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Understanding bank chargebacks

Understanding bank chargebacks

If you’ve ever used a debit or credit card, you have probably heard the term “chargeback”. How does a chargeback work, and what is the purpose of one? We will walk you through every aspect of bank chargebacks in this article.

Chargebacks affect the banking industry by costing significant financial losses, damaging reputations, and adding compliance burdens. According to the most recent UK Finance Annual Fraud Report, banks and card companies prevented £1.4 billion in unauthorised fraud in 2021. The pandemic increased certain types of fraud like social engineering fraud and friendly and APP fraud. 

Chargebacks require banks to refund the cardholder, pay additional fees, and allocate resources for investigation and processing. Moreover, frequent chargebacks can erode consumer trust and damage a bank’s reputation.

What is a chargeback?

A chargeback is a transaction reversal process in which a cardholder disputes a charge on their account and asks the bank to investigate and reverse the transaction. Chargebacks are designed to protect consumers from fraudulent or unauthorised transactions and ensure that merchants comply with industry regulations and best practices.

Depending on the circumstances, the cardholder, the card issuer, or the merchant can initiate a chargeback. In most cases, the cardholder will first attempt to resolve the issue with the merchant directly before requesting a chargeback. If the merchant refuses to issue a refund or resolve the issue, the cardholder can file a chargeback request with their bank.

Discover our Fraud and chargebacks guide.

Is a chargeback the same as a refund?

While chargebacks and refunds may seem similar at first glance, they are actually two distinct processes. A refund is initiated by the merchant and involves returning the funds directly to the cardholder’s account. On the other hand, a chargeback is initiated by the cardholder and involves the bank investigating the transaction and potentially reversing the funds.

How do chargebacks work?

When a cardholder initiates a chargeback request, the bank will investigate the transaction to determine its validity. The bank will typically ask the merchant to provide evidence that the transaction was authorised and that the goods or services were delivered as promised. If the merchant cannot provide sufficient evidence, the bank may reverse the transaction and debit the merchant’s account.

Banks can refuse a chargeback if they find the transaction valid or if the cardholder did not follow proper dispute procedures. To fight a chargeback, merchants can provide evidence that the transaction was authorised and that the goods or services were delivered as promised. The party that pays for a chargeback depends on the circumstances. If the chargeback is successful, the merchant may be required to refund the disputed amount and pay additional fees or penalties.

Chargebacks can be costly for merchants, as they may be required to pay additional fees or penalties in addition to losing the disputed funds. In some cases, a high volume of chargebacks can result in a merchant losing their ability to process card payments altogether.


What are the common reasons for chargebacks?

Cardholders may initiate a chargeback request for a variety of reasons, including:

Fraudulent or unauthorised transactions

Cardholders can request a chargeback if they notice a charge on their account that they did not authorise or appears fraudulent.

Consumer disputes

Cardholders can request a chargeback if they are unhappy with the goods or services they received from a merchant.

Processing errors

Transactions may be charged multiple times or for the wrong amount due to technical issues or errors with the payment processing system. In these cases, a chargeback may be necessary to correct the error and reverse the transaction.

How to avoid chargebacks

As a merchant, there are several steps you can take to minimise the risk of chargebacks and protect your business from fraud:

Provide clear product descriptions

Customers need to know exactly what they are buying, so ensure your product descriptions are clear and accurate. Use language that's clear and non-misleading to avoid confusion and dissatisfaction.

Respond promptly to customer inquiries

Respond promptly and professionally to customer questions. Addressing issues quickly and effectively can help prevent them from escalating into chargeback requests.

Use secure payment processing systems

Ensure that your payment processing system is secure and compliant with industry standards. Use fraud detection tools and other security measures to prevent fraudulent transactions from occurring.

Keep accurate records

Keep detailed records of all transactions, including receipts, invoices, and shipping information. This way, it is possible to prove that the transaction was authorised, the goods or services were delivered as promised, and that fraud prevention steps were taken.

How Trust Payments can help you avoid chargebacks

Unified payment platforms like TRU Connect will help your business substantially reduce chargebacks. Through our partnership with the leading service providers in this field, such as Chargebacks 911, Verifi and Ethoca, we can ensure real-time transaction monitoring and chargeback protection for our customers.

Chargebacks can happen at any time, and the worst thing you can do is nothing. Don’t let lost revenue affect your business – contact us today.

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