How Does A Chargeback Work?

The eCommerce segment has exploded to touch most people, consumers, or businesses. The industry was a humble $1.3 trillion in 2014 and has snowballed to $4.1 trillion by 2020. The U.S. accounts for the second-largest portion of global online sales. 

As an entrepreneur, you, too, want to participate in this “gold-rush” but are concerned about the huge threat that chargebacks pose. A better understanding of how does a chargeback work will help you avoid them to a great extent. The attempt here is to explain the chargeback process to help you safeguard your interests. 

Cardholder Files a Complaint 

The process begins when the cardholder notices an unfamiliar charge on their statement. They will call their bank and file a dispute with them. 

Issuing Bank Sends Inquiry to Acquiring Bank

The issuing bank is one that issued the customer’s credit/debit card. The acquiring bank is your banker that collected the payment on your behalf. Your bank will, in turn, send the dispute to you for further inquiry. 

Merchant Accepts or Contests It

You have an option to agree to the chargeback and carry on or contest it. If you agree, you return the amount plus the chargeback processing fee. If you decide to contest, you will have to send the relevant proofs about the charge.

Important Tip

You must maintain scrupulous documentation. You will have to show what security measures you used to verify that the cardholder had authorized the transaction. You will also have to provide details such as the date, time, items purchased, shipping address, and the total amount charged, including shipping.

Only when you can prove that you were thorough from your side will you be able to contest a chargeback successfully. If you are wondering, “how does a chargeback work?” the following will help dispel the mystery surrounding it. 

Your Bank Sends Evidence to the Customer’s Bank

When your bank has verified the evidence you presented and agrees that the chargeback is invalid, they will forward the same to the customer’s bank to verify it further.

How Evidence Can Be In Your Favor

It may be that the customer gave their card to a friend or family and forgot about it. Another reason could be that the customer wants to return the product, and instead of contacting you, they contacted their bank. There are many reasons why the customer’s dispute may be in your favor, even though the chargeback process was initiated to protect them.

Issuing Bank Decides

After verifying the customer’s evidence, the issuing bank will rule in your favor or the customer. If the proof, for any reason, is unsatisfactory, the will file a second pre-arbitration, and the process will begin all over again.

Timelines

The cardholder has 45 to 180 days to file a dispute. It depends on the issuing bank’s policies. The issuing bank will take two to six weeks to review the claim. Only after they confirm that it is valid will they send it to the acquiring bank. Your banker will also take a couple of weeks to review the claim and forward it to you. 

You will be given 7-10 days to respond to the claim. As a merchant, you should respond to the claim as a priority. A prompt response will represent you as a reliable business person. 

While chargebacks were put in place to safeguard consumer interests, they can also work in your favor. So long as you have used enough security measures to avoid frauds from being carried out on your eCommerce platform, you can be assured that chargebacks will work for your benefit. Knowing how does a chargeback work will help you create protocols that help avoid them.