In the digital age, with more and more of our daily lives becoming cashless, consumers have an added layer of protection when they spend their money: They can have credit card charges reversed.
Chargebacks are a legitimate tool consumers have to protect themselves from fraud and shady business practices when they pay by credit card. But like most financial dealings, using a chargeback is a little bit more complicated than just having a charge to your credit or debit card reversed.
There are risks and rules involved with using chargebacks, and to protect yourself, you need to understand how and when to use them the right way. Read on to learn all about the history and purpose of chargebacks, a step-by-step guide to using them, and risks and consequences you should keep in mind before using chargebacks.
First, let’s start with what exactly a chargeback is: A dispute of a charge that can result in a forced reversal of the charge that a consumer initiates via their bank.
Chargebacks exist to give consumers the option to reverse charges so they can protect themselves. Unfortunately, not all consumers know the ins and outs of chargebacks. They can even be overutilized or used at the wrong times. To further understand, let’s take a look back at the history of chargebacks and why they came to be.
In the early 1970s, credit cards and bank charge cards were beginning to come to prominence, but many consumers were still wary of them because they worried cards could be lost or stolen, sticking card owners with the bill for unauthorized transactions.
There was also the risk of shady merchants using credit card numbers to add fraudulent charges to purchases and take advantage of their customers. So when the Fair Credit Billing Act of 1974 was written into law, it created chargebacks as a way for consumers to protect themselves when they used credit cards.
Before chargebacks, the fear was that once money was taken from a consumer’s account, there was nothing they could do to get it back. But chargebacks gave them an avenue to ask their bank to replace funds that had been taken during fraudulent transactions — or even to forcefully take back money from a merchant in the event of a disagreement.
Chargebacks were meant to provide consumers with a safety net that would protect their money if they used cards instead of cash and checks. It worked — credit card use exploded in popularity in the 1970s.
Today, chargebacks are still a legitimate way for consumers to protect themselves while making purchases with credit cards. They serve a number of purposes in the digital age, including:
Helping customers feel safe and secure when making digital payments for goods and services, because they know they have an avenue to get their money back if something goes awry.
Keeping merchants honest and transparent, because if they deliver subpar goods or services or try to take advantage of their customers a bank can forcefully remove money from their accounts (and even impose additional fees or revoke charging privileges).
Protecting consumers from fraud. As data breaches, hacks, and identity theft have become more and more the reality of living in a modern world, chargebacks are a way for victims of criminal fraud to reverse unauthorized transactions and recoup the money they lost.
The Fair Credit Billing Act that created chargebacks as a protection for consumers only applies to credit cards.
If you make a purchase with your debit card and run the card as a credit (meaning you didn’t enter your PIN), the bank will likely be able to follow chargeback procedures. If you entered your PIN, though, the process will be a little tougher for you.
You can still dispute a purchase you made on a debit card by contacting your bank. But what happens after you initiate a dispute is up to the bank’s policies and procedures.
Here’s the rub: You can’t just use a chargeback whenever you feel like it. The power to initiate a chargeback doesn’t give consumers carte blanche to reverse any transaction. There are situations where you might consider a chargeback and end up not initiating one. And there are times when chargebacks are absolutely necessary and within your rights as a consumer.
These are situations in which you’re allowed to initiate a chargeback:
You didn’t authorize charges to your card, generally because your card has been stolen or your account has been otherwise compromised.
You never received products or services that you paid for.
You received products or services you paid for, but they were defective or not-as-described.
You were charged a recurring fee after canceling a subscription.
You were charged more than once for the same purchase.
You were charged the wrong amount for a purchase.
You were charged in the wrong currency for a purchase.
You returned an item but never received a refund.
But hold up — just because your situation matches one on this list doesn’t mean you can go straight to your bank for a chargeback. In fact, the only situation in which you should contact your bank first is if there are unauthorized charges on your card. Otherwise, you are expected to attempt to work with the merchant first.
Here’s why: When you complete a chargeback, you get to keep the item in question, but the money gets taken from the merchant and given back to you. That means the merchant is basically paying double — they’re losing the inventory, but also not being paid for it. Plus, many payment processors will charge the merchant fees for chargebacks to cover their administrative costs. A chargeback should be a last resort to use with a merchant who’s unwilling or unable to help you, not a tool you use on the regular.
Plus, it’s possible that your issue with the merchant is the result of an honest mistake. Most merchants don’t want to deal with the hassle and cost of chargebacks, so they’re likely to be willing to work with you to make things right in a dispute. It’s only if you’ve contacted the merchant and they’re not willing to work with you that you should contact your bank about initiating a chargeback.
Like we said above, chargebacks can definitely be overused and abused. These are just some of the situations in which you should not use a chargeback:
You have buyer’s remorse.
The return process seems long, complicated, or burdensome.
You don’t want to pay for shipping, handling, or a restocking fee to return an item.
You feel like delivery for your item took too long.
You want to return an item, but you waited too long and the return window is closed.
