Understanding Chargebacks: What Merchants Need to Know

Chargebacks can occur when you are selling in person or online and a card transaction occurs. 

As a merchant, you may have already experienced chargebacks. If/when they do occur, we hope the following guidance will allow you to understand the reasons for this, what is required of you and how you can take steps to avoid or minimize them.  

Think of a chargeback as a challenge to a previously accepted transaction, which occurs when a customer contacts their debit or credit issuer and requests a refund of the transaction they successfully completed with you… 

The following provides details of what a chargeback is, when a customer is entitled to a chargeback, what you must do to accept or support us in defending a chargeback, the different types of chargebacks, and how to take steps to avoid or reduce the chances of chargebacks being raised by your customers. 

Chargebacks – what are they?

 A chargeback is raised when a customer reports or disputes the validity of a previously successful charge on their debit or credit card with the card issuer, asking them to issue a refund of the previously successful transaction. 

Chargebacks are usually initiated with the card issuer by the customer who made the transaction. For a customer to begin the chargeback process, they must report the dispute within a specific time — usually up to 120 days after the transaction date. It is recommended that the customer should firstly contact the merchant to try and resolve the issue, but this is not a hard requirement. 

For instance, a scenario that would result in a chargeback report by a customer would be where they have purchased a product or service from you, which is either delivered in a damaged state or not delivered at all. The customer would have the right to raise a chargeback request with their card issuer that completed the transaction on their behalf. 

Other reasons for a chargeback request could include, but are not limited to: 

• The product was not as advertised. 
• The customer was charged twice for only one item. 
• The service did not provide the required contractually supported outcome. 

If the chargeback is approved, the customer receives the transaction amount back. However, if the merchant disagrees with the basis on which the chargeback has been raised, the merchant can defend the chargeback and the customer’s card issuer will have to determine if the chargeback is valid and if funds should be reimbursed to the customer. 

Is there a difference between a chargeback and refund? 

Both chargebacks and refunds may involve the return of funds for a transaction, but there are a few significant differences in the two events. 

A refund is the return of funds to the customer from the merchant. Refunds are at the discretion of the merchant and are completed on a voluntary basis. They do not involve the customer’s card issuer and are the result of a direct agreement between the merchant and the customer. 

For instance, in the scenario mentioned previously, the customer could have opted to contact the merchant to request a refund rather than raising a chargeback. If the merchant agreed, the customer would have received the refund directly. This supports relationships with regular customers and is also a quicker and less intensive activity to responding to a chargeback request. 

If the customer was unable to contact the merchant or the merchant does not agree to the refund request, the customer may progress the matter by reporting a chargeback to their card issuer.  

Chargeback Related Terms 

Below is a helpful list of terms that may be used in the chargeback process: 

• Chargeback or chargeback dispute: A claim by a customer relating to a previously completed card transaction that is made directly to their card issuer, resulting in a forced payment reversal.  
• Pre-arbitration (pre-arb): This is where the customer chargeback is referred to the card acquirer (i.e. myPOS in relation to your service) with details and evidence to support the case. 
• Retrieval: Where a customer makes a request for details of a charge on their account that relates to a card transaction. This provides the merchant with an opportunity to explain what the charge related to (service/product). 

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Reasons for chargebacks 

There are many reasons that a customer may opt to raise a chargeback. Five  common examples are detailed below: 

• Did not receive the item they ordered and paid for — this can also include where the item or service is not as advertised. 
• Received a damaged or defective item. 
• Does not recognise the debit or credit card charge. 
• Is double or triple charged for a single item or service.  
• Claims their account has been used to purchase an item fraudulently without their permission or authorization — where the customer alleges, they did not order the item/service or did not receive this item or service. 

The Chargeback Process 

Step 1 

A customer has a reason to raise to seek a refund for a service or item previously purchased. 

Step 2 

The customer makes a reasonable attempt to contact you (the merchant) to resolve the matter. They are either unsuccessful in contacting you or you refuse to honour their refund/replacement request. 

Step 3 

They raise a chargeback with their card issuer. 

Step 4 

myPOS receives notification of the chargeback and contacts you for details of the matter and confirmation if you accept the chargeback or wish to dispute it. We will also debit the chargeback amount from your account. This ensures that is the chargeback is accepted it will not result in an unexpected debit being processed on your account. It also ensures that your available credit is not the subject of challenge. 

Step 5 

If you opt to dispute the chargeback, we require that you provide evidence that supports your belief that the service or item has been provided as per the transaction completed. 

Step 6 

 myPOS will respond with its assessed position to the Card Issuer and they will review the case and provide a ruling. 

Step 7 

If the Card Issuer rules in your favour, the disputed amount will be credited to your account. If you lose or accept the chargeback, the customer will receive the funds, and the matter will be resolved. 

Step 8 

Arbitration may be requested at an additional cost in the event that your position has not been accepted and you wish to challenge the decision outcome. 

