The History of Chargebacks

As a business owner, the word ‘chargeback’ probably makes you shudder. It might help if you had some background. The first credit cards were issued in 1950 by Diners Club. They were mainly used for travel and dining. Amex launched their credit card in 1958. Still, by 1970, Americans were yet to fully embrace the credit card, because they were afraid of fraud. Many business interests saw the benefit of these cards for business, so there was a lot of lobbying, and it worked.

In 1974, the government passed the Fair Credit Billing Act. It introduced the concept of a chargeback in order to protect consumers from misuse of their credit cards. With the introduction of the chargeback, if someone made a purchase on a cardholder’s credit card and the purchase turned out to be fraudulent, the cardholder could now go straight to the bank and ask for their money back. The bank – after some investigation – would pull money back out of the merchant’s account and refund it  to the customer.

The trouble with chargebacks

Chargebacks are sometimes rescinded. The customer may realize they made a mistake, or maybe there was an error somewhere along the purchase chain. So the money could end up coming back to the merchant. But the chargeback remains on the merchant’s record, and the chargeback fees don’t normally get refunded. Having a chargeback on a merchant’s account could lead to a series of problems for the merchant. If the merchant accumulates enough chargebacks on its balance sheet, it could be audited, have your account frozen, and possibly even be blacklisted.

Many chargebacks are well-founded, such as those resulting from credit card fraud or identity theft. In such cases, the business simply has to bear the brunt (assuming the fraudster can’t be held responsible), because the purchase wasn’t the card owner’s choice. However, 80% of the time, a customer requests a chargeback in lieu of a refund. Sometimes, the customer may have requested a refund from the merchant, but the merchant refused. But often, the customer may be unclear on how to approach the merchant and get their money back, so they just ask their bank to ‘cancel’ the transaction instead, even though a direct merchant-initiated refund would be better for everyone.  Clear refund/return policies

In these cases, speaking to the merchant would be faster and less irksome. However, businesses don’t always offer this information. Many businesses can avoid that kind of chargeback by communicating better. By offering customers clear channels they can use if they’re unhappy, including good, reliable, reachable customer care (that doesn’t put customers through multiple voice prompts before connecting them to an actual person), businesses can resolve many of these issues before they turn into chargebacks.

Providing clear details in advance regarding a refund policy is also vital for reducing chargebacks (even if that policy is “no refunds”). When a business sends out a package, it should also let the customer know exactly when it will arrive, and issue a tracking number if possible.

Fortunately, Visa’s new chargeback transaction rules provide protection to merchants. The new rules are expected to drastically cut down ‘friendly fraud’ by way of inaproppriate chargebacks.

For more information on the history of chargebacks, or to sign up for a merchant account, please call (888) 924-2743 or go to Charge.com.