You don’t want to pay for an authorized charge on your credit card bill.
You forgot about or don’t recognize a transaction, but you haven’t investigated it to see if it was legitimate.
You want to keep your money or get an item for free.
A growing problem in the digital age is what’s called “friendly fraud,” or seemingly trustworthy people using chargebacks in situations that don’t warrant them. We’ll get more into the costs and consequences of chargebacks (both for merchants and consumers) below, but be aware that knowingly requesting a chargeback without attempting to work with a merchant first is illegal and abuses the system.
While most of us understand that we should be concerned on some level about how much personal data companies. If you’ve been a victim of fraud, or you’ve attempted to work with a merchant and found them unwilling or unable to help you, you can start the chargeback process. Before we get into the steps involved, let’s look at all the parties involved in a chargeback.
Here are the roles each of those parties plays in a chargeback…
Unless someone is making charges to your card that you didn’t authorize, your first step should always be to try to work with the merchant directly. In credit card terminology, the “merchant” is whoever you are using your card to pay, whether they sell physical goods or something else. Contact them and explain the problem. Try to do this in writing so you have documentation if you need it — email is a great option. If they can’t help you or refuse to help you (or if you have been the victim of fraudulent charges), go to step 2.
Make sure you have all the documentation ready that shows why you’re using a chargeback. This could include:
The receipt from your purchase.
Any written communication with the merchant that shows they couldn’t resolve your complaint.
Photos or other evidence of a faulty product.
Any other proof you can come up with.
Basically, anything you can submit to your credit issuer to help prove that you deserve your money back can’t hurt. It’s better to be over-prepared than not to be able to show that your chargeback is necessary.
How you initiate a chargeback will vary a little bit depending on who issued your card. In many cases, you can dispute a charge or request a chargeback online or in your bank’s mobile app. If you’re not sure where to start, call the service number on the back of your card and tell them you’d like to dispute a charge. They’ll be able to direct you on what you should do next.
A chargeback is a little bit like a trial. The credit issuer will receive the documents you collected back in step 2 and likely do a little bit of investigating. If the issuer finds that the merchant acted in good faith, they may decline the chargeback, and this is where the process ends. If they find in your favor, however, proceed to step 5.
Your bank will withdraw funds from the merchant’s account to refund you for the disputed charge. There may also be fees that are withdrawn from the merchant’s account to cover administrative costs for the chargeback. The merchant cannot stop this and may not even know about the chargeback until after funds are withdrawn from their account.
While chargebacks were created and intended for protecting consumers, which is a good thing, they aren’t free of consequences. It’s important to use chargebacks legitimately because of all the downsides that can come with them, both for merchants, and for consumers.
Chargebacks can hurt merchants both in the short- and long-term…
Every time a chargeback is initiated, the merchant is charged a fee — often between $20 and $100 per chargeback. Even if the chargeback is determined to be illegitimate or the buyer cancels it, the merchant is generally stuck with the fee.
And if a business receives too many chargebacks in a month, it could get hit with excessive fines (think $10,000+).
There’s a list originally created by Mastercard called MATCH, which stands for Member Alert to Control High-Risk Merchants. If a business receives too many chargebacks per month for several months in a row, it could result in that business getting placed on the MATCH list, which means their merchant accounts are terminated, their ability to process card payments is revoked, and they won’t be able to get a new merchant account with any card processor who uses the list for at least five years.
Even if the business isn’t placed on the MATCH list, too many chargebacks could mean it’s forced to work with a high-risk payment processor, which comes with higher processing fees that cost the merchant more to do business.
While merchants have the right to dispute chargebacks (and should dispute them if they’re illegitimate), it takes time and resources to gather evidence and fight back. That’s taking time and resources away from growing the business. Plus, even if the merchant wins, the chargeback stays on the account record, which doesn’t help protect them from being forced to use a high-risk processor or having their accounts terminated altogether.
While chargebacks are meant to protect consumers, they still bear at least some of the consequences that can come with chargebacks.
While working with the merchant to get a refund usually gets you your money back within a matter of days, chargebacks can take months while an investigation is carried out.
If a bank investigates a chargeback and decides it’s not legitimate, they may classify it as a case of “friendly fraud.” (“Friendly” because the initial request for the chargeback seemed trustworthy and credible). A finding like this may lead them to close your account, which will negatively impact your credit score.
Plus, “crying wolf” too often can mean that if you need a chargeback for a legitimate reason, it might be harder to convince a bank or credit issuer to take your side.
Since merchants have to plan for the cost of chargebacks and accompanying fees, it means their prices often need to be higher to help offset their costs. That means chargeback fraud and abuse hurts all consumers, not just the ones who abuse the system.
Nope! As a consumer, you have rights and a lot of options if you’ve been wronged by a business. While a chargeback is one official avenue meant to protect consumers from shady business practices, there are many others. The first step to protecting yourself is knowing your consumer rights, and deciding from there what’s the best way to fight back against shady businesses — whether that’s with a chargeback or some other avenue.
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