A
chargeback is the return of funds to a consumer, forcibly initiated by the consumer's
issuing bankAn 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 accountA bank account is a financial account with a banking institution, recording the financial transactions between the customer and the bank and the resulting financial position of the customer with the bank....
or
line of creditA line of credit is any credit source extended to a business by a bank or financial institution. A line of credit may take several forms such as cash credit, overdraft, demand loan, export packing credit, term loan, discounting or purchase of commercial bills etc. It is like an account that can...
.
The chargeback mechanism exists primarily for
consumer protectionConsumer protection laws are designed to ensure fair 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 Regulation Z under the
Truth in Lending ActThe Truth in Lending Act of 1968 is a United States federal law designed to protect consumers in credit transactions, by requiring clear disclosure of key terms of the lending arrangement and all costs. The statute is contained in Title I of the Consumer Credit Protection Act, as amended...
. U.S. debit card holders are guaranteed reversal rights by Federal Reserve Regulation E under the
Electronic Funds Transfer ActThe Electronic Funds Transfer Act, also known as Regulation E, was implemented in the US in 1978 to establish the rights and liabilities of consumers as well as the responsibilities of all participants in EFT activities.-EFT Errors:...
.
A
chargeback is the return of funds to a consumer, forcibly initiated by the consumer's
issuing bankAn 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 accountA bank account is a financial account with a banking institution, recording the financial transactions between the customer and the bank and the resulting financial position of the customer with the bank....
or
line of creditA line of credit is any credit source extended to a business by a bank or financial institution. A line of credit may take several forms such as cash credit, overdraft, demand loan, export packing credit, term loan, discounting or purchase of commercial bills etc. It is like an account that can...
.
Overview
The chargeback mechanism exists primarily for
consumer protectionConsumer protection laws are designed to ensure fair 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 Regulation Z under the
Truth in Lending ActThe Truth in Lending Act of 1968 is a United States federal law designed to protect consumers in credit transactions, by requiring clear disclosure of key terms of the lending arrangement and all costs. The statute is contained in Title I of the Consumer Credit Protection Act, as amended...
. U.S. debit card holders are guaranteed reversal rights by Federal Reserve Regulation E under the
Electronic Funds Transfer ActThe Electronic Funds Transfer Act, also known as Regulation E, was implemented in the US in 1978 to establish the rights and liabilities of consumers as well as the responsibilities of all participants in EFT activities.-EFT Errors:...
. Similar rights extend globally pursuant to the rules established by the corresponding
card associationA 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 theftIdentity theft is a term used to refer to fraud that involves someone pretending to be someone else in order to steal money or get other benefits. The term is relatively new and is actually a misnomer, since it is not inherently possible to steal an identity, only to use it...
.
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 funds
"Non-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 check 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 theft
Identity theft is a term used to refer to fraud that involves someone pretending to be someone else in order to steal money or get other benefits. The term is relatively new and is actually a misnomer, since it is not inherently possible to steal an identity, only to use it...
.
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
creditCredit is the provision of resources by one party to another party where that second party does not reimburse the first party immediately, thereby generating a debt, and instead arranges either to repay or return those resources at a later date. It is any form of deferred payment...
. 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
transactionA financial transaction is an event or condition under the contract between a buyer and a seller to exchange an asset for payment. In accounting, it is recognized by an entry in the books of account. It involves a change in the status of the finances of two or more businesses or...
(
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 associationA 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 bankAn acquiring bank is the bank or financial institution that accepts payments for the products or services on behalf of a merchant...
accepts the risk that the merchant will remain
solventIn finance or business, solvency is the ability of an entity to pay its debts. Solvency can also be described as the ability of a corporation to meet its long-term fixed expenses and to accomplish long-term expansion and growth. The better a company's solvency, the better it is financially...
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
MasterCardMasterCard Worldwide is a multinational corporation based in Purchase, New York, United States. Throughout the world, its principal business is to process payments between the banks of merchants and the banks of purchasers that use its "MasterCard" brand debit and credit cards to make purchases....
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 associationA 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 theft
Identity theft is a term used to refer to fraud that involves someone pretending to be someone else in order to steal money or get other benefits. The term is relatively new and is actually a misnomer, since it is not inherently possible to steal an identity, only to use it...
, 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 remorse
Buyer's remorse is an emotional condition whereby a person feels remorse or regret after a purchase. It is frequently associated with the purchase of higher value items which could be considered unnecessary although it may also stem from a sense of not wishing to be "wrong".In an extreme situation,...
, or engage in other forms of friendly 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".
- Fluctuation in currency exchange rates is not taken into account in the chargeback process. A consumer who initiates a chargeback on an international purchase may receive an entirely different amount in return. The acquirer (and merchant) may be obligated to pay the difference.