Chargebacks: Overview

Updated 23 August 2023 11:16

A chargeback is the reversal of a payment made by a client to a merchant and is completed by the card issuer, who sends the funds back to the customer’s original payment method.

Chargeback representment is the process by which merchants present evidence to issuing banks to fight chargebacks. If the evidence is compelling enough, the chargeback is reversed. Keep in mind that you will have 15 days to initiate a representment request from the first day a chargeback is filed.

Tip:

Click here for our detailed article about on how to dispute a chargeback.

Common reasons for chargebacks

There are many reasons a chargeback can occur. The main reasons are the following:

Customer disputes
A customer not receiving a refund
Friendly fraud
Buyer identity fraud

Customer disputes

Customer disputes can happen for a variety of reasons. Most notably, customers can be confused with a merchant's refund policies and not know how to request a refund. Another common reason can be that the customer is dissatisfied with the product or service received and they do not communicate this directly to the merchant, but rather file a chargeback representment instead.

Refund not received by the customer

As a merchant, the status quo for granting a refund to a customer is refunding the money within three days of the request. If the merchant does not grant the refund request, the customer is entitled to submit a chargeback request to receive the funds.

Friendly fraud

Friendly fraud happens when a customer purchases a product or service and then demands the funds back in bad faith.

Buyer identity fraud

Buyer identity fraud occurs when a customer steals someone else’s payment information to purchase a product or service. In cases like these, the victim of the identity fraud will be the one to submit the chargeback request. The fraud victim's credit card will be canceled and a new one will be issued in order to protect their privacy.

Chargeback process

Customers must do the following if they are unable to resolve a dispute with a merchant:

Contact their card issuer and request a dispute to be registered against the charge. They have 60 to 120 days following the initial purchase or payment to make this request.
The card issuer will then investigate the dispute and decide whether there are grounds for the customer’s complaint.
If the card issuer approves the chargeback, they will forward the dispute to the acquiring bank (the merchant’s bank) to debit the funds from the merchant’s account.
The acquirer then sends the dispute to the merchant to dock the funds from their account.
Finally, the funds are transferred to the card issuer and subsequently to the customer’s account.

Chargeback fees

Chargeback fees are issued to merchants by their processing bank when a chargeback occurs. These fees are meant to cover the operational costs associated with managing the chargeback process — including investigation, communication between the card issuer, acquiring bank, and merchant, and dispute resolution.

The merchant's agreement with their payment processor usually outlines the chargeback fee amounts and circumstances in which these fees will be charged.

Related to:

GFP: Financials