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A chargeback is a return of money to a payer of a transaction, especially a
credit card A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's accrued debt (i.e., promise to the card issuer to pay them for the amounts plus the o ...
transaction. Most commonly the payer is a
consumer A consumer is a person or a group who intends to order, or uses purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. ...
. The chargeback reverses a money transfer from the consumer's
bank account A bank account is a financial account maintained by a bank or other financial institution in which the financial transactions between the bank and a customer are recorded. Each financial institution sets the terms and conditions for each type of ...
,
line of credit A line of credit is a credit facility extended by a bank or other financial institution to a government, business or individual customer that enables the customer to draw on the facility when the customer needs funds. A line of credit takes s ...
, or credit card. The chargeback is ordered by the bank that issued the consumer's
payment card Payment cards are part of a payment system issued by financial institutions, such as a bank, to a customer that enables its owner (the cardholder) to access the funds in the customer's designated bank accounts, or through a credit account and ...
. In the distribution industry, a chargeback occurs when the supplier sells a product at a higher price to the distributor than the price they have set with the end user. The distributor submits a chargeback to the supplier so they can recover the money lost in the transaction.


United States overview

The chargeback mechanism exists primarily for consumer protection. Holders of credit cards issued in the United States are afforded reversal rights by Regulation Z of the
Truth in Lending Act The Truth in Lending Act (TILA) of 1968 is a United States federal law designed to promote the informed use of consumer credit, by requiring disclosures about its terms and cost to standardize the manner in which costs associated with borrowing ...
. United States debit card holders are guaranteed reversal rights by Regulation E of the Electronic Fund Transfer Act. Similar rights extend globally, pursuant to the rules established by the corresponding
card association A card association or a bank card association is a network of issuing banks and acquiring banks that process payment cards of a specific brand. Examples Familiar payment card association brands include China UnionPay, RuPay, American Express, Di ...
or bank network. A consumer may initiate a chargeback by contacting their issuing bank and filing a substantiated complaint regarding one or more debit items on their statement. The threat of forced reversal of funds provides merchants with an incentive to provide quality products, helpful customer service, and timely refunds as appropriate. Chargebacks provide a means for reversal of unauthorized transfers due to
identity theft Identity theft occurs when someone uses another person's personal identifying information, like their name, identifying number, or credit card number, without their permission, to commit fraud or other crimes. The term ''identity theft'' was c ...
. Chargebacks can also occur as a result of
friendly fraud Chargeback fraud, also known as friendly fraud, occurs when a consumer makes an online shopping purchase with their own credit card, and then requests a chargeback from the issuing bank after receiving the purchased goods or services. Once approve ...
, where the transaction was authorized by the consumer but the consumer later attempts to fraudulently reverse the charges. Card association chargeback rules are available online for public inspection and review. They comprise a system for adjudicating transaction disputes between cardholders and merchants, primarily where the issues can be resolved based on documentary evidence incident to the transaction. The rules provide for arbitration of issues by the card association. This may occur where the card issuer generates a second (or "arbitration") chargeback against the merchant, after receiving the merchant's response to the initial chargeback. Normally this would require the cardholder to rebut elements of the merchant's response. The second chargeback results in a second crediting of the cardholder's account for the disputed funds, after having been credited back to the merchant with its response to the initial chargeback. The merchant's only recourse after the second chargeback is to initiate arbitration of the dispute by the card association. The fee for this is on the order of $250, and the arbitration loser is obligated to pay the costs of the arbitration.


Reason codes

With each chargeback the issuer selects and submits a numeric reason code. This feedback may help the merchant and acquirer diagnose errors and improve customer satisfaction. Reason codes vary by bank network, but fall in four general categories: * Technical: Expired authorization,
non-sufficient funds Dishonoured cheques (also spelled check) are cheques that a bank on which is drawn declines to pay (“honour”). There are a number of reasons why a bank would refuse to honour a cheque, with non-sufficient funds (NSF) being the most common on ...
, or bank processing error. * Clerical: Duplicate billing, incorrect amount billed, or refund never issued. * Quality: Consumer claims to have never received the goods as promised at the time of purchase. * Fraud: Consumer claims they did not authorize the purchase or was a victim of
identity theft Identity theft occurs when someone uses another person's personal identifying information, like their name, identifying number, or credit card number, without their permission, to commit fraud or other crimes. The term ''identity theft'' was c ...
. One of the most common reasons for a chargeback is a fraudulent transaction. In this case, a credit card is used without the consent or proper authorization of the card holder. In some cases, a merchant is responsible for charges fraudulently imposed on a customer. Fraudulent card transactions often originate with criminals who gain access to secure payment card data and set up schemes to exploit the data. In cases of card not present transactions the merchant is usually responsible for the chargeback and associated fees. After the adoption of
EMV EMV is a payment method based on a technical standard for smart payment cards and for payment terminals and automated teller machines which can accept them. EMV stands for " Europay, Mastercard, and Visa", the three companies that created th ...
(cards with a chip in them), merchants who have not upgraded to EMV technology usually become liable for chargebacks received (unless others in the payment chain have also not upgraded) even in cases where prior to EMV adoption the merchant would not have been liable. Chargebacks can result from not receiving credit for returned merchandise, not receiving items they have paid for, or if the items were not what they expected. In these examples, the merchant is responsible for issuing credit to its customer and would be subject to a chargeback. Other reasons include charging the consumer twice for a single transaction or charging an account after the bank declined the transaction.


