Chargeback

Chargeback

A chargeback is a charge that is returned to a payment card after a customer successfully disputes an item on their account statement or transactions report. The acquiring bank would then contact the card’s processing network to send payment from the merchant’s account at the merchant bank to the cardholder’s account at the issuing bank. If initiated with a merchant the process is similar to a standard transaction; however, the funds are taken from a merchant’s account and deposited with the cardholder’s issuing bank. For example, a chargeback initiated by a merchant would begin with a request sent to the merchant’s acquiring bank from the merchant. A cardholder may have been charged by a merchant for items they never received, a merchant could have duplicated a charge by mistake, a technical issue may have caused a mistaken charge, or a cardholder’s card information may have been compromised.

A chargeback is the payment amount that is returned to a debit or credit card, after a customer disputes the transaction or simply returns the purchased item.

What Is a Chargeback?

A chargeback is a charge that is returned to a payment card after a customer successfully disputes an item on their account statement or transactions report. A chargeback may occur on debit cards (and the underlying bank account) or on credit cards. Chargebacks can be granted to a cardholder for a variety of reasons.

In the U.S. chargeback reversals for debit cards are governed by Regulation E of the Electronic Fund Transfer Act. Chargeback reversal for credit cards are governed by Regulation Z of the Truth in Lending Act.

A chargeback is the payment amount that is returned to a debit or credit card, after a customer disputes the transaction or simply returns the purchased item.
The chargeback process can be initiated by either the merchant or the cardholder’s issuing bank.
Merchants typically incur a fee from the card issuer when a chargeback occurs.

Chargebacks Explained

A chargeback can be considered a refund since it returns specified funds taken from an account through a prior purchase. In this sense, it differs from a voided charge, which is never fully authorized for settlement. Focused on charges that have been fully processed and settled, chargebacks can often take several days for full settlement as they must be reversed through an electronic process involving multiple entities.

Charges can be disputed for many reasons. A cardholder may have been charged by a merchant for items they never received, a merchant could have duplicated a charge by mistake, a technical issue may have caused a mistaken charge, or a cardholder’s card information may have been compromised.

Typically, credit cardholders have a timeframe in which they can dispute a charge, known as the chargeback period.

Disputing a potential chargeback can be challenging for a cardholder as it requires time to dispute the charge with a customer service representative and may also require a receipt or proof of transaction. Still, in the case of a fraudulent charge, banks are usually highly supportive
in researching and issuing chargebacks in a situation where a card number has been compromised.

The most common chargebacks occur, however, simply when a cardholder chooses to return an item. If it is within the merchant’s allowable timeframe, the merchant can initiate a chargeback as a refund. If it's not, the merchant might issue the customer a store credit, as a courtesy. Other chargebacks may be more complicated.

Chargeback Processing

The chargeback process can be initiated by either the merchant or the cardholder’s issuing bank. If initiated with a merchant the process is similar to a standard transaction; however, the funds are taken from a merchant’s account and deposited with the cardholder’s issuing bank.

For example, a chargeback initiated by a merchant would begin with a request sent to the merchant’s acquiring bank from the merchant. The acquiring bank would then contact the card’s processing network to send payment from the merchant’s account at the merchant bank to the cardholder’s account at the issuing bank.

If a chargeback is initiated by the issuing bank, then the issuing bank facilitates the chargeback through communication on their processing network. The merchant bank then receives the signal and authorizes the funds' transfer with the confirmation of the merchant. In some cases, such as with fraudulent charges, the issuing bank may grant the cardholder with a chargeback while also sending the claim to a collection department. In this case, a bank takes on the liability and expenses the chargeback through reserve funds while researching and resolving the claim.

Merchant acquiring banks will generally charge a fee to merchants for chargeback transactions. These fees are detailed in a merchant account agreement. Fees are typically charged per transaction to cover the costs by the processing network. Additional penalties for chargebacks may also apply.

Related terms:

Chargeback Period

A chargeback period is the time frame during which a credit card user can dispute a transaction with a merchant. read more

Checking Account

A checking account is a deposit account held at a financial institution that allows deposits and withdrawals. Checking accounts are very liquid and can be accessed using checks, automated teller machines, and electronic debits, among other methods. read more

Credit Card Posting

Credit card posting occurs when a cardholder transaction has been settled and recorded with a post date. read more

Credit Card

Issued by a financial company giving the holder an option to borrow funds, credit cards charge interest and are primarily used for short-term financing.  read more

Fair Credit Billing Act – FCBA

The Fair Credit Billing Act (FCBA) is a 1974 law that protects consumers from unfair credit billing practices. Read about the benefits of FCBA. read more

Mastercard

A Mastercard is any electronic payment card that uses the Mastercard network for processing transaction communications. read more

What Is a Merchant Account?

A merchant account is a business bank account allowing companies to accept payments and pay bills. read more

Payment Gateway

A payment gateway is the front-end technology that reads payment cards and sends customer information to the merchant acquiring bank for processing. read more

Regulation E

Regulation E outlines rules for electronic funds transfers, provides guidelines for issuers and sellers of debit cards, and protects consumers. read more

Regulation Z

Regulation Z is a U.S. Federal Reserve Board regulation that implemented the Truth in Lending Act and introduced new protections for consumer borrowers. read more