A credit card chargeback is when a bank returns money to you because a credit card charge was fraudulent or you bought something online that wasn’t delivered or was defective. Except for fraud, you would usually request a chargeback only after you tried to get a refund from the merchant and were not successful.
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How do chargebacks work?
A credit card chargeback request involves four main participants—the consumer, merchant, credit card issuer, and credit card network. The chargeback is preceded by a credit card transaction that involves two additional participants, the credit card processor and payment gateway. All play a role in the overall process that ends in a chargeback request.
DescriptionPerson who initiates the credit card chargeback request
ExamplesFraud; Missing/defective; product; Wrong price; Wrong product
DescriptionBusiness where the credit card was used to make a purchase
ExamplesAmazon; Kroger; Marriott
ParticipantCredit card issuer
DescriptionFinancial institution that issued the credit card
ExamplesChase; PNC Bank; U.S. Bank
ParticipantCredit card network
DescriptionCredit card brand name
ExamplesAmerican Express; Mastercard; Visa
DescriptionCompany that executes the transaction
ExamplesPayPal; Clover; CashApp
DescriptionThe technology (software) that encrypts and transmits transaction details to payment participants as part of payment processing
ExamplesPayPal; Square; Stripe; Major banks
The chargeback process begins when the consumer contacts the credit card issuer to report a problem. This could include a transaction the customer doesn’t recognize, a missing or damaged product, or a transaction with the wrong price.
The consumer initiates the chargeback to get their money back or have the transaction canceled. A chargeback is similar to a refund except that a refund is usually requested from a merchant while a chargeback request goes directly to the credit card issuer.
Once initiated, chargebacks go back and forth among the issuing bank, the merchant (and its bank), and the customer until one of them agrees to accept liability or until the credit card network is asked to resolve the dispute through arbitration.
What are the most common reasons for a credit card chargeback?
There are several situations that could result in a chargeback request.
- Fraud. Fraud is when someone obtains your credit card information and makes charges on the card that you did not authorize.
- Missing orders. In this case, you order something and it doesn’t arrive. You may be notified that the item was delivered but you believe it was not.
- Damaged or incorrect orders. Sometimes an order is delivered but the product is damaged, missing parts, or isn’t the item you ordered.
- Mispriced orders. You may have ordered or purchased something that you thought was $50 but the credit card statement says it was $75.
As far as the law is concerned, the federal Fair Credit Billing Act mandates that if your physical credit card is stolen, the bank can only hold you responsible for up to $50 in fraudulent charges depending on when you report the card stolen. If your card number is stolen due to a hack or data breach, you have no liability.
In addition, many banks have a zero liability policy of their own including:
- American Express.
- Capital One.
- PNC Bank.
- USAA Bank.
- U.S. Bank.
For the consumer
When should consumers use a chargeback?
If you suspect fraud may be the reason for your credit card problem—i.e., you don’t recognize the transaction, especially after your card was stolen or you have reason to believe you are the victim of hacking—initiate a chargeback with your credit card issuer (bank).
When you have a dispute with a credit card charge that is merchant-related—i.e., you made a purchase and it didn’t turn out well—you should always start by contacting the merchant to resolve the issue without involving the credit card issuer or network.
If working with the merchant isn’t satisfactory, only then should you initiate a chargeback. Keep in mind, however, that there is a time limit to initiate a chargeback. U.S. law gives you a minimum of 60 days, but most credit cards give you 120. Refer to the terms of your credit card to be sure.
How should consumers submit a chargeback?
If you contacted the merchant and are not happy with the response you received, go to the issuing bank’s website or call them to ask about the process they use for initiating a chargeback request. Most banks let you file a chargeback request online, by phone, or by mail.
Expect to be required to provide supporting information or documents including receipts, copies of an invoice, contract, or any communication you’ve had with the merchant. This process can take up to 90 days and sometimes more.
For example, here is the process for filing a dispute with U.S. Bank:
Online or mobile app
- Log in to your account online or on the U.S. Bank mobile app.
- Choose the account (credit card) on which the charge was made.
