What is a chargeback in payment processing?

Definition of chargebacks

Chargebacks - Clearly Payments

Simply put, a chargeback is a refund initiated by a credit card holder. In a typical refund, the merchant issues a chargeback with their point of sale (POS) terminal. In a chargeback, the consumer does it with their bank. Most of the time, merchants will not know it is even happening.

How a chargeback works

  • A cardholder sees a charge on their credit card and feels it is not a valid charge (more on this below).
  • The cardholder contacts their bank and requests a chargeback
  • The bank takes the charge off the cardholders credit card
  • The initial purchase amount and a chargeback fee are withdrawn from the merchant’s bank account. The chargeback fee is typically around $25.

Why credit card chargebacks exist

Chargebacks exist to protect consumers which is a key reason credit cards are so popular. Credit cards are convenient, they give you rewards, and they protect consumers. Around 90% of adults in North America own credit cards. All credit cards allow consumers to do a chargeback.

Common reasons for chargebacks

  • Duplicate processing: the charge is on the credit card twice.
  • Customer claims services do not occur.
  • Cancelled recurring transaction: the consumer claims they asked to stop the recurring transaction/subscription.
  • Merchandise/service not as described
  • Defective merchandise
  • Customer claims merchandise not received

In the end, this is where the customer is always right (mostly). It is really important to set expectations as a merchant. Setting expectations on your refund policy will help you with reducing chargebacks. There are a number of things you can do to reduce the number of chargebacks. The better you set expectations, the less likely you will see chargebacks.