Why You Should Know the Truth About Chargebacks

June 27, 2014|Posted in: Uncategorized

I recently received a phone call from my credit card company, notifying me of fraudulent activity. I was flabbergasted and frustrated. After all, only 6 months prior a similar incident occurred with the same credit card.

The bank’s representative asked me to review a series of recent charges. While the first two were clearly not mine, the last charge was from two weeks prior. I didn’t recognize the company name or transaction immediately, but I wasn’t certain that it wasn’t me. I’m not the only authorized user and the card is used often enough for me to think it could have been me, yet not frequent enough that I was ready to say with certainty that it was me.

I explained this to the representative, who told me she would note it as a “chargeback” and if it were an authorized charge, it would simply be added back to my account. The casually assertive tone used made me feel as if this was okay.

And then I looked up what a chargeback actually is.

What a Chargeback Is

When a customer flags a transaction as fraudulent, the credit card company performs an investigation on behalf of the buyer (you). When this is initiated, money is transferred from the seller to the buyer. This was initially meant to serve as a means of consumer protection, helping you feel safer using credit cards for purchases.

I quickly learned that every time I’d ever disputed a charge, I’d initiated a chargeback.

When a Chargeback Should be Used

The concept of a chargeback sounds simple enough, but the more I researched what a chargeback is and its uses, the more I realized how often this is misused. A lot of its misuse is simply a lack of understanding of its role in consumer protection.

A chargeback is designed to help you in the event of unauthorized or fraudulent charges are made. It can also be used if the merchant is selling counterfeit or otherwise unsatisfactory products and services.

However, that’s where the use of a chargeback should stop.

You should not initiate a chargeback because an item arrived late, or because you forgot to cancel that automatic subscription renewal.

What Chargebacks Mean for Sellers

I was immediately concerned about that “not sure” charge when I realized what happens to merchants when a chargeback is initiated. Here’s what happens:

  • Since the credit card company charges the seller a transaction fee, not only does the merchant lose the sale, but the seller also loses the processing fee. These fees can add up quickly and be problematic for small businesses.
  • If the consumer has already received the item, the seller loses merchandise as well as money.
  • The seller is hit with a chargeback fee. These fees range from $20 to $70!

My research also revealed that merchants actively try to prevent credit chargebacks. As an uneducated consumer, I was saddened to see how much responsibility merchants bear in regard to these financial setbacks. Merchants blame themselves for a credit chargeback. That’s not right! Ignorant customers and fraudsters are the real culprits!

I quickly realized that I should investigate the mystery charge myself so as not to have bad retail karma, so to speak. Thankfully, I was able to research chargebacks, locate the source of the transaction, and make a phone call to the credit card company to verify the charge within the span of an hour.

Studies indicated that as many as 50% of online merchants are cored out of business due to the high costs associated with chargebacks. That is a staggering amount. Multiple chargebacks do not only become costly, but if disputes reach a certain threshold, a merchant account can be terminated entirely.

I wanted to share my “findings” to help others understand what a chargeback actually is, what it does, and its implications. Ultimately, chargebacks protect consumers, but should be used with caution. Before filing a chargeback, try to talk to the seller. Consider chargebacks a last resort.