What is Chargeback and How do Payment Gateways Reduce It

Ever had that moment after a sale where, instead of a happy notification that you received your money, you get news that the customer wants their money back? That, in essence, is what a chargeback is.

It is like hitting the rewind button on a transaction, initiated by the customer contacting their bank or card issuer to dispute a payment they have made. For any business, especially those operating online, understanding what is a chargeback and how to minimise these disruptions is important to sustaining revenue and trust.

Payment gateway, the platform that facilitates online payments, plays a significant role not only in processing transactions but also in helping to reduce these unwelcome chargebacks. 

What is a Chargeback?

A chargeback is a direct reversal of funds after a customer disputes a debit or credit card transaction with their bank or card provider. 

It is a consumer protection mechanism designed to protect buyers from issues like fraud or receiving unsatisfactory goods or services. When a customer believes there’s a problem with a transaction, they can file a claim with their bank, initiating a process that can lead to the funds being taken back from the merchant.

What Are The Common Reasons For Chargebacks

Understanding why chargebacks happen is key to preventing them. Although cases vary from customer and transactions, here are some of the common causes:

Understanding these reasons is the first step in tackling the chargeback challenge. Knowing the ‘why’ helps you implement strategies to prevent them.

Certain sectors often see a higher frequency of chargebacks. These can include:

Online Retailers

Due to the ‘card-not-present’ nature of transactions, online retailers are susceptible to friendly fraud. For instance, a customer might claim they never received an item, even if it was delivered, or dispute a charge for a product they simply no longer want, effectively using the chargeback system as a convenient but unfair alternative to a return. 

Digital Goods and Services

With items like software downloads or streaming access, it can be difficult to definitively prove the customer received and used the service. This ambiguity or uncertainty can be exploited for friendly fraud, where a customer might claim non-receipt after accessing the content. Additionally, disputes can arise if the service does not not meet expectations.

Travel and Hospitality

Bookings for flights or hotels can be subject to cancellations and disputes over refunds or service quality. Unexpected fees or changes to itineraries can also lead to chargebacks. Furthermore, the higher transaction values can make these sectors attractive targets for actual fraud using stolen card details.

Subscription Services

Subscription services are increasingly common and with it, customers may forget about recurring payments or find it difficult to cancel their subscriptions, leading to chargebacks when they see unexpected charges. Disputes can also arise if the service quality declines or if promised features are not delivered. 

High-Value Goods

Items like electronics, jewellery, or luxury goods are prime targets for actual fraud due to the significant financial gain for criminals. Merchants in this sector need to be very vigilant with security measures. Additionally, disputes over the authenticity or condition of these items can also lead to chargebacks.

Remote Sales

This includes telemarketing or sales made through social media without a formal e-commerce setup. Lack of clear documentation, aggressive sales tactics, or misunderstandings about the product or service can result in customers disputing the charges later.

What Happens When a Chargeback Occurs?

It’s useful to understand the typical flow of a chargeback to better help understand the process:

1. Customer Files a Dispute: The customer contacts their bank or card issuer.
2. Issuing Bank Reviews: The bank assesses the customer’s claim.
3. Chargeback Notification: If deemed valid, the issuing bank notifies the acquiring bank (your bank, often via the payment gateway).  
4. Merchant Notification: You receive notification of the chargeback, usually through your payment gateway or acquiring bank, along with a reason code.  
5. Merchant Response: You have the option to accept the chargeback or dispute it by providing evidence.
6. Issuing Bank Decision: The issuing bank reviews all the information and makes a final decision.
7. Funds Adjustment: If the chargeback is upheld, funds are debited from your account and credited back to the customer. You might also incur a chargeback fee.

How Payment Gateways Reduce Chargebacks

Modern payment terminals offer several features and functionalities that can act as a strong defence against chargebacks. They provide tools and processes that help verify transactions, manage risks, and provide evidence if a dispute arises. Here is is how they contribute:  

1. Advanced Security Features

Payment gateways employ various security measures to authenticate transactions and detect suspicious activity such as false card swipes or possible fraudulent BNPL transactions.

• Address Verification System (AVS): This checks if the billing address provided by the customer matches the address on file with their card issuer.  
• Card Verification Value (CVV): Asking for the three or four-digit security code on the card helps ensure the person making the purchase has physical possession of the card.  
• 3D Secure: This adds an extra layer of authentication, often redirecting the customer to their bank for verification (e.g., using a one-time password).  

By acting as a secure intermediary and offering tools for verification and monitoring, payment gateways are a valuable ally in the fight against chargebacks.

2. Fraud Monitoring and Detection

Many gateways have built-in systems that analyse transaction patterns and identify potentially fraudulent activities based on various risk indicators. They can flag suspicious transactions for review, allowing you to take action before they potentially turn into chargebacks.  

3. Clear Transaction Information

Gateways ensure that the billing information that appears on the customer’s statement is clear and recognisable. This can greatly reduce non-recognition chargebacks, a common form of friendly fraud.

4. Providing Transaction Records

In the event of a chargeback, the payment gateway can provide detailed records of the transaction, including timestamps, IP addresses, and other relevant data. This information can be invaluable when you need to dispute a chargeback and demonstrate the legitimacy of the sale to the customer or bank.  

5. Integration with Dispute Management Tools

Some gateways offer direct integration with dispute management platforms, streamlining the process of responding to chargebacks and providing evidence. This can save time and make it easier to organise your defence.  

6. Guidance and Best Practices

Reputable payment gateway providers often offer advice and resources on how to minimise chargebacks based on their experience and industry best practices. They can help you understand common pitfalls and suggest preventative measures.

Actions You Can Take To Minimise Chargebacks

While payment gateways offer significant help, there are also preventive steps you can take to reduce the likelihood of chargebacks. After all, prevention is better than cure and the fewer chargebacks for merchants, the better.

• Provide clear and accurate product descriptions and images.
• Ensure your shipping and return policies are easily accessible and understandable.
• Offer prompt and helpful customer service. Address queries and complaints quickly.
• Use clear and recognisable billing descriptors.
• Obtain proof of delivery for shipped goods.
• Consider using tools like order tracking and signature confirmation for higher-value items.
• Keep records of all customer communications.

The Cost of Chargebacks

Chargebacks can be expensive. You not only lose the money from the original sale but might also have to pay a chargeback fee. 

High chargeback rates can also lead to increased processing fees and even the risk of losing your payment processing facilities. It is therefore in your best interest to take proactive steps to keep them to a minimum.  

Conclusion On Chargeback and Payment Gateway

Grasping what is a chargeback and the reasons behind it is important for any business operating online. 

At Paydibs, we get the impact of these disputes, which is why our smart payment terminals incorporate strong security measures such as AVS, CVV, and 3D Secure, alongside smart fraud monitoring, all designed to give you a solid footing against unauthorised activity and unfair claims.

While we cannot promise a completely chargeback-free world, our goal is to equip you with the right tools to reduce them significantly and handle any that come your way effectively. 

Choosing Paydibs means selecting a partner focused on building a secure and reliable payment system for you and your customers, ultimately protecting your earnings and promoting positive interactions.

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