Chargeback

A forced refund a bank issues back to a customer's card after they dispute a charge, taken out of the merchant's account.

The customer tells their bank that something is wrong with a charge, and the bank pulls the money back from the merchant while it looks into the dispute.

A reversal of funds initiated by the card-issuing bank on a cardholder's dispute, debited from the merchant's account along with an associated reason code (item not received, unauthorized use, etc.), regardless of whether the merchant already shipped the goods.

A chargeback typically follows these steps:

1. The cardholder disputes a charge with their issuing bank.
2. The bank reverses the funds and debits the merchant, with a reason code that explains the dispute.
3. The merchant can contest the chargeback by submitting evidence, a step called representment.
4. The card network and banks decide the outcome, and in some cases the case goes to a final arbitration.

Chargebacks happen for several reasons:

• Fraud, where the cardholder says they did not authorize the purchase.
• Item not received or not as described, where the cardholder says the goods never arrived or were not what was promised.
• Processing errors, such as a duplicate charge or the wrong amount.
• Friendly fraud, where a genuine cardholder disputes a purchase they made.

Merchants reduce chargebacks with clear billing descriptors, delivery proof, responsive customer service, and 3-D Secure, which can shift liability for fraud disputes.

Chargebacks sit next to terms that are easy to mix up:

• Refund is a return of money that the merchant chooses to give, while a chargeback is forced by the bank.
• Chargeback rate is the share of transactions that end in a chargeback.
• Friendly fraud is a type of dispute that produces chargebacks.

For more, see Digit-Free Cards: The Latest Move to Combat Identity Fraud in Banking.