What is a Chargeback?
A chargeback is a reversal of a credit card or debit card transaction initiated by the cardholder’s bank. It occurs when a customer disputes a charge on their account and asks their bank to return the funds. Chargebacks are intended to protect consumers from fraudulent or unauthorized transactions, but they can also be used for other reasons, such as:
Fraudulent Transactions: The cardholder claims that they did not authorize the charge.
Goods/Services Not Received: The customer claims they never received the product or service they paid for.
Product or Service Dispute: The customer is dissatisfied with the quality of the product or service received and feels it wasn’t as described.
Billing Errors: The customer was charged more than expected or charged multiple times for the same transaction.
What is the Difference Between a Refund and a Chargeback?
The main difference between a chargeback and a refund lies in who initiates the transaction reversal and how the process works:
1. Initiator
Chargeback: Initiated by the customer through their bank or credit card issuer. The customer disputes a charge, and the bank acts on their behalf to investigate and potentially reverse the transaction.
Refund: Initiated by the business or merchant. The customer contacts the business directly to request a return of funds for a product or service they are unsatisfied with, and the business agrees to issue a refund.
2. Process
Chargeback: The customer contacts their bank, and the bank automatically reverses the charge (temporarily or permanently) without the merchant's immediate consent. The merchant is then given a chance to dispute the claim, but the process is more formal and can involve legal protocols.
Refund: The customer communicates with the merchant, and if the refund is approved, the business voluntarily returns the money to the customer without involving the bank. It is usually a more straightforward, collaborative process.
3. Financial Impact
Chargeback: In addition to losing the sale, the merchant often faces additional chargeback fees imposed by payment processors or banks. Multiple chargebacks can also hurt a business’s reputation and even lead to higher transaction fees or restrictions on using payment services.
Refund: The merchant typically only loses the sale amount. There are usually no additional fees, and the customer relationship can often be preserved.
4. Purpose
Chargeback: Designed to protect consumers from fraud or billing errors and can be used without the merchant’s consent.
Refund: Often a part of good customer service policies, where businesses provide a return mechanism for dissatisfied customers.
5. Customer Trust & Business Control
Chargeback: The customer bypasses the merchant and places trust in their bank to resolve the issue. The merchant has less control over the process and outcome.
Refund: The customer trusts the merchant to resolve the issue. The merchant has more control over when and how the refund is issued.
See this support article for steps (and a video) on how to refund a credit card payment.
Common Reasons for Chargebacks
Fraudulent Transactions
The cardholder claims the transaction was unauthorized or that the card was used without their knowledge (e.g., in cases of identity theft or stolen credit card information).
Goods or Services Not Received
The customer claims they did not receive the product or service they paid for, despite being charged.
Product Not as Described or Defective
The customer disputes the charge because the product or service they received was significantly different from what was advertised or promised, or the product was faulty or damaged.
Duplicate Charges
The customer was charged multiple times for a single transaction or order.
Canceled Recurring Transactions
The customer was charged for a subscription or service that they had already canceled but were still billed for.
Credit Not Processed
The customer returned an item or canceled a service and was promised a refund, but the refund was never issued.
Technical or Processing Errors
The customer disputes charges resulting from technical issues such as incorrect billing amounts, errors during payment processing, or other system failures.
Customer Changed Their Mind
The customer decided they no longer wanted the product or service, but instead of requesting a refund directly from the merchant, they initiated a chargeback through the bank.
Unrecognized Transaction
The cardholder doesn't recognize the merchant name or transaction on their statement and mistakenly assumes it is unauthorized, prompting them to dispute it.
Merchant Fraud
The customer believes the merchant intentionally misrepresented their product or service, or the transaction itself was fraudulent, such as the merchant charging for something that was never agreed upon.
These reasons reflect both legitimate disputes and cases where customers may misuse chargebacks (often called "friendly fraud") instead of seeking a resolution directly with the merchant.
How Much Do Chargebacks Cost Merchants?
Chargebacks can be costly for merchants, often far exceeding the amount of the original transaction. The total cost of a chargeback to a merchant typically includes several components:
Lost Revenue
When a chargeback occurs, the merchant loses the revenue from the disputed transaction. This means the merchant not only loses the original sale amount but also the product or service that was provided.
Chargeback Fees
Merchants are usually required to pay a chargeback fee to their payment processor for each chargeback, regardless of whether they win or lose the dispute. These fees can range from $20 to $100 per chargeback, depending on the payment processor and the type of business. EnrollsyPay charges $20 per chargeback.
Administrative Costs
Dealing with a chargeback requires time and resources. Merchants must gather evidence, submit documents, and correspond with their payment processor. This can result in indirect costs such as:
Staff time spent managing disputes.
Operational delays if too many chargebacks require attention.
Potential Increase in Processing Fees
If a merchant has a high chargeback rate (generally above 1%), credit card companies and payment processors may increase their processing fees. This is because chargebacks signal a higher risk for the payment processor.
Long-term Impact on Merchant Account
Repeated chargebacks can hurt a merchant’s reputation with payment processors. Too many chargebacks may lead to:
Higher processing fees.
Merchant account termination, making it difficult or impossible to accept credit card payments.
Being labeled a high-risk merchant, makes securing payment processing more expensive and restrictive.
Reducing chargebacks through better fraud prevention, clear communication, and transparent policies can help merchants minimize these costs. See this support article for how to prevent chargebacks in the first place.
See How to Dispute a Chargeback for more information on how to dispute a chargeback.
The Difference Between the Issuing Bank and the Acquiring Bank
The terms issuing bank and acquiring bank refer to two different types of financial institutions involved in the processing of credit and debit card transactions. Each plays a distinct role in the payment process.
