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 transactions report.
A chargeback may occur on bank accounts or credit cards. They can be granted to a cardholder for a variety of reasons. A chargeback can be considered a refund since it returns specified funds taken from an account through a prior purchase. It differs from a voided charge which is never fully authorized for settlement. Chargebacks are focused on charges that have been fully processed and settled. Chargebacks can often take several days for full settlement as they must be reversed through an electronic process involving multiple entities.
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 are governed by Regulation Z of the Truth in Lending Act.
Charges can be disputed for many reasons. A cardholder may choose to return an item, they may have been charged by a merchant for items they never received, a merchant could have duplicated a charge by mistake, a technical issue may have caused a mistaken charge or a cardholder’s card information may have been compromised. Disputing a potential chargeback can be challenging for a cardholder as it requires time to dispute the charge with a customer service representative and may also require a receipt or proof of transaction.
The most common chargebacks occur when a cardholder chooses to return an item. If it is within the merchant’s allowable timeframe the merchant can initiate a chargeback as a refund. Other chargebacks may be more complicated. In the case of a fraudulent charge, banks are usually highly supportive in researching and issuing chargebacks in a situation where a card number has been compromised.
Chargebacks 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.
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 with a chargeback while also sending the claim to a collection department. In this case, a bank takes on the liability and expenses the chargeback 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.