Chargeback
Encyclopedia
A chargeback is the return of funds to a consumer, forcibly initiated by the consumer's issuing bank
. Specifically, it is the reversal of a prior outbound transfer of funds from a consumer's bank account
, line of credit
, or credit card
.
Chargebacks also occur in the distribution industry. This type of chargeback occurs when the supplier sells a product at a higher price to the distributor than the price they have set with the end user. The distributor then submits a chargeback to the supplier so they can recover the money lost in the transaction.
. U. S. credit card holders are afforded reversal rights by Federal Reserve
Regulation Z
under the Truth in Lending Act
. U. S. debit card holders are guaranteed reversal rights by Federal Reserve
Regulation E under the Electronic Funds Transfer Act. Similar rights extend globally pursuant to the rules established by the corresponding card association
or bank network.
A consumer may initiate a chargeback by contacting their issuing bank, and filing a substantiated complaint regarding one or more debit items on their credit card statement. Chargebacks are the consumer's last line of defense against unscrupulous merchants. The threat of forced reversal of funds provides merchants with added incentive to provide quality products, helpful customer service, and timely refunds as appropriate. Chargebacks also provide a means for reversal of unauthorized transfers due to identity theft
.
One of the most common reasons for a chargeback is known as a fraudulent transaction. A credit card is used without the consent or proper authorization of the card holder. In some cases, a merchant is responsible for charges fraudulently imposed on a customer. Mostly, fraudulent card transactions originate with criminals who gain access to secure payment card data and set up schemes to exploit those data.
Chargebacks can also result from a customer dispute over credit
. This type of chargeback is usually described as credit not processed. A customer may have returned merchandise
to a merchant in return for credit, but credit was never posted to the account. In this example, the merchant is responsible for issuing credit to its customer, and would be charged back.
Other types of chargebacks are related to technical problems between the merchant and the issuing bank, whereby a customer was charged twice for a single transaction
(duplicate processing) or other various mistakes. Yet other chargebacks are related to the authorization process of a credit card transaction, for example, if a transaction is declined by its issuing bank and the account is still charged.
Another reason for chargebacks is when a customer does not receive the item they paid for. In this case, a chargeback is initiated and the payment to the merchant is reversed.
. If the acquirer prevails in the dispute, the funds are returned to the acquirer, and then to the merchant.
accepts the risk that the merchant will remain solvent
over time, and thus has an incentive to take a keen interest in the merchant's products and business practices. Reducing consumer chargebacks is crucial to this endeavor. To encourage compliance, acquirers may, at their discretion, charge merchants a penalty per chargeback received. Payment service providers, such as PayPal, have a similar policy.
In addition, Visa and MasterCard
may levy severe fines against acquiring banks that retain merchants with high chargeback frequency. Acquirers typically pass such fines directly to the merchant. Merchants whose ratios stray too far out of compliance may trigger card association
fines of $100 or more per chargeback.
Issuing bank
An issuing bank is a bank that offers card association branded payment cards directly to consumers.-Detail:The issuing bank assumes primary liability for the consumer's capacity to pay off debts they incur with their card....
. Specifically, it is the reversal of a prior outbound transfer of funds from a consumer's bank account
Bank account
A Bank account is a financial account recording the financial transactions between the customer and the bank and the resulting financial position of the customer with the bank .-Account types:...
, line of credit
Line of credit
A line of credit is any credit source extended to a government, business or individual by a bank or other financial institution. A line of credit may take several forms, such as overdraft protection, demand loan, special purpose, export packing credit, term loan, discounting, purchase of...
, or credit card
Credit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
.
Chargebacks also occur in the distribution industry. This type of chargeback occurs when the supplier sells a product at a higher price to the distributor than the price they have set with the end user. The distributor then submits a chargeback to the supplier so they can recover the money lost in the transaction.
Overview
The chargebacks mechanism exists primarily for consumer protectionConsumer protection
Consumer protection laws designed to ensure fair trade competition and the free flow of truthful information in the marketplace. The laws are designed to prevent businesses that engage in fraud or specified unfair practices from gaining an advantage over competitors and may provide additional...
