All About Chargebacks
A chargeback can be pretty frightening to sellers, especially if it’s the first time you’ve ever dealt with one and you don’t know what they are.
I put together this post to help! It includes info on what a chargeback is, how to protect yourself before one even happens, and how to handle it when one does happen.
Where possible, I’ve included sources so you can do more reading on your own. (If these articles are selling a product, I don’t endorse that product, it’s just good info.) Keep in mind that none of this is legal advice and, in many cases, is specific to US sellers or those who accept US issued payment methods.
What is a chargeback?
To simplify it greatly, a chargeback is when a customer contacts their bank or credit card company and asks to reverse a charge. The money is temporarily credited back to the buyer and removed from the seller’s account. Both seller and buyer then go through the chargeback process where the seller can present evidence in their defense and the bank ultimately decides who gets the money. (For a more detailed look, check out this article)
Buyers must give a reason for their chargeback. These reasons include, but aren’t limited to, not receiving their order, receiving something entirely different than what was described, being charged incorrectly, or not receiving a refund after returning a product.
As a seller, the chargeback system can feel kind of unfair. As a seller, your money gets taken immediately, you have to provide all the proof, and in the end it’s the buyer’s bank who decides the outcome. Ultimately, though, chargebacks exist to make sure customers feel safe using their credit cards. So even though they are a pain in the butt to deal with, they do make it so customers are more willing to purchase from small businesses knowing they have protection if something goes wrong. So they’re not the worst thing in the world.
How does this work on the sellers end?
The specifics will change depending on your selling platform and payment processor, but the basics are the same.
You will get a notice that a chargeback has been submitted for one of your orders. The money will be immediately debited from your account and temporarily credited to the buyers account. (Yes, even if you don’t have the money or close the account. You’ll still be responsible for it.)
You’ll also be charged a chargeback fee in most cases. This fee varies (it’s often $5-50) and is generally non-fundable. Some payment processors have seller protections in place that will refund or waive this fee. Paypal, for example, will waive the fee if you qualify for seller protection. Shopify will refund the fee if you win the chargeback.
You’ll have 2 options to respond to the chargeback. First, you can accept the chargeback which ends the process and the buyer keeps the money permanently. This is the route to take if you know you made a mistake and don’t want to spend time fighting it.
Second, you can choose to fight the chargeback which is also known as “representment”. You’ll have a window of time to respond with information that supports your side of the story. The time frame varies between 7-45 days. Don’t miss this window of opportunity or you’ll automatically lose!
The evidence you will need to collect depends on the reason the buyer gave for the chargeback. For example, if they said the order wasn’t delivered, a tracking number showing delivery would be compelling evidence. On the other hand, if they say the item was damaged, a tracking number showing delivery doesn’t prove it wasn’t damaged.
Once you’ve presented your evidence, the buyer’s bank will make a decision. This can take 4-6 months. The laws greatly favor the customer and it’s their bank making the decisions. So keep in mind you might do everything right and still lose the case. If the bank sides with you, the money is given back to you immediately. If they don’t, the buyer’s temporary credit turns into a permanent one and they keep the money.
Even if the chargeback is decided in your favor, the buyer can still open a second chargeback known as “pre-arbitration”. (Visa does not have pre-arbitration). This gives the buyer a chance to respond to the information you supplied with anything new or that they forgot to include or to change their chargeback reason.
This process is similar to the first and you’ll need to provide the same information as before as well as additional information to dispute any new claims the buyer makes. The bank will, again, make a decision on who gets the money.
If you, as the seller, lose this second chargeback you can request arbitration to make a final decision. Arbitration means the card association (for example, Mastercard) steps in to resolve the dispute instead of the customer’s bank. However, there are high fees associated with this ranging from $500-900+ and sellers are still at a disadvantage so many people do not take this final step unless there is quite a bit of money at stake. If you win this final arbitration you will get the money back and the buyer will be responsible for the arbitration fees. If you lose, the buyer gets the money back and you are responsible for the arbitration fees.
It is very rare a chargeback goes past the first determination, but it can happen. It ultimately depends on the buyer and the specific set of circumstances. For example, orders with a high amount at stake are more likely to be heavily disputed.
What are the consequences of a chargeback?
There are consequences for both buyers and sellers when it comes to chargebacks.
Most serious is legal action. The chargeback system is separate from the legal system and you can still face legal repercussions. Both buyer and seller can take legal action against each other. It’s rare, especially when selling online when your customer isn’t local for small claims.
Customers who submit too many chargebacks can lose their accounts. This can hurt their credit score. They can also be “fired” as customers and no longer allowed to shop at a store they did a chargeback with. Stores don’t want people who do frequent chargebacks as customers.
