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What is a Chargeback?

For businesses taking payment online, chargebacks can be a serious issue, as they lead to a loss in revenue. Plus, if they occur too regularly, penalties may be imposed. To be profitable, it’s important to take the necessary steps to minimise your business’ chargeback rate.

Find out a little more about credit card chargebacks, debit card chargebacks, and Direct Debit chargebacks with our simple guide.

Chargeback meaning

So, what is a chargeback? A chargeback – also referred to as a “reversal” or a "claim" – is when debit card funds, credit card funds, or Direct Debit funds used to make a purchase are returned to the buyer.

Chargebacks are relatively rare - at the time of writing, GoCardless has seen only 0.15% of our merchants' transactions we process charged back. However, it’s still important to have a solid understanding of what chargebacks are, why they happen, and what you can do about them.

Reasons for chargebacks

Chargebacks can occur for a variety of reasons. Usually, it’s because a consumer wants to dispute a fraudulent transaction made using their card. There are four key categories associated with chargebacks:

  • Fraud – Purchases that have been made without the buyer’s knowledge or consent

  • Quality – Purchases that were paid for but haven’t been received

  • Clerical – Purchases that the buyer has been billed for more than once, purchases that have been billed incorrectly, or refunds that haven’t been issued

  • Technical – Purchases that the buyer doesn’t have enough funds to cover, or bank errors

These are the “right” reasons to request a chargeback, but what are the “wrong” reasons?

  • Buyer’s remorse

  • Desire to avoid a handling fee

  • Desire to avoid a cumbersome returns process

  • Failure to return item before expiration date

  • Forgetting about or failing to recognise the transaction

As you can see, customers may wish to void a purchase due to any number of factors, but that doesn’t mean that they’re allowed to do so. If a merchant feels that a customer has misrepresented the situation and requested a chargeback for the wrong reasons, they can dispute the claim and – if successful – return the funds to their account.

How do chargebacks work?

Now that you understand a little more about the meaning of chargebacks, it’s time to look at how they work in practice.

Chargeback process for credit cards and debit cards

  1. Filing a chargeback – First, the customer contacts their bank (issuer) and requests a chargeback.

  2. Issuer reviews the chargeback – If the bank determines that the chargeback request is valid, the funds will be removed from the merchant account and credited to the customer. If they decide that the claim isn’t valid, the chargeback will be voided. At this stage, the merchant will receive a notification regarding the chargeback.

  3. Merchant reviews the transaction – Merchants can dispute a chargeback if they feel it is illegitimate. Initially, the chargeback will be presented to the acquirer, but if they don’t have any reason to dispute the chargeback, it will be forwarded to the merchant. If the merchant has sufficient evidence to dispute the chargeback, they can present it for review.

  4. Issuer re-reviews the chargeback – If the issuer decides that the evidence presented by the merchant refutes the claim, the funds will be reinstated to their account. If it doesn’t, the chargeback will stand, and the funds are permanently removed from the merchant’s account.

  5. Further action – After a chargeback has been finalised, the merchant may be issued with an additional chargeback fee as a penalty.

Chargeback process for Direct Debit in the UK (Bacs)

In the UK, Direct Debit payments operate through the Bacs scheme. Part of this scheme is the Direct Debit Guarantee, which protects customers paying by Direct Debit and empowers them to submit chargebacks. Here's how the process works:

  1. The customer contacts their bank and files an indemnity claim to charge back any Direct Debit payment that has been collected in error. (They will typically receive the funds back into their account on the same day.)

  2. The bank notifies the Direct Debit provider (e.g. GoCardless) of the chargeback and debits the amount of the chargeback from them. (For merchants with direct access to the scheme, they will be notified and debited directly.)

  3. The Direct Debit provider (where the merchant uses one) notifies the merchant and debits the amount of the chargeback from them.

Note: There is currently no time limit in which the customer must submit a chargeback under the Bacs scheme. They are able to submit it any time after the transaction has occurred.

Chargeback process for Direct Debit around the world

With Direct Debit chargebacks, the process for reclaiming the funds varies between schemes. In all cases, the process is started by the customer contacting their bank and asking for a chargeback.

Costs and consequences of credit card chargebacks

It’s very important to stay on top of your chargeback rate for the simple reason that it could have significant ramifications. Aside from lost revenue, there’s the chargeback fee, which usually ranges from £15 to £100 per transaction.

It’s also important to remember that if your business’ chargeback rate is above a set threshold, larger fines (around £10,000) could be incurred.

Furthermore, if your chargeback rate remains too high, your merchant account could be terminated, and you won’t be able to accept credit card payments at all.

How can my business minimise chargebacks?

There are many different strategies your business can use to reduce the chances of a chargeback:

  • Offer proof of delivery – Ensure you’re covered by requesting delivery information from your shipping partners to prove that items were delivered to their destination.

  • Encourage communication – Sometimes, chargebacks may be requested because the customer can’t work out what the charge refers to. By including your company name and number on your credit card transactions, customers are more likely to get in touch to find out more, rather than immediately requesting a chargeback.

  • Reduce manual processing – To cut down the chances of a clerical error or customers getting billed more than once, reduce your reliance on manual processes. For example, GoCardless offers automated payment collection for both ad hoc and regular recurring payments.

  • Improve your security processes – As fraud is the most common reason for chargebacks, you should ensure that you’re not accepting payment from fraudulent cards. There are a broad range of anti-fraud security practices that you can pursue. Make sure that your employees have been trained to prevent credit card fraud and follow PCI DSS compliance requirements to keep your cardholder’s data safe.

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GoCardless Ltd., Sutton Yard, 65 Goswell Road, London, EC1V 7EN, United Kingdom

GoCardless (company registration number 07495895) is authorised by the Financial Conduct Authority under the Payment Services Regulations 2017, registration number 597190, for the provision of payment services. GoCardless SAS (23-25 Avenue Mac-Mahon, Paris, 75017, France), an affiliate of GoCardless Ltd (company registration number 834 422 180, R.C.S. PARIS), is authorised by the ACPR (French Prudential Supervision and Resolution Authority), Bank Code (CIB) 17118, for the provision of payment services.