Merchant recourse

For transactions where the original invoice was signed by the consumer, the merchant may dispute a chargeback with the assistance of the merchant's
acquiring bank An acquiring bank (also known simply as an acquirer) is a bank or financial institution that processes credit or debit card payments on behalf of a merchant. The acquirer allows merchants to accept credit card payments from the card-issuing bank ...
. The acquirer and issuer mediate in the dispute process, following rules set forth by the corresponding bank network or
card association A card association or a bank card association is a network of issuing banks and acquiring banks that process payment cards of a specific brand. Examples Familiar payment card association brands include China UnionPay, RuPay, American Express, Di ...
. If the acquirer prevails in the dispute, the funds are returned to the acquirer, and then to the merchant. Only 21% of chargebacks lodged globally are decided in favour of the merchant. The 2014 Cybersource Fraud Benchmark Report found that only 60% of chargebacks are disputed by merchants, and that merchants have a success rate of about 41% with those they do re-present. To address these more effectively, technology companies have written code and built algorithms that help merchants determine if chargebacks are legitimate or fraudulent.


Merchant penalties

The merchant's acquiring bank accepts the risk that the merchant will remain
solvent A solvent (s) (from the Latin '' solvō'', "loosen, untie, solve") is a substance that dissolves a solute, resulting in a solution. A solvent is usually a liquid but can also be a solid, a gas, or a supercritical fluid. Water is a solvent for ...
over time as during a chargeback it has to return the funds to the cardholder, and that sum then has to be received back from the merchant, and thus has an incentive to take a keen interest in the merchant's products and business practices. Reducing consumer chargebacks is crucial to this endeavor. To encourage compliance, acquirers may charge merchants a penalty for each chargeback received.
Payment service provider A payment service provider (PSP) is a third-party company that assists businesses to accept electronic payments, such as credit cards and debit cards payments. PSPs act as intermediaries between those who make payments, i.e. consumers, and thos ...
s, such as
PayPal PayPal Holdings, Inc. is an American multinational financial technology company operating an online payments system in the majority of countries that support online money transfers, and serves as an electronic alternative to traditional paper ...
, have a similar policy. PayPal Merchant charges $20 for each chargeback, when the transaction isn't covered by seller protection (regardless of whether or not it is the first) plus it will retain the original transaction fee. In addition,
Visa Visa most commonly refers to: *Visa Inc., a US multinational financial and payment cards company ** Visa Debit card issued by the above company ** Visa Electron, a debit card ** Visa Plus, an interbank network *Travel visa, a document that allows ...
and MasterCard may levy severe penalties against acquiring banks that retain merchants with high chargeback frequency. Acquirers typically pass such fines directly to the merchant. Merchants whose ratios stray too far out of compliance may trigger
card association A card association or a bank card association is a network of issuing banks and acquiring banks that process payment cards of a specific brand. Examples Familiar payment card association brands include China UnionPay, RuPay, American Express, Di ...
fines of $100 or more per chargeback. Merchant service providers may ultimately decline to provide an account for businesses with too high of a chargeback ratio.


Other types

Accounts may also incur credit reversals in other forms. ATM reversals occur when an ATM deposit envelope is found to have fewer funds than represented by the depositor. A chargeback is made to correct the error. This could result due to a counting error or intentional fraud by the account holder, or the envelope or its contents could have been lost or stolen. Chargebacks also occur when a bank error credits an account with more funds than intended. The bank makes a chargeback to correct the error. If an overdraft results and it cannot be covered in time, the bank could sue or press criminal charges. When a direct deposit is made to the wrong account holder or in a greater amount than intended a chargeback is made to correct the error. Finally, chargebacks occur when an account holder deposits a check or money order and the deposited item is returned due to
non-sufficient funds Dishonoured cheques (also spelled check) are cheques that a bank on which is drawn declines to pay (“honour”). There are a number of reasons why a bank would refuse to honour a cheque, with non-sufficient funds (NSF) being the most common on ...
, a closed account, or being discovered to be counterfeit, stolen, altered, or forged. Banks may sue account holders or press criminal charges when chargebacks are required due to fraudulent activity and insufficient funds are in the account to cover the chargebacks.


Negative database

Merchants sometimes maintain a record of customers who chargeback regularly, in a "negative database".https://www.merchantconnect.com/CWRWeb/pdf/Avoiding_Chargebacks.pdf


See also

* Card security code *
Chargeback insurance {{More citations needed, date=December 2008Chargeback insurance is an insurance product that protects a merchant who accepts credit cards. The insurance protects the merchant against fraud in a transaction where the use of the credit card was un ...


References

{{Credit cards Merchant services