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A chargeback (also known as a reversal) is a form of customer protection provided by the card issuing banks, which allows cardholders to file a complaint regarding fraudulent transactions on their statement. Once the cardholder files a dispute, the issuing bank makes an investigation into the complaint. Once the transaction is proven to be indeed fraudulent, the bank will refund the original value to the cardholder.

From the merchant’s standpoint, if you cannot prove the transaction to be legitimate, the bank will take back the entire value of the transaction from your account, along with an additional fee. This chargeback fee will range from $15 to $100, depending on the merchant bank sponsoring your account. If the cardholder complaint is proven untrue, no refund is requested from the merchant, though additional processing fees may be charged.

For obvious reasons, it is in the merchants best interest not to get involved with chargebacks in the first place, and in the second place be prepared with documentation to prove the legitimacy of the transaction if you are. With situations like these, the merchant stands the risk of losing products or services that have already been sold, the payment, the fees incurred for payment processing, money for chargeback penalty, or even possible commissions for currency conversions. It is obviously best to avoid chargebacks at all times.

Also, note that merchant accounts receiving too many chargebacks can be labeled by credit card companies as fraudulent, and this can be potentially damaging to the image and the existence of your business. Know also that credit card issuing banks take chargebacks very seriously, because they are at the most advantage. They don’t only levy fees, but they can also delay merchant remittance for up to three months to cover the fraud, or can even increase their commissions if they choose to label your account “risky.”

By law the cardholder has two years to file a dispute. Your sales can be reversible for two years… That means saving documentation for two years… Most banks will have a policy against handling disputes that are more than six months old but if the cardholder pushes it they have two years to file a dispute.

Valid Reasons for Chargebacks

As a merchant, you need to know the most common reasons why merchants receive chargebacks. These are also the exact circumstances that you also need to avoid at all costs. Most, if not all, chargebacks are initiated by cardholders. These are usually because inconsistencies they find on their credit card statements.

Fraudulent Transactions

The most frequent cause for chargeback is fraudulent transactions. This occurs when the credit card is used without the authorization and consent of the cardholder. In these situations, the merchant is held solely responsible.