is a reversal of a payment card transaction initiated by the consumer who holds the card or the bank that issued the card used in the purchase. This differs from a refund or "credit," which is agreed to and initiated by the merchant at the point-of-sale. A chargeback usually occurs when a
consumer files a dispute with their bank or credit/debit card
provider. This can happen when a consumer discovers fraudulent or improper
transactions on their card statement or online account view. Consumers in the US who use credit cards are afforded chargeback rights under Federal Reserve Regulation Z
, which is made possible by the Truth in Lending Act
. US debit card holders are guaranteed similar rights under Federal Reserve Regulation E
, which is made possible by the Electronic Funds Transfer Act
. Card networks enforce chargeback rights globally through their network rules and regulations.
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
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.
Reasons for chargeback
Most chargebacks are initiated by the cardholder, who may contact his/her card issuing bank regarding an inconsistency in his/her monthly credit card statement. This begins the dispute process that may eventually lead to a chargeback, and a reinstatement of credit to the cardholder's account.
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:
- Card holder requests a copy of the transaction receipt.
- Card holder did not authorize the transaction.
- Non-matching account number.
- Transaction was processed more than once.
- Transaction receipt was not imprinted.
- Refund not processed.
- No authorization.
- Customer never received merchandise/services.
- Card not used within valid expiration date.
- Services not rendered.
- Error in transaction amount.
- Transaction receipt is incorrect, incomplete, or illegible.
- Transaction processed for incorrect amount.
- Product different from what was described or promised.
- Counterfeit transaction.
- Transaction not processed within Visa or MasterCard time frames.
- Failure to obtain card-holder signature.
- Signature on the card was blank.
- Signature on receipt different from card.
- Card-holder claims merchant changed transaction amount without permission.
- Merchant knowingly participated in a fraudulent transaction.
- Incorrect Transaction Date.
- Card-holder claims invalid mail or telephone order transaction.
- Card-holder was denied ability to return item.
- Transaction was not canceled successfully.
- Card-holder not satisfied with quality of product or services.
- Debit-cardholder's bank initially approves a transaction, but subsequently returns the charge due to non-sufficient funds, an account closure, or the bank "locking" the card due to a subsequent unauthorized use, loss or theft of the card, or multiple unsuccessful attempts to use it at an ATM.
- Buyer's remorse
- Buyer initiating a false chargeback after receiving goods or services; this is considered fraud.
A merchant is billed for chargebacks as they occur, along with other fees and settlements associated with credit card acceptance. Because a merchant may be charged back in error, and because chargebacks may often involve complicated customer disputes, a chargeback may be appealed by the merchant. This process varies by credit card. If the chargeback is found to have been in error, the transaction will be "re-presented" and the merchant will be granted a reversal
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.
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, 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, 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.
- PayPal user agreement. Section 4.5 lists chargeback info. Section 8 lists chargeback fees.