How Important are Chargebacks to you 

Chargebacks have a fiscal impact on your account value, but they can also have additional impacts on your business and account due to associated contractual fees and public perception: 

• Incurring fees and costs: When you deal with a chargeback, you may be subject to additional charges from card issuers. 
• Impacting your chargeback ratio: Whether you win or lose a chargeback request, it will affect your chargeback ratio. This is like a credit rating for you as a merchant with the Card Schemes, such as Mastercard and VISA. This can impact the service they provide to you via myPOS. In simple terms, the more chargeback requests you lose as a merchant, the higher your chargeback ratio and the more likely the Card Schemes will view your business as high-risk. This may then result in increases in scheme related fees for every transaction you process, which will impact your revenue position.  

Even if you win a chargeback dispute, your chargeback ratio can be impacted. Your chargeback ratio is the percentage of payment disputes you face relative to your total number of transactions. It is best to keep this ratio low. A chargeback ratio under 1% is considered a good ratio, but 0% is the ideal.  

• Reputational Damage: Customers view the service provided by a merchant or the provision of a purchased item to be in an acceptable condition as a standard requirement.  If this does not occur, then they place greater weight on the way a Merchant then deals with the dispute. Although refund requests are often not the targeted outcome, the way they are managed can lead to positive reputational outcomes. On the other hand, where a refund request is not overseen well or there are significant chargebacks raised against a merchant it can lead to reputational damage. This risk is exacerbated with the more common usage of social media to comment on services received and to share details of the various issues individuals have experienced with merchants.  

What we need from you when a chargeback is received 

There are many things that can have an impact on both your and our ability to defend a chargeback: 

• Customer Service history:  Previous details of either positive or negative customer experiences give an indication of the validity of a chargeback. For instance, positive customer reviews will support the defence of a chargeback if you have a record of refunding when the service or item was not provided as expected. 
• What your business does:  Different types of businesses receive chargebacks for varied reasons and there are also certain business types where chargebacks are more regular. Merchants who deal with goods online for instance have additional risks regarding delivery of the item in pristine condition. Where a merchant provides a service, customers may raise a chargeback if they believe the service has not been provided as advertised. 
• Good recordkeeping:  The quality of the documentation that you provide to myPOS where you wish to dispute a chargeback is critical to allow us to defend the chargeback on your behalf. Failure to provide detailed documentation or respond to our requests will result in a probable loss of the chargeback.  Evidence that confirms the condition of an item, delivery confirmation, customer acceptance etc. greatly strengthens our and your ability to dispute a chargeback. 
• Due diligence: The speed and level of detail you can provide on receipt of a chargeback notification from myPOS indicates to us how you do business overall and how prepared you are to handle a chargeback dispute. 

How can you protect yourself against Chargebacks? 

Here are our top tips to reduce chargebacks and to strengthen your position when they do occur: 

Tip 1 

Have clear and easily understandable terms and conditions – with special focus on the returns and refunds conditions that apply to items or services you provide. Place these in an easily available section of your website. Ensure all employees are aware of the conditions and approach that needs to be taken should a return or refund request occur. 

Tip 2 

Always strive to provide customer service – this supports resolution of grievances and the reduction of the potential for chargebacks to occur.  For example, answer customer queries quickly and identify where a query is a complaint. Provide tracking for items that are being dispatched to customers to reduce delivery related disputes. This also supports the management of customer expectations regarding delivery timeframes. Good service reduces the chance of issues escalating to chargeback status. 

Tip 3 

Keep detailed and available sales records; to defend chargebacks, we need evidence. Receipts and shipping information are especially important when attempting to dispute a chargeback. Keep records of all mails/calls with a customer where a dispute is developing, as these may help with disputing the chargeback. 

Tip 4 

Ensure your billing descriptor is clear and contains your business name – this will remove the chance of customers being unable to identify transactions associated with a sale or provision of service. Make sure the name is the same as your brand if your registered business name differs. 

Tip 5 

Ensure your contact details are readily available to customers – Ideally these should be easily accessible on your website and noted on the receipts you provide, whether electronically or physically. 

Tip 6 

Monitoring transactions received – you are the most informed person about your business and know what to expect regarding sales and orders. Where you see orders that are not the norm we would recommend further consideration. Sometimes if it looks to good to be true – it is. 

Chargebacks & Fraud 

Friendly Fraud? 

Chargeback fraud is sometimes mistaken as friendly fraud, as it occurs when a customer purchases an item or service with a card online and then disputes the charge with their bank – even when the item or service has been provided as advertised. 

Understanding the legitimacy of cases like this can be critical in how you respond to a chargeback claim – and can help prevent chargebacks as a merchant. Ask yourself, did we deliver the item, was it delivered in a reasonable period, and was the product or service received as advertised. If you believe that a chargeback is fraudulent, please provide evidence to support this position at the earliest opportunity. 

How Chargebacks may impact the service provided by myPOS 

As stated, we require your support to defend chargebacks and respond to raised cases in a timely manner, as required by Card Scheme rules.  

If we do not receive a timely response to our request for details, or where a received chargeback results in a negative balance on your account, or where the chargeback ratio is above expectations, as stated in the Merchant Agreement we may: 

• Suspend provision of the myPOS Service or elements of it. 
• Place a reserve on your account for a period up to 180 days, to protect us from chargeback claims. 
• Suspend the ability to withdraw funds or use an associated myPOS issued debit card. 
• Terminate your account. 

We hope this guide has been helpful and should you have any chargeback queries, please contact us at +44 74 4137 0710