Issuing Bank
Definition: The issuing bank is the financial institution that provides credit or debit cards to customers (cardholders). This is the bank that the customer uses when they make a payment using a credit or debit card.
Role in the Transaction:
Card Issuance: The issuing bank gives the cardholder a payment card (e.g., Visa, Mastercard, or debit card).
Customer Authorization: When a customer makes a payment, the issuing bank is responsible for authorizing or declining the transaction, based on available credit, account status, and fraud checks.
Funds Deduction: The issuing bank deducts funds from the customer’s account if the transaction is approved.
Chargebacks: If a cardholder disputes a charge, the issuing bank initiates the chargeback process on behalf of the customer.
Acquiring Bank
Definition: The acquiring bank, also known as the merchant bank, is the financial institution that maintains the merchant’s bank account and facilitates the processing of credit or debit card payments on behalf of the merchant.
Role in the Transaction:
Merchant Account Provider: The acquiring bank enables merchants to accept credit and debit card payments by providing them with a merchant account.
Transaction Processing: The acquiring bank receives payment requests from the merchant and communicates with the card networks and issuing banks to authorize and settle payments.
Settlement: Once a payment is authorized, the acquiring bank credits the funds to the merchant’s account (after deducting processing fees).
Chargeback Handling: If a chargeback is initiated, the acquiring bank helps facilitate the chargeback process between the merchant and the issuing bank.
Key Differences
Aspect | Issuing Bank | Acquiring Bank |
Who they serve | Cardholders (customers, parents, guardians) | Merchants (schools, businesses) |
Primary role | Issues credit/debit cards and authorizes payments | Provides merchant accounts and processes payments |
Transaction function | Approves or declines a cardholder's payment request | Settles transactions and deposits funds to merchant accounts |
Chargebacks | Initiates chargebacks on behalf of the cardholder | Facilitates chargebacks for the merchant, managing disputes |
Funds management | Manages the cardholder's account and deducts funds for transactions | Credits funds to the merchant’s account after the transaction is completed |
How They Work Together
In a typical card transaction:
The issuing bank approves or denies the cardholder’s payment.
The acquiring bank processes the payment, ensures funds are transferred, and credits the merchant’s account.
Both banks communicate through the card network (e.g., Visa, Mastercard) to ensure the transaction is completed smoothly.
Understanding the difference between these two entities is essential, especially for merchants like schools, as they navigate payments, fees, and chargeback disputes.
The Difference Between Debit Card & Credit Card Chargebacks
Debit card chargebacks and credit card chargebacks serve a similar purpose, allowing customers to dispute transactions and potentially recover their funds. However, there are some key differences between the two in terms of how they work, their implications, and the processes involved. Here’s a breakdown of the differences:
Nature of the Cards
Debit Card:
Linked directly to the cardholder’s bank account.
Funds are immediately withdrawn from the account when a transaction is made.
Credit Card:
Allows cardholders to borrow funds up to a certain limit to make purchases.
Payment is not immediate; the cardholder receives a bill at the end of the billing cycle.
Chargeback Process
Debit Card Chargebacks:
Direct Impact on Funds: Since debit card transactions involve direct withdrawals from the cardholder’s bank account, disputing a charge may lead to a temporary reversal of funds while the dispute is investigated.
Time Limits: Customers generally have fewer protections and a shorter timeframe to dispute a debit card charge, often limited to 60 days from the transaction date.
Fewer Consumer Protections: Debit card transactions are subject to fewer consumer protection laws compared to credit cards. For example, the Electronic Fund Transfer Act (EFTA) governs debit card transactions but provides less coverage than the Fair Credit Billing Act (FCBA), which protects credit card users.
Credit Card Chargebacks:
Credit Balance: When a chargeback is initiated on a credit card, the funds are essentially reversed, and the cardholder’s credit balance is restored while the dispute is investigated.
Longer Timeframes: Customers typically have up to 120 days to dispute a charge on a credit card, depending on the card issuer’s policies.
More Protections: Credit cards offer greater consumer protections, such as fraud protection and the ability to dispute charges for undelivered goods or services under the FCBA.
Reason Codes and Disputes
Debit Card Chargebacks:
Disputes often relate to unauthorized transactions, fraudulent activity, or errors in processing. The cardholder must show that the transaction was unauthorized or incorrect.
Credit Card Chargebacks:
Credit card disputes can involve a wider range of issues, including dissatisfaction with goods or services, fraudulent transactions, and billing errors. Cardholders can dispute transactions even if they received the product or service but were dissatisfied with it.
Merchant Implications
Debit Card Chargebacks:
Merchants may face immediate account debits for the disputed amounts, which can affect cash flow more directly than credit card chargebacks.
Credit Card Chargebacks:
Credit card chargebacks may result in a temporary hold on funds but generally provide more time for merchants to respond to disputes. Additionally, credit card chargebacks can impact a merchant’s overall chargeback ratio, affecting their processing fees and ability to accept credit card payments.
Summary Table
Aspect | Debit Card Chargeback | Credit Card Chargeback |
Nature of Transaction | Direct withdrawal from bank account | Borrowed funds from the credit limit |
Timeframe for Dispute | Generally up to 60 days | Typically up to 120 days |
Consumer Protections | Fewer protections (EFTA) | More protections (FCBA) |
Impact on Funds | Immediate account debit | Restoration of credit balance |
Types of Disputes | Unauthorized transactions, errors | Fraud, dissatisfaction, billing errors |
Merchant Impact | Immediate impact on cash flow | Temporary hold; affects chargeback ratio |
Understanding these differences can help both consumers and merchants navigate the chargeback process more effectively, ensuring that they are aware of their rights and responsibilities related to debit and credit card transactions.