. U. S. credit card holders are afforded reversal rights by Federal Reserve
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
Regulation Z
Truth in Lending Act
The Truth in Lending Act of 1968 is United States federal law designed to promote the informed use of consumer credit, by requiring disclosures about its terms and cost to standardize the manner in which costs associated with borrowing are calculated and disclosed...
under the Truth in Lending Act
Truth in Lending Act
The Truth in Lending Act of 1968 is United States federal law designed to promote the informed use of consumer credit, by requiring disclosures about its terms and cost to standardize the manner in which costs associated with borrowing are calculated and disclosed...
. U. S. debit card holders are guaranteed reversal rights by Federal Reserve
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
Regulation E under the Electronic Funds Transfer Act. Similar rights extend globally pursuant to the rules established by the corresponding card association
Card association
A card association is a network of issuing banks and acquiring banks that process payment cards of a specific brand.-Examples:Familiar payment card association brands include Visa, MasterCard, American Express, Discover, Diner's Club, and JCB. Visa, MasterCard and American Express issuers co-brand...
or bank network.
A consumer may initiate a chargeback by contacting their issuing bank, and filing a substantiated complaint regarding one or more debit items on their credit card statement. Chargebacks are the consumer's last line of defense against unscrupulous merchants. The threat of forced reversal of funds provides merchants with added incentive to provide quality products, helpful customer service, and timely refunds as appropriate. Chargebacks also provide a means for reversal of unauthorized transfers due to identity theft
Identity theft
Identity theft is a form of stealing another person's identity in which someone pretends to be someone else by assuming that person's identity, typically in order to access resources or obtain credit and other benefits in that person's name...
.
Reason codes
With each chargeback the issuer selects and submits a numeric "reason code". This feedback may help the merchant (and acquirer) diagnose errors and improve customer satisfaction. Reason codes vary by bank network, but fall in four general categories:- Technical: Expired authorization, non-sufficient fundsNon-sufficient fundsNon-sufficient funds is a term used in the banking industry to indicate that a demand for payment cannot be honored because insufficient funds are available in the account on which the instrument was drawn. In simplified terms, a cheque has been presented for clearance, but the amount written on...
, or bank processing error. - Clerical: Duplicate billing, incorrect amount billed, or refund never issued.
- Quality: Consumer claims to have never received the goods as promised at the time of purchase.
- Fraud: Consumer claims they did not authorize the purchase, or identity theftIdentity theftIdentity theft is a form of stealing another person's identity in which someone pretends to be someone else by assuming that person's identity, typically in order to access resources or obtain credit and other benefits in that person's name...
.
One of the most common reasons for a chargeback is known as a fraudulent transaction. A credit card is used without the consent or proper authorization of the card holder. In some cases, a merchant is responsible for charges fraudulently imposed on a customer. Mostly, fraudulent card transactions originate with criminals who gain access to secure payment card data and set up schemes to exploit those data.
Chargebacks can also result from a customer dispute over credit
Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
. This type of chargeback is usually described as credit not processed. A customer may have returned merchandise
Merchandising
Merchandising is the methods, practices, and operations used to promote and sustain certain categories of commercial activity. In the broadest sense, merchandising is any practice which contributes to the sale of products to a retail consumer...
to a merchant in return for credit, but credit was never posted to the account. In this example, the merchant is responsible for issuing credit to its customer, and would be charged back.
Other types of chargebacks are related to technical problems between the merchant and the issuing bank, whereby a customer was charged twice for a single transaction
Financial transaction
A financial transaction is an event or condition under the contract between a buyer and a seller to exchange an asset for payment. It involves a change in the status of the finances of two or more businesses or individuals.-History:...
(duplicate processing) or other various mistakes. Yet other chargebacks are related to the authorization process of a credit card transaction, for example, if a transaction is declined by its issuing bank and the account is still charged.
Another reason for chargebacks is when a customer does not receive the item they paid for. In this case, a chargeback is initiated and the payment to the merchant is reversed.
