A Peek Into The World of Chargebacks

Transactions and money exchange through credit cards have proven to be very beneficial in online business. It aids in increasing revenue and your customer base, in addition with the improvement in overall productivity. All you have to do is- Get yourself a merchant account to be able to accept cards for payments. With this, you add convenience, cost-effectiveness and a professional image right into your business.

If you have already covered this step, you probably realize how confusing credit card processing can be. Here is a figure to simplify it for you.

Flow During ChargebackGiven that it may take time for you to get around with this entire process, there is one important aspect about merchant accounts that you need to know very well – chargebacks.

Chargeback Definition

Whether you are someone who is just curious about how a chargeback works, or a seller who has received his first chargeback, it is important to understand how chargebacks have a great and irreversible impact on an online business.

In chargeback process, cardholders file a dispute with their issuing bank, at which point the merchant’s bank is debited the amount of the transaction that was previously credited. The merchant must provide compelling evidence to disprove any fraudulent activity associated with the transaction. If the issuing bank deems the evidence enough to overturn the cardholder’s dispute, the funds are returned to the merchant. If the cardholder still believes he was the victim of fraud, he can initiate a second chargeback, also called pre-arbitration.

When Consumers Can Legally Use Chargebacks

It is undeniably important to understand when consumers can use the privilege of chargebacks.

In any case of identity theft and unauthorized transactions, the victim should contact the bank immediately. This is necessary not only to recoup victim’s stolen money, but also to help prevent future losses.

However, it is for the consumer’s betterment to contact the merchant directly when fraud has or seems to have occurred.

In some cases, it is observed that the supposed fraud was actually an accident. This could happen as an innocent under which the consumer has forgotten about the purchase. Additionally, a refund is recommended because it usually puts money back in the consumer’s account much quicker than a chargeback.

Filing a chargeback instead of seeking a traditional refund when unsatisfied with a purchase is cyber shoplifting.

Filing an illegitimate chargeback allows the cardholder to retain possession of the purchased item, even after the purchase amount has been refunded. Consumers need to request a traditional refund from the merchant and return the item, making it possible for the merchant to sell the merchandise again for a profit. Otherwise, the consumer is getting something for free—the very definition of stealing.

Types of Chargebacks

Chargebacks can be catergorized into three types.

1. Merchant Error

Merchant error chargeback is the most common type of chargebacks. Merchant side errors don’t necessarily mean to be intentional. But, the effects of such mistakes end up bringing a great deal of harm and damage to the store in different ways.

Following are some of the observed reasons of these chargebacks-

  • System errors or problems arising from your business process
  • Poor customer service
  • Unwanted recurring payments
  • Authorization errors or faulty product fulfillment.

Customers are liable to filing a chargeback if your system is generating their bills without their knowledge or consent. This type of recurring billing chargebacks is common with the businesses that accept payments in installments.

2. Unauthorized Card Use

This category deals with an actual fraud. Purchase made by an individual is completed by a presumably stolen credit card information while the legitimate card holder is unaware of the transaction made. So, the owner of the credit card is sure to file a chargeback. Such a transaction is illegal and laws in place can severely punish the person held responsible for this crime.

Occasionally, this chargeback can be a result of some internal misunderstading.

Sometimes, a family member could make a purchase using a family credit card and another member of their family may not be aware of that transaction and could file a claim against your business.

3. Friendly Fraud

This type of fraud is also considered to be an honest and innocent mistake. But this time, unlike from merchant’s side in ‘Merchant Error’ category, this is a mistake from consumer’s side.

A customer committing friendly fraud doesn’t present a potential threat to your business. You can assume this type of fraudster belongs to the confused, misguided or forgetful lot.

For subscription merchants, this usually manifests in customers who legitimately agreed to recurring billing, but were genuinely unaware of what they were agreeing to. No matter how many fail-safes and opt-ins your business uses, there will always be a customer who overlooks the terms of an agreement. That doesn’t mean the customer won’t be interested in your services in the future.

