What is chargeback? How does it work?

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what is chargeback

Chargeback – what is it, how does it work, what is it good for and when is it useful? In short: it is one of the basic arguments for using cards for payments – especially online.

Chargeback – what is it?

Chargeback is a mechanism that allows consumers to recover money for services or goods that were not provided or not properly performed. It is a type of consumer/payment protection that allows consumers to pursue their claims (recover money) in case of problems with payment card transactions.

Can chargeback be applied only to online payments?

No. Chargeback applies to online payments, standard ground/POS payments, and MO/TO transactions (most commonly referred to as transactions made over the phone by providing your card information).

Chargeback can be applied to various types of transactions, such as standard online purchases, payments for hotel services, airline tickets, etc. It can include regular e-commerce payments as well as recurring (subscription) transactions.

How does the chargeback process work?

The chargeback process begins when a consumer files a complaint with their bank or other financial institution that issued them a payment card. The bank or financial institution then reviews the complaint and, if it is found to be valid, forwards it to the merchant or service provider. The merchant or service provider then has a certain amount of time to respond to the complaint and state its position. If the merchant or service provider does not respond or does not provide sufficient evidence that the transaction was in accordance with the contract, the bank or financial institution will refund the consumer.

How much time is there to do a chargeback?

You’ll find different deadlines in different places, but as a general rule, a chargeback can be made within 6 months of the date the service was performed or the product was delivered. And the key here is the phrase “date of performance”.

This is because the date of execution is not the date on which the payment you want to charge back is made. It is the date the paid service or product was delivered to us. In practice, this means:

  • for an e-commerce payment for a physical product: the date the product was delivered to the specified delivery address
  • for an e-commerce payment for a virtual product: the date on which the virtual product was delivered to the buyer
  • for a subscription/SaaS/subscription payment: the date on which the period for which we have paid ends

And just as the first two situations are pretty obvious, the third is the most interesting. Because in practice, it means that we have a lot more time to do a chargeback than we might think.

In subscription/SaaS businesses, there are usually two types of subscriptions: monthly and annual. Once we buy them, we should have access to the service for the next month/year. So what if we lose that access one day before the end of that period? The service should not have been provided. And that gives us the ability to do a chargeback. So in short, for subscription services that give us temporary access to a service, that chargeback period is extended by that same period. So in practice, for a monthly service – we have 7 months from the time of payment to do the chargeback, for an annual service – as much as 18 months from the time of payment.

It gets even more interesting with online subscription companies, where we have the option to extend the subscription for a certain period of time even before the current subscription period expires. So, in short, two days ago we bought a subscription for one month, after those two days we liked the service so much that we decided to buy it for another year. We redeem. How much time do we have to do a chargeback? Unless SaaS has decided otherwise (for example, by reducing the annual subscription amount by that less than one month and counting the year from today), we have almost 19 months to do a chargeback (6 months + year + month – 2 days).

Does the chargeback apply only to credit cards or others?

In short, for all types of cards, debit and credit. It is common to think that chargebacks only occur with credit cards. This is not true. They also occur with a regular debit card.

In what situations is chargeback useful?

Chargeback is particularly useful for online transactions where the consumer has no way of contacting the seller or service provider directly. It can also be used for transactions where the merchant does not acknowledge our complaint (and we believe we are owed one), for fraudulent/fraudulent transactions, including, for example, with a stolen card. It is also often used when multiple charges are made for the same service or product.

Will every chargeback be a success and money back?

A few years ago, the answer to such a question would have been “yes, resoundingly yes. Today, however, it is not so simple. And the correct answer to such a question is: it depends.

Just a few years ago, it was quite common to hear stories of a father in the United States calling his bank to complain that his bank/credit card issuer was allowing his son to buy a game online with his card. After all, the bank should have declined the transaction because he (the cardholder) was not the one who made the transaction. And he filed a complaint (did a chargeback) and got his money back. And while such stories are often exaggerated, it should be clear that it was very easy to get the money back. And that was what drove the popularity of card payments. You knew that if something happened, you could get your money back.

What is the situation today? It is not difficult and in most cases the money is returned, but it depends.

First of all, it depends on the chargeback process. Depending on the process used by the bank or the institution responsible for issuing the card, the process is as follows. It may be that the bank that receives information about the chargeback gives the money to the consumer immediately, and only later returns it to the seller. It may go back to the acquirer and/or the merchant first, and only after receiving information from the acquirer will it decide whether to give the money back. It may be that the seller does not recognize the chargeback and wants to fight to keep the money from being returned, presenting its evidence that the service was properly performed.

Second, it depends on whether the transaction was done with strong authentication or not. Strong authentication (SCA) – or the popular 3D Secure – involves additional authorization of the transaction being made. This is most often done by accepting a card transaction in the bank’s mobile app, less often by using a code from an SMS. In the past, passwords invented at the time of signing the card contract or codes from scratch cards were also used.

The difference is mainly related to liability for fraudulent transactions. If this authentication is not available (e.g. another recurring transaction, one-click, low-value transaction, etc.), then everything works as usual. If this authentication is present, the bank/card issuer takes responsibility for fraudulent transactions. So, just as in the case of non-delivery of a product/service there is no difference, the customer gets the money back, so in the case of fraudulent transactions it can be different. In theory, the bank should say, “OK, we allowed the transaction even though we shouldn’t have” and give the money back. In practice, however, there may be situations where the bank will say “hmmm, they stole the card, and the phone, and the password to the phone, and the password to the banking application; something looks suspicious to me.”

Can I dispute a chargeback?

Yes. There may be deviations from the norm, but as a rule, there are two levels of decision-making in the chargeback process.

The first is where the bank/card issuer decides whether the payer’s money is due. In practice, the process varies; in theory, it (the bank/issuer) should collect evidence from both parties and decide on the claim. The second level is where the card institution (e.g. Visa, MasterCard) decides on the validity of the claim based on the evidence from both parties. The decision of the second level is final.

So a possible situation is as follows: the consumer reports the chargeback to the bank, the bank collects evidence from both parties and decides on the validity (or not) of the claim. Then the seller (or consumer) appeals this decision and the case goes to the second instance. Again, evidence is presented and a decision is made to accept or reject the claim.

In practice, this type of situation with subsequent appeals is rare, but theoretically possible.

Author

  • Karol Zielinski

    Karol Zielinski is an entrepreneur and manager, specializing in technology business. He is a member of the Management Board at mPay and the founder & CEO of z3x tech marketing agency.

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