A chargeback is a term that causes major headaches for many merchants. This process is nothing more - and nothing less - than the customer's request for a refund directly to the card issuer. The problem is that, unlike cases such as cancellations, refunds, and right of withdrawal, in this scenario the merchant can lose the sale value without even knowing the reason or having any responsibility for the problem.
In this article, we explain what a chargeback is, why it is important to be aware of this risk, and what measures can minimize its occurrence, both for merchants and card issuers.
A chargeback is the reversal of a payment transaction requested directly from the card-issuing bank, without the buyer contacting the store or service where the purchase was made. It is used in different cases, such as when the customer claims that a purchase involved:
Fraud (which represents 91% of dispute cases in e-commerce transactions);Product not received, lost, or delayed delivery;Damaged product;Billing or payment errors, such as value discrepancies or duplicate charges.
After an analysis process, if the decision favors the customer, the amount must be refunded: in the case of a debit card, returned; in the case of a credit card, removed from the customer's bill.
Depending on the situation, chargebacks can bring various disadvantages to a business. The main reason is that the merchant is exposed to the risk of not having the sale amount credited to their account, even for reasons beyond their control.
For example: when a customer requests a chargeback instead of finding an amicable solution with the establishment where the purchase was made, the merchant may end up bearing the loss. This happens even when it is confirmed that there was, for example, fraud in the use of the card for a purchase, such as the use of a stolen card, leading to issues like:
Losses and damage to cash flow due to returned sales;Costs with administrative fees and penalties;Damage to the merchant's image and reputation;And even payment restrictions if it suffers many chargeback requests.The chargeback works differently from other refunds made directly between the consumer and the merchant. Let's see how the other forms of cancellation and payment refund work:
Cancellation: When the seller themselves requests the reversal of a transaction. For example, when the customer received a defective product and agrees to a refund;Refund: When the seller returns the value of a transaction in agreement with the customer, generally when a product or service does not meet the customer's expectations;Right of withdrawal: When, by consumer right provided by law, a purchase is canceled within up to X number of days after receiving the product (depending on the country). In this case, the customer can request the cancellation of the purchase and the return of the amount paid.Considering how the chargeback process mainly affects e-commerce (which is expected to grow by 95% worldwide between 2022 and 2025, according to FIS), it is very important that all parties involved in the process limit the need to undergo chargeback procedures as much as possible. For this, the main focus should be on mitigating fraud risks and other security issues in payment methods. This is valid for all parties involved, whether they are merchants or in the card market.
Our first advice is: when a chargeback occurs, it's important to have documents and records of the sale. With this, you can dispute it and demonstrate during the dispute process that you committed no irregularities and should not have the sale amounts withheld.
But it doesn't end there. For an online merchant or service provider, other actions are useful to minimize the incidence of chargebacks and reduce the risk of compromising income:
Reinforce security: Considering that fraud is the main reason consumers seek chargebacks, investing in security and antifraud tools to detect suspicious or fraudulent transactions is a smart decision. This helps prevent malicious customers from making purchases with stolen information. For example: Clear refund policy: It is advisable to provide customers with a transparent and easy-to-understand refund policy. This helps to avoid situations where the customer requests a chargeback, when the issue could actually be resolved through a direct refund or by easily dealing with the merchant.Improve communication: Along the same lines as clarity in the refund policy, it is worthwhile to maintain transparent and efficient communication with customers. A good practice is to have a specialized team to quickly respond to doubts and concerns, preventing customers from resorting to a chargeback due to lack of adequate attention, and also to keep open channels for them to evaluate the product/service sold.It's not just merchants who play an important role in reducing chargebacks. The card market (such as issuers, processors, and acquirers) already adopts an increasingly advanced series of measures to ensure transaction security and protect both consumers and sellers. Some measures that can help reduce chargebacks, particularly for issuing banks, include:
Fraud detection systems for identifying suspicious transactions are becoming increasingly sophisticated. They now include analysis of customers' spending patterns, their geographic location, card information, and other metrics. Upon identifying suspicious activity, an issuer can block a purchase or contact the customer in real time to verify the authenticity of the transaction.
In cases of stolen, cloned, or lost cards, card administrators can act quickly to block the card and prevent fraudulent transactions from being made with it.
As our regional director of Risk and Fraud, Gilmar Magi, explains, certain layers and security configurations on the cards can help mitigate the risks of fraud in card usage and, consequently, minimize the occurrence of chargebacks. They are:
The 3D Secure protocol, which we discussed previously;The dynamic CVV process, similar to 3D Secure, which generates a random 3-digit security code, valid only at the time of purchase;Temporary blocking of e-commerce or NFC (contactless) purchases, including via apps;Travel notice, blocking international transactions until this notice is activated;PIN/Password to view the virtual card data in the issuing bank's application.In addition, other key actions in this regard include a good KYC verification and monitoring system (such as for suspicious activities and background checks), as well as regular registration updates.
Have you seen bank campaigns aimed at raising consumer awareness about security practices? That's right: card issuers can provide customers with information and guidance on how to protect themselves against fraud and how to deal with chargeback situations. This helps consumers become more aware of good security practices when making online transactions.
Card issuers are responsible for investigating and managing each chargeback request they receive, including questionable ones. They may request additional information from the customer and the seller to evaluate the validity of the claim and decide whether to reverse the transaction. Cards issued by Pomelo, for example, are backed by an API to facilitate and optimize the management of disputes in payment transactions made through our platform.
Chargebacks are a very valid measure to protect consumers, but they create a series of risks for businesses that accept card payments. It is not surprising that it is so important for everyone to be aware of the implementation measures, especially anti-fraud ones, to minimize the occurrence of chargebacks and protect all parties involved: customers, merchants, and the card market!
Journalist and Master in International Relations from Rio de Janeiro. He was a reporter, editor, producer, and researcher before joining our Marketing team. Curious and playful, he compares himself to a sponge: wherever he goes, he likes to absorb, learn, and experience what each place uniquely offers. He loves music, books, pets, cooking, social issues, soccer, and tennis.
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