Chargeback – what it is, how it works and types of chargebacks

There are cases when a commercial enterprise practices refunding money to a client after the consumer has paid for a product or service non-cashly, with a bank card. The name of this phenomenon, caused by the cardholder's appeal or protest of transactions, is chargeback.

The following text explains how this process occurs, what reasons exist for its initiation, in which cases the bank refuses to return funds, and how the seller company can reduce the likelihood of such a situation occurring.

What is chargeback?

Chargeback is a reverse payment, a return of the payer's money, a type of imperative civil liability of banks and other financial institutions for the fact of delivery, which is imposed on them by international payment systems.

If the buyer, having received the ordered and prepaid goods, notices defects in them, he turns to the bank with a demand for monetary compensation. If the client can substantiate his claims, the store company will be forced to return the money to him. This phenomenon is called the chargeback procedure.

Who can initiate a chargeback and in what cases?

There are a number of circumstances, each of which is a reason to initiate a refund through chargeback.

1. The delivered goods or service provided turned out to be of poor quality, did not correspond to the description, were not suitable for use, or were defective.
2. Illegality of the transaction. This refers to the use of a bank card, that is, the withdrawal of money from it without the permission of its owner by fraudsters.
3. Breach of contract terms. If the cardholder did not agree to the terms of the transaction, and the agreement was violated and the money was withdrawn.
4. Double debiting of the amount from the card. May occur as a result of technical errors in payment processing, due to system failures.
5. The client paid for the product (service) but did not receive it. The reason may be bankruptcy or negligence, or negligence in the company's service.
6. The consumer was denied a refund.

Chargeback processes may vary depending on the banking institution and payment system.

However, its standard procedure is for the bank to initiate an investigation, which involves reviewing evidence from the commercial organization and the consumer. If it turns out that the customer is right, a decision is made to reimburse him.

Main participants in the process

The chargeback option is implemented with the participation of the following actors:

• cardholder (bank card owner, injured party);
• the issuing bank (the financial institution that issued the payment card);
• bank account (international bank account number);
• the legal entity to which the payer filed a claim (store, service center);
• payment system (the most common options are Visa or Mastercard).

According to the Visa/Mastercard code of conduct, the customer has 120 days from the date of the transaction to file a claim.

How does chargeback work?

This financial procedure, which involves the consumer, his bank, and the bank of the business company (store or service provider), is complex and multi-stage.

Step-by-step process description

In general, the chargeback algorithm looks like this.

1. The client contacts the bank with a chargeback request. In the request, the consumer must indicate the reason for which he is requesting a refund (illegal transaction, poor service, etc.).
2. The client's application is reviewed by the bank's card security department. This structural unit of the relevant financial institution conducts an investigation taking into account and based on the evidence provided by the injured party.
3. The cardholder's bank notifies the merchant's bank of the situation. The merchant has the right to provide or present its evidence or arguments.
4. If the selling bank has such strong arguments, it responds to the chargeback request, indicating them.
5. Based on the data received from both parties, the consumer's bank makes a decision to refund or withhold money.
6. Depending on the verdict of the banking institution, the applicant's funds are returned or he is denied chargeback. If the decision is made in favor of the consumer, the money is returned to his account without additional notifications and explanations. If the bank denies the client, it explains the reasons for this denial.

From a legal point of view, chargeback is considered a means of consumer protection. However, this procedure takes time and does not always result in a refund to the applicant. Certain circumstances and lack of evidence may prevent this.

Typical application processing times

The duration of this procedure depends on many factors.

For example, Privatbank states that the period during which the bank that made the transaction is obliged to respond is from 45 to 120 days. And after the request is accepted for processing, the term for its consideration is 14-45 days.

In fact, this period takes from 2 to 4 months.

According to current legal regulations, funds can be refunded to the consumer no later than 120 days after the transaction for a Mastercard card and no later than 180 days for a Visa payment system card.

What documents are needed to issue a chargeback?

The key document is the application. It has a special form. You can get a template of the appropriate form after contacting the issuing bank. You can also contact a specialized chargeback resource for this.

Some banks allow you to submit a refund application in any form.

The key point when submitting such an official request is to ensure that it is accepted and registered. When the application is registered, a specific number is assigned to this document.

In addition, the bank must provide the applicant with the contacts of the branch where the applicant can track current information regarding the processing status of his request.

Proof of the need for a chargeback will be receipts for the transaction, correspondence with the seller, and photos of the product with visually noticeable defects.

Types of chargebacks

The classification of chargeback options reflects different types of scenarios and circumstances that necessitate a refund to the payer.

By reason of initiation

Based on the reasons for the refund initiative, the following types of chargeback can be named:

• for poor-quality goods/services – for example, if the consumer is sent a damaged product or a product that does not meet his expectations;
• for a transaction performed illegally – it may be the work of fraudsters who stole the card itself or the personal data of its owner;
• for double debiting – funds are debited from the account twice due to technical failures or seller errors;
• unfair, incorrect terms of the contract – this refers to a violation of the terms of payment or the payer's disagreement with them;
• for refusal to refund the amount of money - in this case, the store or service company refuses to refund the client, despite the presence of valid reasons for their refund.

The above list shows the most common types of chargeback.

