What Are Chargebacks, and How Does Chargeback Protection Work?

Chargebacks are more than just customer refunds, they represent a significant cost and risk for businesses. Not only can they erode profit margins with excessive merchant fees and lost goods, but too many chargebacks can jeopardize a company’s reputation and even lead to merchant account suspensions, held funds, and frustration in general. Understanding the dynamics of chargebacks and knowing how to manage them proactively is essential for any business handling payments. Here, we break down everything you need to know about chargebacks, why they happen, and how businesses can protect themselves effectively.

What is a Chargeback?

A chargeback is the reversal of funds from a customer’s card transaction, initiated when the customer disputes the charge with their bank or credit card provider. Chargebacks were initially introduced as a consumer protection mechanism, designed to safeguard cardholders from fraudulent charges. Today, however, they have evolved into a complex area of payment management that affects businesses of all sizes. In 2023, chargebacks cost businesses an estimated $8–$11 billion, with each incident averaging a loss of $165. For businesses struggling with constant disputes, or a one-off dispute that's costly, companies like Swipesum can help win or resolve these disputes efficiently. Sometimes it is more cost-effective to issue a refund rather than endure the fees associated with a chargeback. If you want to talk to an expert about your disputes and chargebacks, book a consultation today.

Chargeback vs. Refund: What’s the Difference?

While both chargebacks and refunds involve returning funds to the customer, they differ in key ways:

• Initiator of the Transaction Reversal: A refund is processed by the business at the customer's request, while a chargeback is initiated by the customer’s bank, often without prior notice to the business.
• Control over Funds: With refunds, businesses manage the process, whereas in chargebacks, the bank pulls back the funds first and investigates later.
• Processing Time: Refunds are typically completed within three to seven business days, while chargebacks can take weeks or even months, especially if a business contests the claim.
• Cost: A chargeback will come with a fee from your credit card processing company, typically around $25 per occurrence. A refund will have no fees associated.

Why Chargebacks Happen: Key Reasons to Know

Chargebacks are driven by a variety of factors, and understanding these root causes can help businesses reduce their occurrence:

1. Fraudulent Transactions: This includes situations where stolen card information is used, causing legitimate cardholders to dispute unauthorized charges. Fraud remains the top driver of chargebacks.
2. Friendly Fraud: Often unintentional, friendly fraud happens when a customer disputes a charge due to a misunderstanding. For instance, they may not recognize the business name on their bank statement, forget a recurring subscription, or mistakenly think an item never shipped.
3. Product or Service Issues: Dissatisfaction with product quality, delayed delivery, or unclear return policies can also lead to chargebacks, especially if customers feel they cannot get their money back through other means.
4. Economic Factors: Economic instability can drive “buyer’s remorse” chargebacks, with consumers disputing charges on purchases they can no longer afford.

In recent years, friendly fraud has grown in prevalence, partly due to shifting attitudes and financial pressures, making it essential for businesses to proactively educate customers and offer accessible support. For businesses that frequently encounter such disputes, Swipesum provides essential support in reducing and resolving chargebacks with a comprehensive platform for risk and chargeback monitoring.

How the Chargeback Process Works

Chargebacks follow a structured process, typically involving these steps:

1. Customer Dispute: A customer identifies a charge they believe to be unauthorized or mistaken and contacts their issuing bank.
2. Bank Initiation: The issuing bank processes the chargeback, pulling the funds from the business’s account and notifying the merchant.
3. Merchant Response Opportunity: The business can refute the chargeback by providing evidence that the transaction was valid, such as receipts or delivery confirmations.
4. Bank Decision: The bank reviews both sides of the dispute and makes a decision. If the bank sides with the customer, the funds are permanently reversed.
5. Potential Arbitration: If the business loses the dispute and wishes to escalate, they may pursue arbitration with the credit card network, though this is often costly and time-consuming.

By understanding this process, businesses can better prepare to respond effectively, minimizing losses and protecting their revenue.

The Financial Toll of Chargebacks on Businesses

Chargebacks carry a steep cost beyond the initial transaction amount. Each chargeback incurs additional fees ranging from $15 to over $100, depending on the payment processor. Frequent chargebacks can also put a business at risk of losing its payment processing privileges. For large businesses, the average cost per chargeback can be as high as $237, highlighting the importance of reducing chargebacks proactively.

How to Prevent Chargebacks

Proactive chargeback prevention is the best defense for businesses aiming to reduce the risk of costly disputes. Here are some practical strategies:

1. Strengthen Payment Security: Implementing advanced fraud detection and secure checkout processes reduces unauthorized transactions.
2. Provide Clear Billing Descriptors: Ensure the business name that appears on bank statements is easily recognizable to customers, reducing friendly fraud from misunderstandings.
3. Establish Transparent Policies: Clearly communicate return and refund policies to avoid disputes due to product satisfaction or billing confusion.
4. Maintain Responsive Customer Service: A well-trained customer service team can help address customer issues before they escalate to chargebacks, ensuring customers feel supported throughout the purchase process.

Swipesum’s expert team can support these prevention efforts, like adding 3D Secure to your account, by serving as a Chief Payments Officer (CPO), offering specialized guidance in chargeback management and creating tailored solutions for dispute prevention.

Leveraging a Chargeback Management Company Like Swipesum

Managing chargebacks is a time-intensive process, and it can be challenging for in-house teams to handle disputes efficiently while maintaining focus on other business operations. By partnering with a chargeback management company like Swipesum, businesses gain access to a team dedicated to dispute resolution. Swipesum acts as a Chief Payments Officer to assist merchants in handling disputes and can even recommend when issuing a refund is more cost-effective than incurring the fees associated with a chargeback. With risk and chargeback monitoring built into our platform, we offer a proactive approach to managing disputes, so you can focus on your core business.

If you’re exploring chargeback solutions, there’s a good chance you could benefit from Swipesum’s expertise. Book a consultation today to see how we can help safeguard your business against costly chargebacks and streamline your payment operations.

Chargeback Protection Solutions: AI and Hybrid Models

In today’s rapidly evolving payment landscape, artificial intelligence (AI) is transforming chargeback management. Advanced AI tools can help businesses identify fraud patterns and respond to chargeback requests more quickly. AI-based systems analyze transaction data, highlighting potential fraud cases that might otherwise go unnoticed. However, the most effective chargeback management strategy is a hybrid approach that combines AI insights with expert review. While AI can flag and sort disputes, experienced professionals are often needed to assess complex cases and guide the best response strategy.

Conclusion: Protecting Your Business Against Chargebacks in 2024

With chargebacks on the rise, a robust prevention and management strategy is essential. By understanding the causes and consequences of chargebacks and using proactive prevention techniques, businesses can mitigate the impact on their bottom line. Leveraging AI-driven tools and professional guidance provides an extra layer of defense, ensuring businesses stay protected against both fraud and friendly fraud. If chargebacks are a concern, consider consulting with Swipesum. Our team provides solutions to manage disputes, minimize fees, and prevent chargebacks from impacting your bottom line.

For more insights, reach out to our team and learn how we can help streamline your chargeback management and maximize your revenue protection.