What Is a Chargeback?
A chargeback is a charge that is returned to a payment card after a customer successfully disputes an item on their account statement or transactions report. A chargeback may occur on debit cards (and the underlying bank account) or on credit cards. Chargebacks can be granted to a cardholder for a variety of reasons.
In the U.S. chargeback reversals for debit cards are governed by Regulation E of the Electronic Fund Transfer Act. Chargeback reversal for credit cards is governed by Regulation Z of the Truth in Lending Act.
- A chargeback is the payment amount that is returned to a debit or credit card, after a customer disputes the transaction.
- The chargeback process can be initiated by either the merchant or the cardholder’s issuing bank.
- Merchants typically incur a fee from the card issuer when a chargeback occurs.
- Federal law requires card issuers to offer chargebacks within 60 days of the date of billing.
- In cases other than fraud, you may be able to resolve your issue directly with the merchant, rather than by requesting a chargeback from your bank.
A chargeback can be considered a refund since it returns the funds taken from an account through a prior purchase. It differs from a voided charge, which is never fully authorized for settlement.
Chargebacks are done for charges that have been fully processed and settled. They must be reversed through an electronic process involving multiple entities. As a result, they can take several days to fully settle and return to the original account.
When to Ask for a Chargeback
Though the two terms are often used interchangeably, a chargeback is different than a refund. A refund is a repayment from a merchant when the original product was returned or sometimes because a product or service was faulty. A chargeback is when the card issuer returns funds to the account due to a disputed charge.
Charges can be disputed for many reasons, such as:
- A cardholder being charged by a merchant for items they never received
- A merchant duplicating a charge by mistake
- Mistaken charges caused by a technical issue
- Fraudulent charges from credit or debit card information that has been compromised
Typically, credit cardholders have a timeframe in which they can dispute a charge, known as the chargeback period.
Disputing a potential chargeback can be challenging. It requires time to dispute the charge with a customer service representative and may also require a receipt or proof of transaction. In the case of fraudulent charges, banks are usually highly supportive in researching and issuing chargebacks in a situation where a card number has been compromised. Other chargebacks may be more complicated.
In cases of fraud, you will need to contact your bank directly. However, many other disputes can be resolved by contacting a merchant directly, rather than requesting a chargeback through your bank.
The chargeback process can be initiated by either the merchant or the cardholder’s issuing bank. If initiated with a merchant the process is similar to a standard transaction; however, the funds are taken from a merchant’s account and deposited with the cardholder’s issuing bank.
For example, a chargeback initiated by a merchant would begin with a request sent to the merchant’s acquiring bank from the merchant. The acquiring bank would then contact the card’s processing network to send payment from the merchant’s account at the merchant bank to the cardholder’s account at the issuing bank.
Who Pays for a Chargeback
If a chargeback is initiated by the issuing bank, then the issuing bank facilitates the chargeback through communication on their processing network. The merchant bank then receives the signal and authorizes the funds' transfer with the confirmation of the merchant.
In some cases, such as with fraudulent charges, the issuing bank may grant the cardholder a chargeback while also sending the claim to a collection department. In this case, a bank takes on the liability and absorbs the cost through reserve funds while researching and resolving the claim.
Merchant acquiring banks will generally charge a fee to merchants for chargeback transactions. These fees are detailed in a merchant account agreement. Fees are typically charged per transaction to cover the costs by the processing network. Additional penalties for chargebacks may also apply.
How Do You Do a Chargeback on PayPal?
While PayPal has its own dispute resolution process, buyers also have the option of filing a chargeback with their own debit or credit card issuer. This process is determined by the card issuer, although sellers have an opportunity to dispute the chargeback through PayPal.
How Long Do I Have to Ask for a Chargeback?
The chargeback period, or the time limit for filing a chargeback, depends on the payment processor, but it can range from 60 to 120 days. The Fair Credit Billing Act allows chargebacks within 60 days of the billing date.
How Do You Fight a Chargeback?
When a customer initiates a chargeback, the merchant has a set period of time to respond. This varies by the payment processor but is usually around 30 days. At this time the merchant can provide the signed receipts, contracts, and any other documentation that shows that the chargeback is in error.
The Bottom Line
A chargeback occurs when a payment is returned to a debit or credit card after a customer disputes a transaction. A customer may dispute a transaction due to a duplicate charge, merchandise that was never received, or fraudulent charges. A chargeback is generally initiated by the cardholder's issuing bank, though it may also be initiated by the merchant.
Chargebacks come with fees, which are usually paid by the merchant. In cases other than fraud, you may be able to resolve the dispute by contacting the merchant directly.