Chargebacks happen when a customer disputes a purchase directly with their bank. It's important that merchants be aware of the main causes of chargebacks so they can avoid losing time and revenue.
In 2019, businesses lost 4.4% of their revenue to chargebacks.
If that doesn’t sound bad enough, consider this: too many chargebacks puts B2B merchants at risk of fines, higher payment processing costs, and—in certain situations—possibly a loss of card processing rights. Card networks each set their own thresholds for permissible chargeback rates—a merchant’s total chargebacks compared to their total sales for a given period. But these are often around 1% of all transactions, so it’s not hard for merchants to exceed the limit—especially if they don’t try to minimize chargebacks.
In this article, you'll learn:
What is a chargeback?
A chargeback is a payment that is reversed after a customer disputes the transaction with their bank. A customer can file a chargeback for a transaction that was made on a debit card or credit card.
What is the chargeback process?
While it isn’t difficult for buyers to file a chargeback, there’s a lot that happens behind the scenes. The entire process can take weeks or even months. Here are the steps in the chargeback process:
The cardholder disputes the debit or credit card transaction.
The issuer (the cardholder’s bank) sends the transaction back to the acquirer (the bank that the merchant is associated with) electronically. At this time, the cardholder’s account will be temporarily credited for the amount of the charge.
The acquirer receives the chargeback and notifies the merchant. At this time, the amount in question will be temporarily debited from the merchant’s account.
The merchant will then accept the chargeback or dispute it. If fighting the chargeback, the merchant must provide compelling evidence that they fulfilled their obligation. For example, let’s say you have an ecommerce store that sells office furniture to companies. Documentation like a proof of delivery would be compelling evidence in this case.
Once the merchant sends the acquirer evidence that the product or service was legitimately purchased and delivered to the buyer, the acquirer will pass this information on to the issuer.
The issuer then reviews the evidence and makes a decision in favor of the merchant or buyer on the chargeback case.
The cardholder and merchant are notified of the case decision. If the issuing bank rules in favor of the cardholder, the temporary credit to their account and debit from the merchant’s account will be made permanent. If the issuing bank rules in favor of the merchant, the temporary debit from their account will be reversed, along with the temporary credit to the cardholder’s account. If either party disagrees with the decision, they can go into arbitration.
Why are chargebacks so expensive for merchants?
There are a number of different costs associated with handling chargebacks that figure into that 4.4% of lost revenue we mentioned earlier.
Of the costs, some can easily be calculated. There are chargeback fees—typically between $20 and $100, depending on the merchant's agreement with the acquirer. The costs of producing the product or service are also easy to estimate. The less evident costs like shipping and interchange fees can really add up if a merchant is dealing with a lot of chargebacks.
There are also hidden costs to consider, like the time it takes merchants to go through the chargeback process and build their case as to why the chargeback shouldn’t be accepted. The merchant has to research the transaction and figure out how to prove that they fulfilled their obligations. If that isn’t enough to satisfy the issuer, the merchant has to choose to take the loss or go into arbitration—which comes with additional costs and no guarantee of victory. The odds are in fact against the merchant, with their average win rate when disputing chargebacks standing at just 32%.
What are the common causes of chargebacks?
There are many reasons why a B2B buyer initiates a chargeback. Here are the three fundamental chargeback sources—and what you can do to combat them.
1. Criminal fraud
A chargeback is designed to protect customers from fraudulent transactions, and in some cases, it does exactly that. A fraudster may use a number of tactics to make a fraudulent transaction, including account takeover, identity theft, phishing, smishing (SMS phishing), or domain squatting to facilitate the scheme.
2. Merchant error
A merchant error chargeback occurs when the merchant doesn’t provide the purchased goods or services in a timely manner, or the goods do not meet the advertised specifications.
You can eliminate merchant error chargebacks by setting clear expectations with your customers and consistently meeting those expectations.
3. Friendly fraud
A chargeback that falls outside of criminal fraud and merchant error is known as friendly fraud. Here are a few common sources of friendly fraud:
Return issue: when some B2B buyers want to return their items, instead of going through the returns process, they’ll file a chargeback. This often happens due to complicated returns processes or short return windows. If this type of friendly fraud is recurring at your company, you should consider looking into those issues.
Satisfaction issue: if the buyer isn’t happy with a product or service, they may opt to file a chargeback instead of going through the merchant. This is more likely to happen if you don’t have an easily accessible customer help line.
Recognition issue: a B2B buyer might file a chargeback if they don’t recognize a charge on their statement. For companies that sell annual subscriptions, this type of friendly fraud is more likely, as some buyers will forget about their subscriptions. To reduce this risk, stay in regular contact with your clients so they don’t forget about their subscriptions.
Chargebacks vs. refunds
When a buyer disputes a transaction, they typically have two options: a chargeback or a refund. While these terms are sometimes used interchangeably, the two serve different purposes.
A chargeback is initiated by the customer, who works closely with the issuing bank. A refund, on the other hand, is performed by the merchant, who will then work directly with the customer who’s disputing the transaction. Often a customer will initiate a chargeback if they have already approached the merchant and they are not willing to refund the purchase.
With a chargeback, the process can take anywhere from a few weeks to a few months. A refund, however, is generally completed in a couple of weeks or less.
How integrated payments can help B2B merchants protect themselves from chargebacks
A great first step to minimizing chargebacks is reducing your risk of fraud. You can lower your risk of fraudulent chargebacks by partnering with a secure payment processor that integrates with your enterprise resource planning solution (ERP) like Versapay.
We use both address verification and Credit Card Value (CVV) matching to help ensure the cardholder is indeed who they say they are. Address verification checks to see that a customer’s billing address matches the address the issuing bank has on file for that card. CVV refers to the three to four-digit code on the back or front of a credit card, which helps make sure the purchaser has the card on hand.
By processing payments in sync with your ERP, you also minimize your team’s handling of sensitive card information. Versapay is a PCI-validated service provider and tokenizes, encrypts, and securely stores card data.
Even with protective measures, chargebacks will still arise—particularly those coming from friendly fraud. Maintaining transparent and timely communication with your customers about recurring transactions and throughout the returns process can be effective in limiting your instances of friendly fraud.
Join the 50,000 accounts receivable professionals already getting our insights, best practices, and stories every month