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How Credit Card Companies Handle Chargebacks

March 4, 2014

How Credit Card Companies Handle Chargebacks

March 4, 2014

As a business owner, you’re dedicated to earning your money by working hard and making every dollar count. But there are those times when days, weeks – even months after a sale, your hard-earned money is taken away in the form of a chargeback. It’s never pleasant when it happens, and too many chargebacks can be the death of a business – especially online merchants.

For the most part, brick-and-mortar companies have ways to protect themselves from chargebacks. For example, a card swiped at a retailer’s PoS terminal will be recorded as being swiped on-site, and a signature on a receipt adds further proof that the retailer, customer, card and product were in the same place at the same time – making it difficult to dispute charges that could lead to a chargeback.

For online merchants, this type of proof is not an option. But there are things that can be done to lower the chances of chargebacks. Understanding chargebacks and the chargeback process is the first step in knowing how to prevent them.

The Credit Card Chargeback Process Explained

Chargebacks are the result of customers who request that their card’s issuing bank issue a refund for a credit card purchase. Whether the customer contacts you or not regarding the chargeback is their choice – regardless of their
reason for initiating the chargeback.

Even if the customer’s reason is completely unfounded, the onus on ensuring the customer is satisfied falls on the retailer. This means, even if you’ve sold someone a product, and they received exactly what they ordered and had a positive experience during the buying process, they can still request a chargeback.

The typical chargeback process for card issuers such as American Express can be very time consuming for merchants. It often goes something like this:

  • The customer contacts their card-issuing bank to dispute a transaction.
  • The card-issuing bank performs the research necessary to determine if the customer has a valid reason for the chargeback. If the reason is not valid, the process is stopped and the customer remains responsible for the charges.
  • If the customer’s dispute is found to have validity by the issuing bank, a provisional credit is awarded to the customer.
  • The bank that processed the transaction on behalf of the merchant conducts research into the chargeback. If the merchant’s bank determines the chargeback to be invalid or unfounded, it is declined and returned to the customer’s bank.
  • If the chargeback is found by the merchant’s bank to be valid, the amount is removed from the merchant’s account and the merchant is notified via letter.
  • If a processing error took place, the sale is then re-resented to the card-issuing bank for any necessary corrections.
  • The merchant has the opportunity to provide documentation to dispute the chargeback claim. If the documentation proves the chargeback is unfounded, the customer is re-charged for the merchandise. If the merchant’s documentation is not satisfactory, the chargeback is completed and the process is ended.

This clearly shows that a large amount of time and resources are spent disputing chargebacks – and there’s no guarantee of the outcome for the merchant. And with resolution times taking between six weeks and six months, it’s easy to see the effects that multiple chargebacks can have on a company. The process also makes it somewhat easy for fraudsters and unethical customers to get out of paying you for your products with very little chance of legal recourse.

Lost Time and Money – Just Some of the Realities of Chargebacks

If you think lost time and money are bad when it comes to chargebacks, it gets worse. If a merchant receives too many chargebacks, their merchant account can be terminated and the merchant may be added to the Terminated Match File (TMF) – the blacklist that keeps you from accepting credit cards ever again. Needless to say, keeping chargebacks to a minimum is a wise choice as online retailers have few options when it comes to payment processing.


Eran Feinstein is the founder of Direct Pay Online. Direct Pay Online provides global e-commerce and online payments solutions for the travel and related industries  He is a leading authority in the fields of e-commerce, travel and payments, having acquired extensive experience from various parts of the world.

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