What is a Chargeback? Learn How to Manage Payments Disputes

Nobody likes having customer disputes. It's just not fun.

This is especially true when we're talking about chargebacks.

So, in this complete guide, we'll talk you through everything you need to know about the chargeback process. We'll answer those gnawing questions you have, like:

• What is a chargeback?
• How do chargebacks work?
• Why do chargebacks occur?
• How can I stop chargebacks from happening?

Let's get started!

What is a chargeback in banking?

A chargeback is when a customer tells their bank to reverse a charge from your business because they’re not happy with it or didn’t authorize it. Chargebacks protect people from sketchy transactions (like those unauthorized or fraudulent transactions you hear about), but they can be a real hassle for businesses.

When a chargeback happens, the money is put on hold in the merchant's account while the bank investigates. This chargeback process can take a while and often requires a bunch of paperwork and proof from both sides (that is of course, unless you're working with a payment service provider like Epos Now Payments — we'll get on to that a bit more later.) The credit card issuer or issuing bank determines whether the chargeback request is valid, and if they side with the customer, the business might also face additional chargeback fees.

Reasons for a chargeback

Here are some of the usual suspects behind chargebacks: 

Fraudulent transactions

If a customer sees a charge from your business but never personally bought anything, it could be a case of credit card fraud. This often triggers a chargeback. To protect your business, it's smart to use payment methods like chip cards and contactless payments (think Apple Pay). These are super secure and can help you avoid these headaches. For new businesses, having a chip and PIN reader is a no-brainer. Globally, chargeback fraud cost merchants $20 billion in 2023, according to our friends over at Mastercard.

Issues with shipping and pricing

Shipping and pricing problems are another big reason for chargebacks. Here’s the deal with these cardholder disputes:

• Shipping issues: If a customer doesn’t get their order or if it arrives damaged, they might dispute the charge. And let's face it, you would too! Just think about it. You've waited 3-5 business days for your brilliant new product to arrive only to open the packaging and find it damaged - not nice! Delays, lost packages, or incorrect items can all lead to chargebacks. To avoid this, make sure to provide tracking information and use reliable shipping services. Keeping your customers in the loop helps a lot, too.
• Pricing problems: Customers might also file a chargeback if they’re charged the wrong amount. Hidden fees, unexpected charges, or billing errors can all cause disputes.

How often does this type of payment dispute happen, you ask? Well, according to Clearly Payments, 26% of customer disputes happened because a product didn't arrive, and 15% because the product that arrived wasn't what they ordered.

Billing errors

Billing errors are a common cause of chargebacks. Here’s how it goes down:

If a customer spots a mistake on their bill, like being charged twice or seeing an amount that’s off, they’ll likely dispute it. These errors can be anything from double charges to incorrect amounts.

Remember that Clearly Payments survey we mentioned earlier? It also found that 3% of chargebacks occur because the customer has been billed twice. So, you're gonna want to double-check your invoices and make sure everything is accurate before sending them out.

Customer dissatisfaction

When a customer isn’t happy with what they bought, they might want their money back. Maybe the product didn’t live up to the hype, or the service was a letdown. When this happens, they might run straight to their bank to dispute the charge (and who can blame them?)

To keep this from happening, make sure your products and services are on point. Be upfront about what you’re selling, and handle complaints quickly. Good communication and an easy return policy can save you a lot of trouble and keep your customers smiling.

Cancelling subscription renewals

When customers forget to cancel their subscriptions and get billed again, it’s a recipe for disaster. They might not realize they’re still signed up or simply forgot to hit the cancel button. Then, bam! They see that charge on their credit card statement and dispute it.

How do chargebacks work? 

Now, depending on the reason, the acquiring bank (check out our guide on what is a merchant acquirer for more on what this means), and credit card network, the chargeback process usually takes around 30-90 days. Here's what happens:

The cardholder initiates the chargeback process 

First up, the customer decides they’re not cool with a charge on their cardholder's account (ouch!). They start the chargeback process by letting their bank know something’s up. 

Now, we spoke about why this could happen above, but just a reminder it could be because of credit card fraud, shipping or payment errors, subscription renewals, or the customer just isn't happy with your product or service.