Sellers who receive too many chargebacks can face higher chargeback fees. You can lose your account with your selling platform or payment processor and be banned from opening a new one. You can even end up on what’s known as the MATCH list which will make it impossible to open accounts with many banks.
How do you prevent chargebacks?
You can’t stop 100% of chargebacks, but you can set yourself up for success.
Clear communication in every step of the buying process reduces chargebacks. Contact info needs to be clear and in multiple locations like your website and receipt emails. If a buyer can’t figure out how to contact you, they’ll turn to their bank.
Accurately representing your products is also important and will reduce the amount of “not as described” chargebacks. Clear, well lit photos from multiple angles are a must. Include any important information in the description, but also assume your buyer won’t read the description (many won’t) and mirror this information in the photos as much as possible. For example, you can show the size of the product by showing it held in the hand or next to a ruler. If you are using digital mockups or example photos, be sure to make this very clear that the final product may vary.
Customer friendly policies can also help prevent a chargeback. When possible, allow for returns. It’s generally better to accept a return in the original condition for items you can resell than it is to deal with a chargeback.
Provide clear expectations for shipping such as the approximate processing time required and what shipping method will be used. When the order ships, provide a tracking number so customers can follow the progress. Customers who can see when an item will arrive are less likely to jump the gun and report an item as not delivered when it is still in transit. It can be tempting to use a cheaper service without tracking to save money, but without tracking you have no way to prove an order was delivered.
Use a selling platform with fraud filters when possible such as Address Verification Service (AVS) that will check the cardholder’s address on file vs the address provided at checkout as well as collect the CVV. This helps protect you if someone tries to place an order in your store with a stolen card.
If you can customize it, make sure your billing statement text is clear. For example, mine says SP * BEEZEEART so it is clear who the charge is from. Customers who don’t recognize a charge are likely to dispute it out of confusion.
How do you win chargebacks?
Chargebacks can be difficult for a seller to win, but it isn’t impossible. The best way to ensure the bank sides with you is to make sure you have good evidence to support your case. Having policies in place that protect you and having good record keeping will make all the difference.
If you want to fight the chargeback, you’ll need to know why the customer opened a dispute. The chargeback notice should include a reason code. You can check what that means here.
From there, I tend to recommend contacting the buyer if you think it will help. In some cases, you can resolve the issue entirely with the customer. This is especially true if it was a simple misunderstanding. Then they can contact their bank and cancel the chargeback.
If the buyer is not willing to work with you, you’ll want to provide all evidence in your favor to the bank. It needs to be done ASAP since this is time sensitive. The evidence you give will be based on the reason for the chargeback. Some possible evidence includes:
- Proof of shipping. I personally like to provide a copy of the tracking number and a copy of the shipping label. This shows that I shipped to the address supplied at checkout and that the package was shipped. Another option may be a receipt from the post office.
- Proof of delivery. This is separate from proof of shipping. A tracking number showing delivery or a signature on a signature required package is good proof of delivery. One that I like to also check is the customer’s social media when available to see if they posted photos holding the product as this has happened in the past.
- Communication records. Any emails sent to your customer, including the date and time they were sent, and any responses from the customer. Also relevant may be reviews from the customer or posts the customer made to social media.
- Proof of purchase. The invoice you provided the customer, time and date the order was placed, the IP address that placed the order from, signature of the customer, the # of visits to your website, basically any information you may have that proves the customer made the purchase and not someone else.
- Payment data collected by you. Any information you collected about the payment including AVS, CVV matches, billing address that matches the shipping address, etc.
Compile any information you have in a way that is easy to read and provide it to the correct party. If you are using a selling platform, such as Shopify, you provide the information to them rather than dealing directly with the bank.
Understand that they often have little time per case and little investment in helping you personally, so any way you can make things easier will be helpful. For example, instead of a link to tracking information that they will have to navigate themselves, include a screenshot directly showing tracking information.
What if I lose a chargeback?
Unfortunately, it happens. Even with very good evidence you can still lose. When this happens your only recourse may be legal action and for most it simply isn’t worth it.
It’s not very satisfying, but you can use it to re-evaluate where your evidence might have been weak and how you can improve it. Sometimes you can’t, but if the buyer said the item wasn’t as described and the bank agreed, maybe you can make an effort to improve descriptions in the future.
In some cases, you may also wish to post a buyer beware. This isn’t a method I use very often, but for particular cases I think it’s warranted to warn others so they can avoid that customer. I also block these customers who I felt were less than honest with their chargebacks.
I'll also have a separate blog post coming soon about ways to avoid scams and these include chargeback scams.
I hope all this information helps!