Payment Disputes: Everything you need to know about chargebacks

What is a dispute?

Have you ever reviewed a bank statement and noticed you were double charged for your morning coffee? You’d want your money back, right? One way to solve the problem is to make a claim with your card issuer (your bank) explaining why you shouldn’t be responsible for the charge.

This is an example of a dispute. It’s a situation in which a cardholder disagrees with a debit or credit card charge and requests that the funds be returned.

Disputes vs chargebacks: What’s the difference?

The terms “dispute” and “chargeback” are used interchangeably, but there is a difference.

A dispute is when a customer requests a payment transaction be reversed. A chargeback is when funds are returned to the customer after the cardholder's bank investigates a charge and determines that the transaction is invalid.

One way to think about the difference is that chargebacks arise from disputes, but disputes don’t necessarily lead to chargebacks.

Who is liable for chargebacks?

Online transactions are considered riskier than in-person transactions because the customer’s card isn’t present. Because of this, e-commerce merchants are more often found liable for accepting fraudulent transactions. They are also more often liable for all customer service and product issues.

The most common reasons for chargebacks

Disputes and chargebacks happen for many reasons, from fraud to a simple misunderstanding. However, when you step back and look at the bigger picture, there are 3 primary categories: fraud, friendly fraud, and merchant or product issues.

Fraud

This category includes inappropriate actions that scammers do.

• Stolen card
  When a cardholder's physical card is stolen and used to make unauthorized purchases, they can report the fraudulent charges.
• Hacked account
  This occurs when a fraudster obtains a cardholder’s information or access to an account and uses it to make unauthorized purchases.

Friendly fraud

Friendly fraud, sometimes called chargeback fraud, is a spectrum of fraud activities from the innocent to the nefarious. In these instances, the customer is involved in some way.

Common causes of friendly fraud:

• Forgetfulness
  Customers sometimes don’t remember purchasing a product (especially if it’s digital) and file a dispute.
• Misunderstanding
  Shoppers may misunderstand the terms of service for a product and file a dispute. For example, customers may ask for a refund after a free trial ends, and they’re automatically enrolled in a service with recurring payments.
• Buyer’s remorse
  A customer might make an impulsive purchase and later regret it. Instead of asking for a refund, some customers file a dispute for a chargeback.
• Family fraud
  This occurs when someone in the cardholder's family purchases something without first communicating with the cardholder. Because the cardholder is unaware of the purchase, they request a chargeback.
• Bad billing descriptor
  A billing descriptor appears on a bank statement and describes a payment. Sometimes, the billing description is vague, causing customer confusion.

Merchant or product issues

As the name suggests, chargebacks in this category are related to merchant or product errors.

A few merchant errors to be aware of:

• Duplicate charge
  In this instance, the merchant accidentally charges a customer twice, leading to a dispute. This can occur when a customer encounters an error when purchasing a product online and clicks the buy button multiple times.
• Incorrect amount charged
  This occurs when a merchant accidentally or purposefully charges more for a product than shown at checkout.
• Non-delivery
  When a product doesn’t arrive, customers can file for a chargeback. This situation might occur if a product was lost in shipping, stolen after delivery, or never left your warehouse.
• Dissatisfaction with product
  Ideally, customers would contact a merchant if their product is damaged in shipping, but many don’t. Instead, they file a dispute.

How much do chargebacks cost businesses?

Dispute fees differ between payment processors. Merchants should expect to pay between $15 and $50 per dispute. There are also indirect costs associated with chargebacks, including non-refundable processing fees, lost productivity, and wasted marketing spend.

Indirect costs that businesses should pay close attention to are network non-compliance fees, which add up quickly and are detrimental.

Both Visa and Mastercard fine merchants with excessive disputes. For instance, after 4 months of non-compliance, Visa fines merchants $50 per dispute. After 9 months of non-compliance, Visa includes an additional $25,000 monthly review fee.

How do chargebacks work?

E-commerce chargebacks involve card issuers, networks, customers, and merchants. Here’s the step-by-step process:

Ways to prevent chargebacks

Since disputes and chargebacks have an outsized impact on your business, solving the issue is necessary to achieve long-term growth. Here are a few ways to reduce chargebacks:

• Make it easy for your customers to contact you
• Confirm customer orders
• Manage shipping expectations
• Place your refund, return, and cancellation policies front and center
• Use accurate product descriptions
• Partner with a chargeback prevention solution

Final thoughts

No one likes dealing with disputes and chargebacks, but being proactive will save you future headaches and keep more money in your coffers. Take steps today to reduce chargebacks by partnering with Butter.

Butter's ML-powered dispute solution intercepts disputes before they reach your payment processor by providing transaction data. Dispute by Butter also uses merchant-tailored rules to determine which disputes to fight and which to ignore.

Merchants who partner with Butter save thousands by reducing unnecessary fees and avoiding fraud monitoring programs. Book a consult to learn more.

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Next up: Disputes 101: The hidden costs of chargebacks