The issuing bank contacts the merchant

Next, the unhappy camper’s bank (aka the issuing bank) reaches out to the merchant. It’s like a polite, "Hey, we need to chat about this chargeback thing."

The merchant gets notified about the disputed amount

Now it’s your turn, merchant! You get a heads-up that someone’s disputing a charge from your shop. Cue the suspenseful music.

A decision is made by the credit card company

Time for the credit card company to weigh in. They review the evidence (yes, there’s evidence!) from both sides to decide who’s right and who’s not so right.

The outcome is communicated

Then comes the moment of truth. The credit card company sends the final decision your way. Will you keep the cash, or is it a chargeback party?

Possibility of arbitration 

If things get really hairy in the dispute process, think disagreements on steroids, there might be a round two. It’s called arbitration and it's like a referee stepping in to settle the score.

Chargeback consequences for your business

So, you’ve got a chargeback on your hands—what now? Brace yourself for some serious consequences:

Financial impact

When a chargeback hits, it’s not just about losing the disputed amount. It’s also about lost revenue that could’ve been used to grow your business or cover expenses. Every dollar matters, especially for small retail and hospitality businesses like yours.

More operational costs

Dealing with chargebacks means more paperwork, more time spent on dispute resolutions, and possibly more staff hours devoted to sorting things out. This takes away from focusing on your core business activities and growth strategies.

Brand image suffers

Trust is everything in business. When customers have to initiate chargebacks, it can completely erode their confidence in your business. They might question the reliability and security of your transactions, potentially turning to competitors they perceive as more trustworthy.

Higher merchant account fees 

Chargebacks often incur additional fees (this is called a chargeback fee FYI) imposed by your payment processor or merchant account provider. These fees can add up quickly, further impacting your bottom line.

Account termination risk

If chargebacks become a regular thing at your company, your merchant's acquiring bank won't be very happy with you. If the problem persists, they might  terminate your merchant account altogether. Losing your ability to accept credit card payments can severely disrupt your cash flow. After all, 82% of Americans use a credit card to make payments.

Legal implications

In some cases, chargebacks can escalate into legal disputes, especially if there's a lot of cash being disputed or complex issues are involved. Legal proceedings can be costly (we're talking paying for lawyers and retainers and so on), time-consuming, and add more stress to an already challenging situation.

Inventory loss 

Finally, for businesses selling physical goods (those awesome products at your retail store, for example), a chargeback can mean losing not only the revenue but also the product itself. If the disputed item has already been shipped and is not returned, you’re left with a double loss—no product or payment.

Strategies to prevent chargebacks 

Alright, let’s talk about keeping those chargebacks at bay—nobody wants the unnecessary drama, right?

Ensure product descriptions are clear

Clear product descriptions are your first line of defense against chargebacks. When customers know exactly what they’re buying, there’s less room for misunderstandings or disputes. Think of it as setting expectations right from the start.

To do this, make sure you have detailed info about your products or services, sizes, colors, materials—whatever matters to your customers. Use high-quality images from different angles and provide real-life examples whenever possible. If there are any special terms or conditions, spell them out clearly. The goal? No surprises, just happy customers clicking that “buy” button with confidence.

Provide good customer service

Good customer service goes a long way towards preventing chargebacks. You're going to need to be super responsive to all inquiries and issues. When your customers feel heard and their problems are addressed promptly, they’re less likely to resort to chargebacks out of frustration.

So, make it easy for them to contact you through multiple channels (your socials, your email and even a phone number) and ensure your support team is trained to handle complaints effectively.

Implement fraud prevention measures

Unfortunately, fraudsters are out there, but you can stay one step ahead with smart fraud prevention measures. Here's just a few that we love:

• Watch for any unusual patterns in orders—like big purchases out of the blue.
• Use tools like AVS (Address Verification System) and CVV (Card Verification Value) to double-check customer info.
• Use credit card authorization forms. 
• Keep tabs on the latest fraud trends and tactics—knowledge is power!
• Set up filters to flag suspicious transactions before they become a problem.
• Educate your brilliant team on spotting red flags and handling potential fraud situations like pros.

Set transparent policies for returns and refunds

Think of this as setting clear boundaries in a friendship or relationship, because boundaries are everything. Everyone should know where they stand and be on the same page.

