course the customer is going to say "No I didn't purchase anything from XYZCompany". The banks should provide a customer service # for the company and encourage the customer to first try and figure out on his own to see if he recognizes the charge....

Especially when you are using a third party processor. I even make my custom page for something like "I am aware that the payment will be made through paysystems and myPaysystems.com or paysystems.com will appear on my credit card statement".

I will use the archive files if some how a bank issued a charge back (paysystems guy said that this is possible. But for a certain type of card -- Visa or Mastercard, forgot which) chargeback is instaneous and irreversible (and there goes my $25...)

Personally, I think the best solution towards limiting excessive chargebacks on the part of cardholders is to simply require them to change their entire card # each time they chargeback more than X number of items within a given time.

That way - it is a royal PITA for the cardholder if they are just bad apples and trying to get many service for free and it could help deter them from doing this to many companies. I've seen at least one issuing bank adopt this policy and I think it is a great step in the right direction.

There *are* some regulatory and rules changes being made by the Card Associations (read as "VISA & MC") and some of these are designed to try to level the scale a bit better between cardholder and merchant. I, for one, very much look forward to this becoming a reality.

As a merchant what are the possibilities of calling the related bank and explaining the things?

All merchants have certain policies regarding chargebacks. For instance, my merchant account through Echo charges nothing for the first 5 chargebacks per month, then for each additional chargeback above the 5 per month limit you only pay $5 each. Although I have had no chargebacks it's nice to know that I"m not going to have to pay out the nose if I get hit with some.

My point with this reply is to point out that not all merchants charge $25 per chargeback.

Ryan

As a merchant what are the possibilities of calling the related bank and explaining the things?

Unfortunately... this is not really possible. Everything is handled on an automated basis for 99% of chargeback processing and calling up the issuing bank directly won't really accomplish anything. In fact, you would probably be hardpressed to even get in touch with someone who *knew* what you were asking about.

There is a specific set of VISA and MC guidelines about the handling and back-and-forth interactions related to a chargeback so these procedures need to be properly followed to try to dispute any chargeback, via a chargeback rebuttal.

Chargebacks is good business for them. Why should they bother? Merchants are the only ones to loose in this matter. The rest they all win.

If banks and CC processors wanted to put an end to fraud, it could be done without a doubt.

There are many ways to improve fraud screening I could think of in a couple of hours of thinking, but I guess most banking institutions are not too interested.

Originally posted by etreus
If banks and CC processors wanted to put an end to fraud, it could be done without a doubt.

There are many ways to improve fraud screening I could think of in a couple of hours of thinking, but I guess most banking institutions are not too interested.

Yeah I agree.

Well... some banks are VERY interested in reducing chargebacks - and those banks are the acquiring merchant banks. The ones that underwrite merchant accounts.

Remember - these banks and their ISO's take big financial losses every year due to chargebacks and the those chargeback fees don't even come close to making up for the losses.

That being said, the banks that don't care as much are the issuing banks. And unfortunately - the issuing banks are the ones that originate the chargebacks from the cardholders in the first place.

The best thing to rectify this situation would be a better balancing of the Card Association rules that govern chargebacks in the first place to make it a little more difficult to charge back a purchase or at least subject the cardholder's request to a higher level of due diligence.

Good post, giving me a better knowledge, how this works.

From what I have heard, is that most fraud comes from credit card information being hacked from websites (usually large volume websites).

I have a small ecommerce operation, and dont keep any sensible information on my webserver for more than 5 to 10 minutes after each transaction, then we delete each register completely.

Having said that, I believe that the CC Association should punish the ones, that for some reason, have lost that information and not so much on the victim or ecommerce website that has accepted a transactions which has gone through an incompetent screening process, given by the CC processor.

There is not a good balance of risk on the actual system, and I see it unfair as it is today.

Of course, this issue works on two sides. First of all, merchants should inform their customers clearly WHICH name appears on the customers credit card statements. 9 out of 10 times, people do not recognize the charge on their credit card statements or do not even read their confirmation email properly. As I am working for a credit card processing company myself, I have seen this happen over and over again. Secondly, credit card organisations and banks are always protecting their customers. If a client says that he didn't order the product, even if he did and already has the product, the bank will always issue a chargeback. The only way to dispute this is to have a track record from the postal company with a signature of the client. In our system, people who have issued a chargeback in the past are on our blacklist, unabling them to purchase anything from our merchants. This is a safety measure, because these people obviously do not read their confirmation emails properly.

In our system, people who have issued a chargeback in the past are on our blacklist, unabling them to purchase anything from our merchants. So if a potential client has had a legitimate chargeback in their history they could be prevented from doing business with anyone using your system?

Ouch!

9 out of 10 times, people do not recognize the charge on their credit card statements

I wonder what percentage of total chargebacks they represent. Very little I guess.

Most chargebacks are due to fraud, and not for people not recognizing. Do you have that data Michael?