Chargebacks: a definition
Chargebacks are a protection designed to help customers. When someone maliciously used their card without their knowledge (or they are dissatisfied with a product they bought online or over the phone), they can claim a forced reversal of funds to their bank account – or chargeback.
The funds have to be taken from the merchant’s account, and sent back to the customer. This can take weeks or months and cost a great deal in administrative fees, which are always passed on to the merchant.
1.1 KEY PLAYERS IN THE CHARGEBACK PROCESS
To understand why chargebacks are so expensive, it helps to see who is involved in the process:
- Buyer, or customer: the person who files a chargeback request. We’ll go into the numerous reasons later.
- Merchant: the online store or business that sold the goods or services. They can either accept the chargeback, or fight it through a dispute.
- Issuer: The bank connected to the buyer’s credit card.
- Acquirer: The bank or financial institution that processes card payments for
- Payment Gateway: the software used to transfer transaction data from the merchant to the acquirer.
- Credit card company: The organization that oversees the whole chargeback process. As we’ll see, major credit card companies have different procedures for dealing with chargebacks.
1.2 ANATOMY OF A CHARGEBACK
The positive consequence of having so many parties involved is that any of them can prevent or dispute a transaction if it looks suspicious. Unfortunately, this sometimes leads to false positives, which are frustrating for customers.