What is a Chargeback and How Does It Impact Your Business?

Chargebacks are an unavoidable part of doing business. But they can become costly, especially if you are a smaller business, slowly eating away at your hard-earned revenue. Hence, you must be armed with the right approach to deal with chargebacks and mitigate their impact on your bottom line.
This blog helps you understand what chargebacks are, how they impact your business, and how to deal with them.

What is a Chargeback?

A chargeback is a process by which a consumer can dispute a claim on their credit or debit card. If they succeed, they get a refund. It is usually the merchant who is liable to refund the customer. This process exists to protect customers from fraud. In the event of fraud, where a customer is charged for a product or service that they did not buy, they can raise a chargeback claim. This claim is investigated by the customer’s card-issuing bank (also known as issuer), and if found valid, the customer receives a refund. In most cases, it is usually the merchant who ends up paying the chargeback amount, plus the chargeback fees.

Why Chargeback Occurs?

Consumers raise chargeback claims in the following cases:

• When they are victims of true fraud such as card theft, identity theft, etc.
• When they don’t receive the goods or services they have paid for
• When they are overcharged or charged double the agreed price
• When they do not hear from the merchant on a refund or dispute
• When they are trying to commit “friendly fraud” and do not want to pay for the product or service they have bought

How Chargeback Works

In the event, a cardholder thinks that their credit card has been falsely charged, they can raise a chargeback claim and request a refund. This process aims to protect cardholders from credit card fraud or misuse. Consumers who want to dispute a charge get in touch with their bank and provide details about the reasons for the dispute. If approved, the consumer gets a refund, and the money is charged to the merchant.
In most cases, merchants are liable for chargebacks. If they choose to dispute a chargeback claim, they have to prove why it should be reversed. If they ignore a chargeback claim and take no action, the cardholder wins by default. Chargebacks are annoying and costly for merchants. It puts a lot of stress on them to reconcile and settle each dispute manually. The true cost of a chargeback could be up to 6.5 times the value of the transaction, if you add up all costs such as fees, fines, lost sales, customer acquisition, etc. That means a claim worth € 100 ends up costing the merchant about € 650 eventually!

Who pays the chargeback amount?

The merchant is liable to pay the chargeback amount, unless they have used 3D Secure. In that case, it the card-issuing bank that pays the amount to the customer/ cardholder. If a merchant wins a dispute, the issuing bank pays. If a chargeback claim is ignored, eventually the merchant has to pay the amount by default. Plus, banks also charge a chargeback fee to offset the high costs involved in processing chargeback claims. This fee is usually payable by the merchant. Hence, ensure you check the claims and take the right steps.

What is Chargeback Rate?

The chargeback rate refers to the number of contested transactions when compared to the total number of transactions in a specific time period. A high chargeback rate means a higher number of contested transactions, which means more money lost due to high volumes of chargebacks. High chargeback rates (above 1%) also lead to penalties by card schemes (Visa, Mastercard, etc.). These fees are collected from the acquiring bank (the merchant’s bank) and passed on to the merchant. Hence, online merchants try to keep these rates as low as possible. Plus, if a merchant has a higher chargeback rate (than a set limit), an acquirer can also revoke a merchant’s contract partner number, thus hampering business. Merchants selling high-value items face higher risks of chargeback. In fact, it has been seen that the higher the cart value, the higher the risk of non-payment for the merchant.

How to Reduce Chargebacks?

As a merchant, you must take steps to reduce chargebacks, such as:

1. Improve data-sharing between your internal departments: This will help information to flow smoothly, and chargebacks can be flagged and resolved on time. You can also track data from varied sources to detect and stop habitual fraudsters.
2. Invest in tech: Use the latest 3D Secure 2 and EMV payment technology to protect yourself from liability. Centralize your payments to allow linking of transactions, refunds, and chargebacks. This will help you to detect cases of double-dipping or when a customer tries to defraud you.
3. Consult a specialist payments partner: To guide you with the right advice and strategy. The right partner will give you access to advanced tech tools that can help you counter fraud-related chargeback cases.

How can Novalnet Help?

We can help you build the best chargeback strategy to reduce your chargeback rates. Plus, our payment guarantees ensure your money is safe at all times. As a global PSP, Europe’s leading brands trust us with their payments. With our state-of-the-art technologies, from our instant payment plug-ins or AI-based risk management tools, we get your payments up and running in no time, and with zero hassle.
Reach out to us today to know more.

Jose Augustine

Jose Augustine is the Chief Business Development Officer at Novalnet with extensive experience in European payment industry and a knowledge powerhouse.