What is a Chargeback on a Credit or Debit Card? Is There a Reason Why We Say “Don’t File Chargebacks”?
There's never been a better time to be a consumer. Thanks to the internet, nearly anything you could want is as close as your phone or laptop. Merchants around the globe are fighting for your attention.
You, the buyer, have great power and influence over the eCommerce environment. But there's one aspect of payment card ownership that you may not fully understand—and that lack of understanding is crippling businesses of all sizes.
You see, businesses get hit every time a buyer like you files a chargeback on credit or debit card purchases. The effects ripple out, and merchants are desperate for you to recognise how your actions impact the economy in a big way.
What is a Chargeback?
A chargeback is a bank-initiated refund for a credit or debit card purchase. Rather than request a refund from the merchant who facilitated the purchase, cardholders can dispute a particular transaction by contacting their bank and requesting a chargeback.
Chargebacks are not inherently bad. In fact, when credit cards first started gaining popularity, government officials decided that consumers needed a fallback option. There had to be a way for cardholders to retrieve money lost to fraudsters, identity thieves, and other unauthorised purchasers. As a bonus, the threat of chargebacks also incentivised merchants to stick to fair, above-board practices.
So there are legitimate reasons for requesting a chargeback. When used correctly, chargebacks are a critical layer of protection between consumers and threats like identity theft. Unfortunately, many consumers don’t use the process correctly. In fact, there are numerous occasions where cardholders may not be aware they are filing a chargeback at all.
What cardholders don’t often understand is that filing an illegitimate or unwarranted chargeback is basically the equivalent of cyber-shoplifting.
While we have consumers in mind for the following simplified view of chargeback usage, you might also want to share this info with employees and customers.
Chargebacks On Credit and Debit Card Purchases: Dos and Don’ts
If you're thinking of contacting your bank to force a refund, be sure you understand the "dos" and "don’ts" before making the call.
Correct Use of Chargebacks
First, you can request a chargeback if you legitimately suffered at the hands of an unscrupulous merchant, or one with bad business practices. For example, say a business makes it impossible to request a traditional refund by not displaying contact information or failing to acknowledge your requests. This could be a deliberate move on the part of the merchant, or it may simply be bad customer service. In either case, however, a chargeback might be the only option available.
The other case in which a chargeback is valid is in provable cases of criminal fraud. If a hacker gained access to your personal information and uses it to make purchases in your name, you could be entitled to a chargeback.
Having said that, these are not situations where you should automatically call the bank. In both scenarios, there are advantages to not filing a chargeback, even if it's warranted. In the case of a security breach, for example, the bank will almost always take care of matters, without you needing to lift a finger.
It's also good to understand that the chargeback cycle can be very time-consuming. A chargeback could take several months for the case to be settled, as the merchant has the right to contest your accusation. If things move on to arbitration, it could drag-on even longer (more on that in a bit).
Ultimately, chargebacks are troublesome for everyone involved. That's why filing a chargeback should always be your absolute last resort. Only contact the bank if you have no other options available.
Improper Use of Chargebacks
Because the system was not designed around eCommerce and today's consumers, there are loopholes that allow chargebacks to be deliberately used for illegitimate reasons. Examples of this include:
Contacting the bank seems easier: Few people relish the idea of dealing with a business’s customer service department. If filing a chargeback seems quicker and easier, it might be tempting to try it out. In reality, though, merchants will typically want to retain your business and loyalty by doing all they can to resolve the issue quickly and to your satisfaction.
Buyer’s remorse sets in: This occurs when you regret making a purchase, but don't want to return the merchandise or cancel the service. If you keep the merchandise and get a refund, that's not a refund: it's theft.
A family member used your card: Even if you didn’t know about the purchase, if a member of your household consented to a transaction using your card. Therefore, you shouldn’t call the bank and say it was an unauthorised purchase.
You’re confused about refund options: Some illegitimate chargebacks are just a result of a misunderstanding. You may call the bank for an explanation, but if they think you're asking for your money back, they may initiate a chargeback. It’s one more reason you should always contact the merchant first.
You don’t remember making the purchase: It’s easy to forget one particular transaction, especially if you make a lot of purchases in a short period of time. Again, however, if there is doubt about a transaction, it’s important to contact the merchant directly. A phone number or email address should be listed on your credit card statement. A quick inquiry tells you everything you need to know.
What Happens When Chargebacks are Issued?
Both consumers and merchants ultimately pay the price for chargebacks. The potential negative impacts of each chargeback include:
The merchant must pay expensive, non-refundable fees for each chargeback issued. Even if you later realise the chargeback was filed in error, the damage has already been done.
Some businesses play hard ball against chargebacks. Take Sony, for example. If a PlayStation® user files a chargeback, the company terminates the account and permanently bans the user.
Chargebacks bring increased costs. Merchants are forced to raise their prices, meaning you pay more for goods.
As we implied earlier, merchants have the right to dispute chargebacks, so there's a chance the chargeback will be overturned.
If the bank suspects you’re filling illegitimate chargebacks as a means of cyber-shoplifting, the could choose to close your account. Your credit score can also drop, making it harder to get additional credit.
The Role of the Responsible Cardholder
As a cardholder, it's your responsibility to ensure your account is being used ethically and honestly.
If you don’t recognise a charge on your account, don’t automatically assume it’s fraud. First, consult household members who may have access to the card and see if they authorised it without your knowledge. You should also contact the merchant in question to verify the purchase. It’s possible that you simply don’t recognise the business name or have forgotten a purchase.
Read the terms and conditions carefully before buying anything. Don’t click “accept” if you don’t actually agree to the policies. Before requesting a chargeback, double check what you originally agreed to.
Cancel subscription services long before the next billing cycle hits. Give the merchant plenty of time to terminate your agreement. The process could take a while, so don’t expect to avoid a charge by reaching out the day before.
Give the merchant a sufficient amount of time to initiate a refund before assuming fraud is responsible.
Decrease your fraud risk by adhering to credit and debit card ownership best practices. Don’t let anyone borrow your card, keep personal information safe, and shop on HTTPS sites with a secure WIFI connection. We also strongly recommend that consumers sign up for services like Mastercard SecureCode and Verified by Visa.
We have a simple request on behalf of all eCommerce merchants everywhere: please don’t abuse the chargeback process! Filing a credit or debit card chargeback should be used only in legitimate situations, and only as a last resort after all other options have been exhausted. Remember, your actions have severe consequences for everyone involved…including you!