Definition: Chargebacks are a form of consumer protection where a card company or bank requests a charge from a merchant to be reversed. Chargebacks can result from unintentional mistakes or malicious intentions, and merchants can be subject to penalties if chargebacks exceed a defined threshold.

Safeguard for online shoppers

Chargebacks protect consumers from fraudulent charges, acting as a last line of defense that prevents them from being financially responsible for any unapproved withdrawal of funds. Though the purpose of chargebacks is to prevent deliberate acts of fraud — such as purposefully overcharging or making additional withdrawals — they can also result from a simple miscommunication.

For example, a customer can dispute a charge because they didn't understand that shipping was not included in the base price. These types of chargebacks can typically be resolved between the merchant and customer, but some consumers choose to go directly to their bank.

The chargeback process

Whether a customer makes an inquiry to their credit card company to have charges reversed due to fraudulent purchases, not receiving their order or receiving goods that are unsatisfactory, the process is the same. The chargeback process can be lengthy involving many steps and investigation. The key steps are highlighted below:

  1. Submit: The consumer files a complaint with the card issuer or bank.
  2. Vet: The issuing bank determines whether or not there is validity to the consumer complaint. If so, they will then initiate the chargeback process by notifying the merchant's bank.
  3. Investigation: The merchant's bank researches the purchase in question and notifies the retailer. The bank will speak to the merchant and ask for transactional evidence to validate the purchase.
  4. Decision: After the investigation, if the chargeback is found to be justified, the online retailer is responsible for the amount of the claim plus associated fees that vary by bank and can range anywhere from $50 to $75 or more with the chargeback. If the merchant provides evidence of a valid transaction, there is no chargeback issued.

How to prevent and limit chargebacks

Chargebacks rightfully give consumers a means to dispute unlawful and dishonest charges. However, even the most reputable online retailers still receive chargeback requests from genuine mistakes and miscommunications.

There are ways to limit the number of chargebacks and prevent unauthorized use of cards by watching out for red flags such as:

  • Bulk orders - orders which seem to be outside of normal order quantities
  • Orders for big-ticket items - properly vet new customers ordering one item that has significant dollar value
  • Multiple orders within a short time frame - multiple orders from one customer in a short time frame may signify unauthorized card use
  • Different delivery and billing addresses - may be valid but warrants further scrutiny to ensure card authorization
  • New customers demanding overnight or rush delivery of big-ticket items - a validity check ensures validity of card use
  • Purchases made with numerous tries on the credit card number or expiry date - may signify that the card is not on hand which may be an indication of fraudulent activity
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