What Is a Chargeback? Definition, How to Dispute, and Example

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 is governed by Regulation Z of the Truth in Lending Act.

Key Takeaways

  • 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.
  • Federal law requires card issuers to offer chargebacks within 60 days of the date of billing.
  • There is a fee for initiating a chargeback, so it is preferable to resolve disputes with the merchant if possible.

Understanding Chargebacks

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 chargewhich 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.

When to Ask for a Chargeback

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 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.

Who Pays for a Chargeback

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 a chargeback while also sending the claim to a collection department. In this case, a bank takes on the liability and absorbs the cost 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.

How Do You Do a Chargeback on PayPal?

While PayPal has its own dispute resolution process, buyers also have the option of filing a chargeback with their own debit or credit card issuer. This process is determined by the card issuer, although sellers have an opportunity to dispute the chargeback through PayPal.

How Long Do I Have to Ask for a Chargeback?

The chargeback periodor the time limit for filing a chargeback, depends on the payment processor, but it can range from 60 to 120 days. The Fair Credit Billing Act allows chargebacks within 60 days of the billing date.

How Do You Fight a Chargeback?

When a customer initiates a chargeback, the merchant has a set period of time to respond. This varies by the payment processor but is usually around 30 days. At this time the merchant can provide the signed receipts, contracts, and any other documentation that shows that the chargeback is in error.

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