Can someone explain a "charge-back" to me?

I have been giving consideration to requiring paid subscriptions to my forum/site but I’ve heard the words “charge-back” (with extreme negative connotation) mentioned quite frequently.

What does “charge-back” mean?

Chargeback: A dispute procedure initiated by the issuer after receipt of the initial presentment from the acquirer. Used to correct erroneous presentments.

Chargeback Period: The number of calendar days (counted from the transaction processing date) during which the issuer has the right to charge the transaction back to the acquirer. The number of days varies according to the type of transaction from 45 to 180 days.

In Plain English: A chargeback is when a consumer initiates a refund for a purchase they made on a credit card by contacting their card issuing bank. This usually is because they do not wish to pay for the sale. This may occur:

  • If they believe the sale was fraudulant
  • They don’t recognize the name of the billing company
  • Buyers Remorse (It wasn’t what they were expecting)

The card issuing bank then contacts the card processing bank. The card processing banks then requests information from the merchant pertaining to the sale. This can include:

  • A signed receipt
  • A signed invoice
  • Proof of delivery
  • Proof of service
  • Anything the merchant can provide that proves the sale was legitimate

It is then determined, over a period of weeks usually, whether the consumer should get their money back or if the merchant gets to keep the money. In either case, the merchant is usually charged a fee for the chargeback.

If a business gets too many chargebacks, usually more then 2% of total sales, their merchant account is terminated and the merchant is add the the Terminated Merchant File. This effectively prefents the merchant from ever accepting credit cards again.

That was the best explanation of a charbeback yet…

One thing I would like to add is that if you offer an electronic download or intangible product (i.e. service or subscription to website) it is almost impossible to contest a chargeback. That is why most online merchants are so afraid of them…

So are there effective ways to prevent charge-backs that came from fraud? I thought that credit card companies had checks in place to prevent stolen cards being used.

Are charge-backs through PayPal as common and easy?


Only if the person quickly reports the stolen card.

You can do things like require the shipping address to be the same as the billing address, though a lot of people work so it may PO them. And that eliminates gifts.

Use the Verified by Visa and SecureCode (Masttercard) program. Then you are protected from fradulent chargebacks, if I have understood it correctly.

It mustn’t be stolen but can be valid.
eg you are on vacation in XYZ and passing your creditcard to the waiter for paying for this dinner.
The waiter writes down name/ card number / security code and then goes online shopping with those data.

Pretty much impossible to be protected against that, i guess.

You might be surprised how effective presenting a well documented chargeback rebuttal can be in terms of winning chargeback disputes.

Being able to show a signed authorization form is very helpful as well as evidence of any verifications done on the transaction. E-mail receipts, order documentation, etc. can all assist in this process. The more info you have, the better.

One of the problems that we see a lot in the bankcard industry is that many processors don’t go up to bat for their merchants but merely automatically assume that most chargebacks are a lost cause.

However, this is definitely not the case. We have seen our merchants win rebuttals on virtually every reason code out there.

Naturally, this doesn’t happen on every attempt and for some reason codes it is rare - but I can definitely tell you that it is worth the effort to try.

After all, if you don’t try - you only assure yourself 100% that you won’t succeed on the rebuttal. :slight_smile:

In addition, not all settlement networks will automatically verify incoming chargebacks to see if a credit return has already been issued against them and then perform an automate rebuttal.

Lastly, I think the other big issue that happens all of the time is that chargebacks come through, merchants are debited without explanation and then a week or two later they get the chargeback advice notice in the mail.

For instance, for our own merchants we built a system that we call Chargeback Defender. This system receives chargeback files each day and automatically notifies all merchants via e-mail, in advance of them being debited.

Then they can login and perform an online rebuttal and we have a dedicated person who assists them in formulating and preparing their rebuttals.

This way, they really maximize their chances for winning and we’ve seen a suprising number of successful rebuttals since we started implementing this.

Additionally, our settlement network actually scans all inbound chargebacks and compares them against the prior transaction data to see if there was a matching credit issued prior. If that is the case, it auto-rebuttals it without any merchant intervention needed and sends it back to the issuing bank.

Now - in terms of preventing chargebacks in the first place… there are a number of measures that can be employed.

The Cardholder Authentication programs such as Verified by Visa provide an additional layer of protection that virtually insulates merchants against 60% of the most common chargeback reason codes - even if the cardholder has not enrolled in the VbV/MSC program.

Outside of that, doing order verifications on all new signups with an automated phone verification call such as that provided by - in combination with an IP/BIN/GEO-cross check and other fraud scoring indexes… will help most merchants see a reduction of up to 80% or more on their chargeback losses.

So my suggestion is to use the proactive fraud scrubbing methods outlined above and definitely talk to your merchant processor any time you get a chargeback and definitely try to perform a rebuttal on each one.

But is it more difficult for a merchant to challenge a chargeback if they only offer a service (non-tangible) electronically? For example, a web-site that offers subscription to it’s users–like

Since there is no product being shipped chargebacks are chargebacks more common?

Thanks, I am learning a great deal on this thread.

In answer to your question - yes, it can be more challenging to dispute a chargeback for a service than for tangible merchandise.

With tangible merchandise, you can show an AVS, CVV2 match plus a tracking # showing delivery of the product at the same address as the cardholder.

does the inclusion of the 3-digit number on the back of the credit card, when an online order is being placed for a service, provide any security for the merchant?

It means it’s very probable that the card used is indeed in the persons possesion, and not just the card number.

not necessarily. Although it gives one more security it also can be (as i mentioned above)
that someone you gave the card to for processing, wrote down all details.
And then that person can also provide those 3 additional digits.

I never had any idea that charge-backs were such a problem. That is terrible. I guess I will have to give much more thought to requiring subscriptions to my website. Sounds like it could really cost me. :frowning:

I didn’t say that it was necessarily so. Just that it is very probable.

edit: If you want certainty, use the goddamn 3DSecure system that I have already mentioned in this thread. This is a combined effort from Visa and MasterCard that completely protects you from fradulent chargebacks. Visa calls it Verified by Visa and MasterCard calls it SecureCode.

Fraud wasn’t all that is discouraging…according to stymiee, above, a customer can cause a chargeback by " Buyers Remorse (It wasn’t what they were expecting)".
It sounds like a person can just call up their credit card company and say they don’t want the product/service and they’ll get their money back and the merchant will get nailed with a chargeback.

I never knew that was so easy to do. I once tried to return an piece of clothing (yes,it was never worn) and I couldn’t do it…I don’t recall how long i waited though.

Look, if your service is good, this will not turn into anything but a minor problem. A huge, enourmous amount of companies offer no-questions-asked money-back guarantees with great success. If you feel that a lot of people will be dissatisfied with your service, you should consider improving the quality of your service or offering another kind of service altoghether.

Adult websites have a huge problem with chargebacks. Customers get what they want, and then chargeback the card. I’m sure stolen #s are used a lot as well. Oddly enough, a lot of people don’t even know chargebacks exist.

If the item is big enough in value you may consider sending a debt collection agency after the individual.

so does it make more sense to offer a refund to the customer than have a customer request a refund through their credit card company? Will this save the merchant the chargeback fee?

imho that’s not possible, since there was an order an a delivery.
If the customer is not happy with the product (for whatever reason) he has to contact you,
but the credit card organization must not accept a charge back in that case.