Chargebacks are transactions that are disputed by the cardholder. Chargebacks were established to protect cardholders from unauthorized transactions. Once a chargeback is initiated, the merchant may not find out about it for up to 120 days after the purchase. In the meantime, the chargeback journeys through the issuing bank, the card association and the acquirer. The issuing bank investigates the dispute and, if it finds the fraud claim to be legitimate, will refund the amount of the transaction and deduct the amount from the merchant’s account. Chargebacks cost merchants the the cost of the refund, the cost of the goods/services sold, the time spent investigating the chargeback and fines and fees by the card brands.
Chargebacks also cost the merchants in the form of reputation with the acquirers and card brands. When a merchant receives too many chargebacks, it is placed on a monitoring program where it much lower their chargeback ratio or face additional fines and penalties. If it fails to keep chargebacks in check, the merchant may have its merchant account terminated. After account termination, merchants may find it very difficult to re-establish another merchant account. Fortunately, there are payment processors like MerchACT who specialize in working with high-risk merchants who have had a merchant account terminated.
Merchants should always have fraud prevention tools in place to protect against chargebacks. Working with a payment processor who has extensive knowledge of fraud prevention tools can be a good first step in protecting transactions from fraud and chargebacks. Many solutions can protect high volume orders from chargebacks without adding customer friction.