- Select the transaction in question, expand the details, and choose “Dispute this transaction.”
- Answer the questions, then select “Continue” to start your chargeback request.
- You will receive confirmation at the end of the process.
Call 1-800-USBANKS (872-2657) to speak with a banker.
Include the following information:
- Your name, card number, address, and phone number.
- The amount of the transaction and the date it posted.
- The reason for the dispute and why you believe a mistake was made.
Send the information to:
PO Box 6335
Fargo, ND 58125-633
What happens after consumers submit a chargeback?
The precise process after you submit a chargeback request varies by credit card issuer (bank), but, in general, includes the following:
- You file a chargeback request online, by phone, or in writing with the credit card issuer (bank).
- The bank reviews your request and decides if it is valid. If the bank agrees with you, it passes the request on to the card network, (i.e., Visa) at which point you may receive a temporary credit on your card. (If the bank decides you are at fault, you can accept the bank’s decision or appeal.)
- The card network reviews the request (or appeal) and either requires the bank to pay you or it sends the dispute to the merchant.
- The merchant can either pay or send the dispute back to the card network saying it is the card issuer’s fault.
- If the merchant disputes the chargeback, there may be more back-and-forth as the merchant and card issuer attempt to settle the matter. If the merchant or issuing bank ultimately agrees to pay, the dispute is over and your temporary credit becomes permanent.
- If the dispute cannot be settled, the card network acts as arbiter and decides who pays.
For the merchant
What are the merchant’s rights regarding credit card chargebacks?
Even if your store has a “no refund” policy, the Fair Credit Billing Act permits consumers to file a chargeback request. Even so, it’s best to clearly display your refund policy and make sure your employees know it.
If nothing else, this practice may be helpful if a customer’s dispute ends up in arbitration and you are asked about your policies and how well documented they are. Since banks tend to favor customers over merchants in chargeback disputes, you are well-served to document clearly and consistently and follow all rules of credit card networks.
How can merchants prevent chargebacks?
If your business accepts credit cards, you will likely deal with chargebacks. The best way to minimize chargebacks is to utilize best practices on credit card use and make sure your employees know them.
Here are some examples of situations that lead to chargeback requests and how to preemptively prevent customers from requesting one in the first place.
|Chargeback reason||How to prevent the chargeback|
Chargeback reasonCustomer’s credit card has been stolen or has been compromised via a security breach resulting in an unrecognized transaction on the credit card statement.
How to prevent the chargebackGet cardholder’s signature on the receipt. Require expiration date and security code for online transactions. Consider calling the customer for unusually high transactions.
Chargeback reasonShipping or delivery issue resulting in the product not arriving when expected.
How to prevent the chargebackShip products ASAP. If shipping will take time, notify the customer. Respond to customer concerns quickly.
Chargeback reasonCredit/refund not processed.
How to prevent the chargebackHave a clear written refund policy and process refunds quickly.
Chargeback reasonDefective product.
How to prevent the chargebackMake sure product descriptions are accurate. Package products securely to avoid damage. Respond quickly to complaints and offer a replacement or refund.
Chargeback reasonUnrecognizable business name.
How to prevent the chargebackMake sure your business name appears on all billing statements.
Chargeback reasonFailure to cancel subscription.
How to prevent the chargebackSend advance notice of renewals and respond quickly to cancellation requests.
Frequently asked questions (FAQs)
What is the downside of a chargeback?
For the consumer, initiating a chargeback request likely means you’ve already failed to resolve the issue with the merchant. For the merchant, it means you may have missed an opportunity to resolve the issue on your terms and, importantly, without paying a fee to the bank.
Is a chargeback a refund?
A chargeback is a process initiated by a customer to receive their money back after they formally dispute the transaction with the card issuer (bank). A refund is the return of money to a customer by the merchant without involvement of the bank. The result is the same but the process is different.
How long do you get to file a chargeback request?
U.S. law sets a minimum time limit of 60 days to initiate a chargeback. Most credit card issuers give customers 120 days to dispute a charge.
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