Chargebacks and Why It Pays to Use a Credit Card

It’s been a while since we’ve posted anything on chargebacks on our blog. In fact, I think this must be our longest chargeback-free spell. So I was hugely relieved to find out that the good people at Card Hub have published a report on the controversial issue, in the process giving me a perfect excuse to dive into the subject once more. And I will gladly take full advantage of the opportunity.

To compile their report, Card Hub has relied on the answers of three of the four major U.S. credit card networks and six of the biggest U.S. issuers. Visa had declined participation in the survey, we are told, as had done Chase and U.S. Bank. I don’t understand why Visa would have refused to answer Card Hub’s questions. After all, Visa’s chargeback policies are freely available to anyone, so it’s not like they are trying to hide something. On the other hand, I am much more sympathetic to the reasons for not participation given by U.S. Bank which claims, correctly, that all issuers follow the same chargeback policies, as laid down by Visa and MasterCard.

And the conclusion drawn by the researchers is that the chargeback process is a consumer-friendly one, which I’m sure will not come as a surprise to many of you.

What Is a Chargeback?

Before I get into the details of Card Hub’s report, I need to expand on their definition of chargeback. Here is how the report defines the term:

A chargeback is when a merchant refunds a customer after a customer successfully disputes a charge made to their credit card.

This definition is incomplete. Chargeback is a transaction that is disputed by the cardholder or the issuer and is returned to the processor for resolution, at which point it is indeed reversed. The processor then contacts the merchant and requests that additional information is provided to support the transaction’s validity. The issuer and processor then research the facts to determine who is responsible for the transaction. If they cannot agree, the Credit Card Association (Visa or MasterCard) is the final arbiter. If the final decision is that the transaction was valid after all, the merchant gets its money back. The process is much simpler for American Express and Discover transactions, because the two companies act as both an issuer and a processor.

In other words, a chargeback occurs before the dispute is resolved and remains on the merchant’s record even if the final decision is in its favor (the chargeback fee is irreversible). That is something most merchants do not understand, so let me take a moment to explain its significance.

Visa and MasterCard have set a one-percent limit on the number of monthly transactions a merchant is allowed to have charged back to them. If you exceed it, you will be labeled as an “excessive chargeback merchant” and soon enough you will lose your merchant account. In fact, in real life your processor will freeze your merchant account long before you even come close to the one-percent threshold. So, if Card Hub’s definition were complete, only the successfully disputed and refunded transactions would be used when calculating your chargeback ratio. In reality, however, even disputes that are eventually decided in your favor are counted as chargebacks.

What Card Hub Found

Now let’s take a look at Card Hub’s findings. Here are the most important of them:

• Among the credit card networks and issuers that responded, all have consumer-friendly charge back policies and tend to favor the customer over the merchant.

…

• Among the issuers and networks that responded, all of their policies stipulated that a merchant is charged back in the event that the merchant does not respond to a customer’s dispute.
• The most common scenario in which the customer is not credited for a dispute is when a customer is unable to produce a receipt when claiming that a tip was inflated.

So the above findings clearly tell you (in the case of the first one explicitly so) that the system favors the consumers over the merchants. That is a fact.

The Takeaway

What merchants should take out of Card Hub’s report is that your goal should be to do your best to encourage your customers to contact you first with any disputes having to do with a purchase made at your store. To help you achieve that goal, we have often written about best practices for providing great customer service, so take a look at our suggestions. And when customers do contact you with a dispute, do your best to resolve it. Because if you don’t, your customer will take the dispute directly to the issuer, at which point the chargeback (unless it is invalid) has already occurred.

On the other hand, the report should convince consumers that using a credit card provides them with the best possible insurance for getting their money back whenever a transaction goes wrong. So it does indeed pay to use a credit card.

Image credit: Flickr / Infusionsoft.