The card issuing bank will investigate disputes, and will "charge back" the value of the original transaction directly from the merchant's acquiring bank, which is obligated under card network rules to pay the card issuer. The merchant's acquirer will then attempt to recover an equal value of the chargeback plus a processing fee from the merchant's bank account. Chargebacks are typically passed on to the merchant as a matter of acquirer policy unless the merchant can prove the transaction was legitimate, or goods and services have been rendered to a customer claiming otherwise.
Sometimes the consumer dispute is untrue, and their refund claim gets denied. In these situations, the merchant will sometimes still be charged processing fees.
In cases of credit card fraud, the merchant loses the goods or services sold, the payment, the fees for processing the payment, any currency conversion commissions, and the chargeback processing fee. For obvious reasons, many merchants take steps to avoid chargebacks - such as not accepting suspicious transactions. This may spawn collateral damage, where the merchant additionally loses legitimate sales by incorrectly blocking legitimate transactions.
There are other forms of credit reversals that may also be referred to as chargebacks listed below.
A retrieval request is a "pre-chargeback" and a request for a merchant's documentation of the transaction in question. Retrievals may also incur a fee. Some providers charge $10-$20 and others do not refund this.
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.
List of reasons for a chargeback:
Thieves occasionally abuse the chargeback system. For example, in a "Friendly Fraud", an unscrupulous customer will make a purchase over the Internet with his own credit card and then issue a chargeback once the product or service is received. In such cases merchants can have difficulty recovering payment.
Chargeback processing (handling) is complex as a result of frequent rule changes by the major credit card companies (MasterCard, Visa, American Express, etc.). There is an emerging market for business software that simplifies the chargeback process as well as separate chargeback processing services.
It is possible for the chargeback and associated fee to cause an overdraft or leave insufficient funds to cover a subsequent withdrawal or debit from the merchant's account that received the chargeback. This could cause pending checks to be returned due to non-sufficient funds. Unless the merchant detects the chargeback in time to cover pending debits, a snowballing effect of penalties assessed could result.
Credit card companies require that, for internet purchases, when the items are delivered, the cardholder must sign in their name and other names like roommates or family members do not count. Without the cardholder's own signature, it is not counted as delivered.
Address verification also provides protection by partially verifying the cardholder's address, however the cardholder's signature is most important.
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