Chargebacks – What are they?

A chargeback is any situation where the funds from a transaction have to be returned to the consumer by a forcibly initiated motion where the consumer’s bank becomes involved. It is a reversal of any outbound transfer of funds from a consumer’s bank account, credit card or line of credit, and if you have ever been on the receiving end of a chargeback you understand just how complex the system can be. Thankfully, the United States has a variety of mechanisms in place to protect both merchants like yourself as well as the consumers. Unfortunately, protection exists primarily for the consumer’s sake, which is one of the reasons why it is so important that you understand all of the paperwork involved in setting up your merchant account, to make sure you are protected against chargebacks and possible litigation.

A chargeback is one of the largest risk factors when it comes to the business that you operate, and while that risk is largely on the side of the banks and providers themselves, it is important to understand how a chargeback works. The most important thing to remember is that a chargeback should not be confused with a refund, which is where a merchant refunds the transaction fee to the customer. According to Visa and MasterCard, the merchants processing bank is 100% responsible for any transactions that the merchant performs, which can leave the provider open to literally millions of dollars in potential losses, if said merchant operates in a way which is either illegal or extremely risky, generating a large percentage of chargebacks. While the provider could pass this cost on to the merchant, the problem is that if the merchant is fraudulent, or simply doesn’t have the money, the providers themselves are liable to cover all the costs to reimburse the card holder. This is one of the reasons why it is so difficult for smaller businesses to set up merchant accounts with financial institutions, and why ISOs charge a higher percentage to set them up for you. A higher level of risk requires a higher transaction fee.

Often the only recourse for merchants like you is to dispute whether or not the chargeback should take place. In most instances this can only happen if there is an original invoice signed by the consumer, in which case you and your bank can dispute whether or not the chargeback should go through. However, much of it depends upon rules as set forth by the corresponding bank networks and the card association. Unfortunately, the system is still not as good as it could be, with many unscrupulous customers abusing the system at the expense of merchants like you, with one of the most common problems being buyer’s remorse, where individuals habitually reverse transactions. Thankfully, chargeback insurance exists specifically to protect you and your business, by protecting you against cardholder fraud and problems with customers who decide at the last minute that they actually didn’t want to purchase the service in the first place, despite having signed a transaction agreement.

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