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An Introduction to Chargebacks, Part I: Chargebacks and How to Prevent Them


A chargeback is an inconvenience, but it can be prevented.

In the ever-growing and ever-changing credit card processing industry, keeping merchants up-to-date about business security and fraud is a major priority. As explained in our “Don’t Get Slammed: Safeguarding your Merchant Account” and “Three Ways to Improve your Business’ Security” articles, cyber criminals and data thieves cost businesses millions each year. But there is another threat to your business that is discussed less frequently, yet is as damaging as any data breach: the chargeback. Having too many chargebacks puts your business at risk of a poor reputation, numerous fees, and the possibility of losing your merchant account.

What is a chargeback?

A chargeback is the return of funds to a cardholder initiated by the issuing bank. The consumer files a complaint with their bank or credit card issuer and the charge is reversed. This temporarily returns the funds to the cardholder until the dispute is fully investigated.

The chargeback exists as a form of consumer protection. As a cardholder can file a complaint at any time, this system is intended to act as an incentive for merchants to provide quality products and customer service. Chargebacks also serve as a way to reverse unauthorized transactions due to stolen credit cards or other forms of identity theft. If the cardholder legitimately completed the transaction but later files a complaint solely to retrieve funds, this is considered friendly fraud.

Generally, there are four major categories into which a chargeback can be “coded” – the reason for the chargeback. Visa (PDF) and MasterCard (PDF) have a number of different codes for chargebacks. A few of the more frequent reasons are listed as:

  • Products or services not received. The cardholder authorized the transaction, but did not receive the merchandise or services
  • Counterfeit transactions. The cardholder did not authorize the transaction or the transaction was conducted with a counterfeit card.
  • Expired card. A transaction with an expired card was completed.
  • Unrecognized transaction. The transaction is unclear to the cardholder and additional information is requested in order to identify the transaction.
  • Fraud. The cardholder did not authorize the transaction, whether in a card-present or card-not-present (online, over-the-phone, or through the mail) environment.
  • Returns. A customer returns a product but does not receive a credit for the return.

Preventing a chargeback

The best method to fight a chargeback is prevention.

Securely storing all credit card orders can prevent a cardholder from automatically winning the chargeback. If the business can prove that the transactions were processed correctly, the business owner is more likely to get chargebacks reversed during the “retrieval period,” an industry term for the investigation following a cardholder complaint. Receipts and order forms, especially those with card information imprinted on them, serve as further proof of a legitimate transaction.

Outstanding customer service and a proper employee training program can limit chargebacks as well. Consumers satisfied with your customer service may be less likely to attempt to solve a dispute through a chargeback, but rather by approaching your business directly. Ensure employees are educated in proper transaction processing and documentation methods, such as checking IDs or obtaining signatures. A clear return policy can also prevent customer confusion.

A number of chargebacks occur when cardholders do not recognize the charge on their credit card statement. If the charge will appear on the cardholder’s statement as something other than your DBA name, be sure to educate the consumer ahead of time. Post a sign on the register or a note on your shopping cart checkout page that informs the cardholder how the charge will appear on their statement.

While prevention is the best way to fight a transaction, not even the greatest customer service in the world and the tightest security protocols can fully protect your business from a chargeback. For information on how to fight a chargeback, be sure to look for the second installment in our Introduction to Chargebacks series.