Make sure your policies are crystal clear from the get-go. Tell your customers how they can return stuff, when they can do it, and what conditions apply (like ‘no trying to return a half-eaten cake or biker boots you've clearly worn to a muddy festival campsite’.)

The easier you make it for people to understand, the less likely they’ll feel the need to wave that chargeback flag. Plus, when your customers know what to expect, they’re more likely to stick around and shop with confidence.

Use a secure payment processing

Using secure payment processing like Epos Now Payments, is like putting a lock on your cash flow—safe and sound! Epos Now hooks right into your point of sale setup, so handling payments is super easy; no more bouncing between different systems. They keep things upfront with pricing too, with no sneaky charges creeping up on you. Whether your customers swipe Visa, Mastercard, or even Amex, you know exactly what each transaction costs.

Security-wise, Epos Now is on it with PCI DSS compliance and fancy encryption tech to shield customer info. They cover all the bases, from chip and pin to those tap-and-go moments with contactless. And hey, if your crowd loves Apple Pay or Google  (now known as Google Wallet BTW), they’ve got that too. Plus, their support team is there round-the-clock, so if you ever need a hand, they’ve got your back.

Record all your credit card transactions 

By documenting every swipe and tap, you not only stay organized but also have a clear trail of who paid what and when. This comes in handy for tracking sales trends, balancing your books, and spotting any discrepancies before they become issues.

Now, a retail POS system can really help here. That's because it takes away the annoying manual recording you'll have to do without one. It automatically logs all transactions so that you can say goodbye to the old pen-and-paper routine. With everything recorded automatically, you’re saving time and reducing any pesky errors that might creep in.

Obtain proof of delivery 

Getting proof of delivery is like getting a receipt for your online orders—it's your golden ticket to proving the goods were delivered! Whether it's a package, a service, or even digital goods, having solid proof that your customers receive what they ordered is super important.

So, how do you nail this down? For physical goods, it's all about tracking numbers, delivery signatures, or even photos of the delivered item. For services or digital goods, it might mean email confirmations, timestamps, or digital signatures, whatever shows your customer got what they paid for.

Ensure your billing descriptors match 

Making sure your billing descriptors match is like ensuring your business name is correctly spelled—it helps customers recognize and trust your charges on their credit card statements. Your billing descriptor should clearly show your business name and the type of transaction.

Why is this important? If your customer sees a charge labeled "XYZ Corp" instead of "ABC Store," they might get confused or think it's a mistake. This confusion could lead to them questioning or disputing the charge, causing unnecessary headaches for everyone involved.

Offer alternative dispute resolution options

Offering alternative dispute resolution options is about giving your customers different ways to fix things without pulling out the big guns (like chargebacks).

Stuff happens, but having options can save the day. Whether it's a hotline where they can vent, a quick chat session for instant fixes, or a straightforward return policy that's as easy as pie (no, seriously, it's that easy!).

Stay compliant with the industry best practices

Let's not forget the last, but definitely not the least important thing: staying compliant (which just means following the rules) with industry best practices.

These practices are there to protect both you and your customers. Whether it's safeguarding data, ensuring fair treatment using the fair credit billing act (check out the FCBA act here), or respecting privacy, compliance shows you're committed to doing things the right way.

How Epos Now can help to dispute these payments

At Epos Now, we're payment pros. That means we know a thing or two about how to deal with the chargeback process. Here's how Epos Now can help you handle those payment disputes:

Step 1 - We notify you about the chargeback

We give you a heads-up when a chargeback hits your doorstep (cue the "uh-oh" moment).

Step 2 - Transaction review starts 

We then jump into the nitty-gritty of the transaction to figure out what went sideways. We're basically Sherlock Holmes but for payments made via an Epos Now card machine.

Step 3 - Collect supporting evidence for the dispute

We'll then gather up all the evidence and backup you need to fight the chargeback. Think of it as arming yourself with all the facts.

Step 4 - Submit the evidence 

Next, we fire off that evidence like a champion archer aiming for the bullseye, because hitting the mark is what we do.

Step 5 - Monitor the process 

We keep an eagle eye on the whole process so you can focus on running your business. That means no need to stress—we've got this.

Step 6 -  Outcome is communicated

And ta-da! We let you know the outcome faster than you can say "chargeback drama resolved" (cue the happy dance).