Merchant recourse
For transactions where the original invoice was signed by the consumer, the merchant may dispute a chargeback with the assistance of their acquiring bank. The acquirer and issuer mediate in the dispute process, following rules set forth by the corresponding bank network or card associationCard association
A card association is a network of issuing banks and acquiring banks that process payment cards of a specific brand.-Examples:Familiar payment card association brands include Visa, MasterCard, American Express, Discover, Diner's Club, and JCB. Visa, MasterCard and American Express issuers co-brand...
. If the acquirer prevails in the dispute, the funds are returned to the acquirer, and then to the merchant.
Merchant penalties
The merchant's acquiring bankAcquiring bank
An acquiring bank is the bank or financial institution that processes credit and or debit card payments for products or services for a merchant. The term acquirer indicates that the bank accepts or acquires credit card transactions from the card-issuing banks within an association...
accepts the risk that the merchant will remain solvent
Solvency
Solvency, in finance or business, is the degree to which the current assets of an individual or entity exceed the current liabilities of that individual or entity. Solvency can also be described as the ability of a corporation to meet its long-term fixed expenses and to accomplish long-term...
over time, and thus has an incentive to take a keen interest in the merchant's products and business practices. Reducing consumer chargebacks is crucial to this endeavor. To encourage compliance, acquirers may, at their discretion, charge merchants a penalty per chargeback received. Payment service providers, such as PayPal, have a similar policy.
In addition, Visa and MasterCard
MasterCard
Mastercard Incorporated or MasterCard Worldwide is an American multinational financial services corporation with its headquarters in the MasterCard International Global Headquarters, Purchase, Harrison, New York, United States...
may levy severe fines against acquiring banks that retain merchants with high chargeback frequency. Acquirers typically pass such fines directly to the merchant. Merchants whose ratios stray too far out of compliance may trigger card association
Card association
A card association is a network of issuing banks and acquiring banks that process payment cards of a specific brand.-Examples:Familiar payment card association brands include Visa, MasterCard, American Express, Discover, Diner's Club, and JCB. Visa, MasterCard and American Express issuers co-brand...
fines of $100 or more per chargeback.
Other types of chargebacks
Accounts may also incur credit reversals in other forms, such as these:- ATM reversal: An ATM deposit envelope is found to have less funds than represented (if any) and a chargeback is made to correct the error. This could result due to a counting error or intentional fraud by the account holder, or the envelope or its contents could have been lost or stolen. If an overdraft results and the amount is too high or cannot be covered in a short period of time, the bank will sue or press criminal charges, unless the account holder has been the victim of the latter scenario, identity theftIdentity theftIdentity theft is a form of stealing another person's identity in which someone pretends to be someone else by assuming that person's identity, typically in order to access resources or obtain credit and other benefits in that person's name...
, or other fraud, and files a sworn police report. - Bank error correction: A bank error credits the account with more funds than intended and makes a chargeback to correct the error. If an overdraft results and it cannot be covered in time, the bank could sue or press criminal charges.
- Direct deposit chargeback: A direct deposit is made to the wrong account holder or in a greater amount than intended and a chargeback is made to correct the error.
- Returned check deposit: The account holder deposits a check or money order and the deposited item is returned due to NSF (Not Sufficient Funds), a closed account, or being discovered to be counterfeit, stolen, altered, or forged. This could occur due to a deposited item that he knows to be bad, or he could be a victim of a bad check or a counterfeit check scam. If an overdraft results and it is too huge or cannot be covered in a short period of time, the bank could sue or even press criminal charges.
Criticisms
Unscrupulous consumers may abuse the chargeback mechanism at the expense of merchants.- Consumers who experience buyer's remorseBuyer's remorseBuyer's remorse is the sense of regret after having made a purchase. It is frequently associated with the purchase of an expensive item such as a car or house...
, or engage in other forms of friendly fraudFriendly FraudFriendly fraud, also known as friendly fraud chargeback, is a credit card industry term used to describe a consumer who makes an Internet purchase with his/her own credit card and then issues a chargeback through his/her card provider after receiving the goods or services...
, may habitually reverse transactions. - Issuers who file a chargeback with an identity-theft related reason code have no obligation (and also a financial disincentive) to report the consumer's account as compromised. As a result, unscrupulous consumers have an incentive to report any unwanted item on their bank or credit card statement as "fraud".