By type of payment systems

Chargeback from VISA and MasterCard There are four categories:

1. Fraud is the most common type, accounting for approximately 75% of the corresponding options.
2. Consumer Disputes – arise in the event of customer complaints about poor quality and defects in the goods received. The share of relevant chargebacks is about 20%
3. Authorization.
4. Processing Errors.  

The last two categories of refunds occur relatively infrequently, in about 51% of cases.

When does chargeback not work?

Typically, a bank denies a customer a refund via chargeback for several reasons listed below.

1. Lack of evidence. The consumer's inability to provide truly compelling evidence and reasoned information to confirm and substantiate the claims made.
2. Authorization of the transaction. If the client himself authorized this money transfer from his card, that is, at the time of payment he was on the site, entered his own PIN code or other authorization index.
3. The presence of technical or system problems. These can complicate the chargeback procedure, because in this case the system recognizes the completed transaction as final.
4. Incorrectness of the consumer's initiative. The banking institution may conclude that the consumer made the transaction intentionally and knowingly, after which he decided to return the corresponding money. In such a situation, the payer will face a refusal.
5. Sale of high-risk goods or services. Goods/services of this type include digital equipment, alcoholic beverages, tourism, and gaming services. If the buyer was informed about the potential risks and still made the payment, the bank will not refund the money.
6. The applicant is unable to prove the fact of fraud. In this case, the banking institution will have no reason to consider the transaction fraudulent, and this will be an argument for refusing the chargeback. 

In general, chargeback can be viewed as a financial tool that helps ensure that consumers have safe and fair transactions.

How to issue a chargeback: advice for consumers

You should contact the bank to request a refund in a timely manner - the Visa and Mastercard payment systems allow up to 120 days for appeals.

The chargeback service does not apply to payments made in cash, via an electronic wallet (LiqPay, Payeer, AdvCash, etc.) or in cryptocurrency.

The chances of a successful chargeback will also increase if the initiator provides evidence of the fraudster's actions - this could be recordings of telephone conversations, screenshots of emails or messaging exchanges in instant messengers, or a written agreement.

If you have been denied a refund without justification, you can appeal the denial by going to court. The chances of a decision in your favor will be if the seller is not located abroad.

How businesses can avoid chargebacks

Experts advise sellers to take into account several relevant recommendations to minimize the relevant risks:

1. Always respond promptly to messages, without avoiding contact with a dissatisfied seller. It is necessary to be willing to compromise, to maintain a constructive written dialogue with the client, which can later become an argument in your favor.
2. Do not limit yourself to verbal objections to chargeback applications, but promptly collect counterarguments in the event of suspicious and unfounded claims.
3. Adhere to a transparent and understandable refund policy. All terms and conditions for refunding funds paid by the client should be detailed, clear, and understandable on the company's website.
4. Specify the name of the company (store, brand) in the payment description, as well as the product category and order number. This will allow you to set up a personalized descriptor. Such data will indicate where and on what the consumer spent their money.
5. Inform customers about your own products/services as much as possible. In case of a possibility that certain product characteristics do not correspond to those indicated on the seller's website, the buyer should be warned about this.
6.  Take care of the security of the payment process. To prevent fraudulent transactions, find out from your provider the methods they use to protect your bank card data and the monitoring technologies they use.

Following these simple rules will help companies significantly reduce the likelihood of chargebacks.

Advantages and disadvantages of chargeback

The chargeback financial instrument has its own pros and cons for both customers and sellers of goods or services. 

For consumers

The priority points are protecting consumers from fraud and low-quality goods, as well as the relative simplicity of initiating the refund process.

The downside is that there are many of the above-mentioned circumstances and obstacles that can prevent a chargeback. Even if the bank decides in your favor, there is no way to quickly get the amount back - you will have to wait.

For business

The chargeback mechanism for trade and service companies is a powerful motivator that encourages them to monitor their own reputation and provide quality goods and services. And this is a plus.

The remaining points are negative. These include frequent cases of false chargebacks, when customers try to manipulate the system in various ways. For example, they may request a refund for reasons other than those stipulated by the rules.

Frequent refunds to customers or other consumers result in financial losses for businesses, forcing companies to raise prices.

High chargeback rates also create additional challenges for banking institutions and payment systems, as they increase the workload on them. In addition, these processes require additional resources to process requests.

Frequently asked questions about chargeback

How long does it take to process a chargeback application?

This process is quite lengthy and takes from 45 to 560 days. According to analysts, most often the funds are returned to the applicant after about 4 months.

Is it possible to do a chargeback a few months after the surgery?

The consumer can contact the issuing bank with a request for a refund to their own card within 120 days after the date of the transaction.

What to do if the bank refuses a chargeback?

If a financial institution has not satisfied a client's chargeback request, and the consumer is convinced of the illegality of such a decision and the seller's fraud, the only way out for the victim is to go to court. The judicial authority, acting within the legislative framework, must establish the truth.

How are funds returned after a chargeback??

If the bank's decision is in favor of the applicant, the money is returned to the bank card from which it was paid. If the bank renews the card, the amount specified in the appeal request is credited to the new card. The banking institution must notify its client of the refund at the time of its receipt.

What is most important to avoid grounds for chargeback?

To avoid such unpleasant and problematic situations, you should only make purchases from trusted, reliable companies. Also, under no circumstances should you disclose your bank card details to third parties.

Theoretically, it is possible to receive chargeback from any company in the event of transferring funds from a bank card to a bank account by entering its number and CVC/CVV code.