What is a chargeback in credit and debit cards and how does it work?

Process involves a consumer's bank investigating disputes with merchants in recovering funds

A chargeback is a consumer protection mechanism that helps bank and card customers in case of fraudulent transactions, merchant misconduct and billing errors -- a measure needed in an era of widespread digital commerce.

 

How chargebacks work

 

“Chargeback is a process wherein a consumer requests their bank to reverse a debit or credit card transaction, in case of unauthorised transactions, fraud, non-delivery of goods or services, or defective products,” said Rohit Chhibbar, chief business officer, credit cards, Paisabazaar.

 

“Unlike a direct merchant-consumer settlement, a chargeback involves the consumer’s bank, which investigates the dispute with the merchant. If the bank rules in favour of the consumer, the transaction amount is refunded. This process often results in significant costs for the merchant in the form of penalties, chargeback fees, etc,” he said.

 

 

Reasons for chargebacks

 

A chargeback can arise from multiple scenarios:

 

Fraudulent transactions: Unauthorised use of a cardholder's information.

 

Merchant errors: Duplicate charges or incorrect amounts billed.

 

Non-delivery of goods: Items paid for but not received.

 

Dissatisfaction with products/services: When products do not meet expectations or differ from what was advertised.

 

The chargeback process

 

The typical chargeback journey involves multiple stakeholders:

 

Initiation: A cardholder notices an issue with a transaction — this could be due to fraud, not receiving goods, or being charged incorrectly. They contact their issuing bank to dispute the charge.

 

Review: The issuing bank reviews the dispute. If deemed valid, it issues a provisional credit to the cardholder while initiating the chargeback against the merchant acquiring bank.

 

Notification: The acquiring bank informs the merchant of the chargeback. The merchant then has two options: Accept the chargeback or contest it by providing evidence that supports their case.

 

Evidence submission: If contesting, the merchant submits relevant evidence to their acquiring bank, which forwards it to the issuing bank for review.

 

Final decision: The issuing bank makes a final determination based on the evidence provided. If it upholds the chargeback, the cardholder retains their funds. If the bank rejects it, those funds are returned to the merchant.

 

“Chargebacks are particularly helpful for the consumers as they provide them with a secure process to recover funds in case of unresolved disputes, reinforcing confidence in card-based transactions,” said Chhibbar.