Banning this customer from making purchases at your store is not recommended. You should rather work to get to the roots of misunderstanding and this way, prevent such scenarios from occurring anytime in future.

 Chargeback Infographic

Who all are involved in a Chargeback?

Let’s have a brief idea of all the roles played when a chargeback if filed and is acted upon.

The Customer

The customer is usually the cardholder who has made a purchase. For our discussion, we will also regard a person who is seeing a transaction on his statement from a particular merchant, as a customer. In further discussions, we will be using terms ‘customer’ and ‘cardholder’ interchangeably. Credit card companies usually guarantee zero-fraud liability to their cardholders.

Issuing Bank

Issuing bank or the issuer is the provider of payment cards (credit, debit, prepaid, etc.) to customers. The issuer is the one responsible in regards to the payout of funds from cardholder to anyone. Also, it is obvious that the customer’s balance and authorization is managed by the issuing bank’s processor.

Issuing Bank Processor

The issuing bank processor manages data and transactions related to customer’s account.

Card Network

Visa, MasterCard, American Express, and Discover are the four major card networks. Card Networks literally provide network for payments. Following functions of Card Networks will give you a better picture:

  1. These take care of payments that take place.
  2. These manage settlement process between issuing and acquiring banks.
  3. These provide data connection and regulate flowing of funds between customer and merchant.

Acquiring Bank

Acquiring Bank is the financial body behind Card Networks. Their main function is to receive funds through card network on the merchant’s behalf from customer’s issuing bank.

Merchant Account Processor

The merchant account processor is a company that partners with an acquiring bank to process payments on behalf of the merchant. Merchants typically have a closer relationship with their account processor than their acquiring bank. A merchant’s processor and acquiring bank can be, and often are, the same institution.

Merchant Commercial Bank Account

Merchant commercial bank account is where the funds are deposited after the acquiring bank acquires those from the issuing bank through card network. This is the last stop of funds transferred from a cardholder.

Also, when a chargeback is initiated, the funds from this account are automatically withdrawn to get them moved back to cardholder’s account.

Payment Gateway

The payment gateway does the complex work of building secure connections to merchant account processors. It acts as a “virtual” credit card terminal allows a merchant to submit payments to a processor via the internet. It is often analogized as a virtual credit card terminal. Payment gateways also provide fraud filters, recurring billing payments, and other valuable functionalities to assist ecommerce companies.

The Merchant

Merchant is any business, company, brand, service provider, or other relevant party who provides a good or service in exchange for payment.

Possible Outcomes of a Chargeback

To identify the reason because of which an issuer files a chargeback, reasons codes were put into place. These reason codes are predefined and vary as per the credit card company. This list gives details about the chargeback reason codes.

If we categorize the outcomes of chargebacks, then you will observe that, every chargeback has three possible outcomes.

  1. Actual Fraud
  2. Chargeback/Friendly Fraud
  3. Product/Service Issues

Chargeback Outcomes

Every chargeback, when filed, is either coded under a fraud reason code or a non-fraud reason code. But sometimes, when chargebacks are coded as fraud, they come out to be non-fraud after further investigations. And in such cases, chargeback fraud or friendly fraud is found to be the reason.

Because of this pseudo categorization of chargebacks into frauds, many merchants simple give in and assume those to be un-winnable cases of fraud. When studies rolled out, it was revealed that more than three quarters of chargebacks are just the cases of friendly fraud.

The Cost of Chargebacks

Accepting credit card payments is beneficial to a business and with chargebacks, we study how it may backfire. When a customer files a chargeback, no matter what reason there is behind it, you have to go through the whole process. It is time-consuming and holds your resources. This may result in a kickback for your sales too. Also, all the fees involved, the stringent process and complex procedures, who knows if all this is worth it in the end!

Online credit card transactions are regarded as ‘Card Not Present’ or CNP transactions. A merchant account agreement usually, specifies that the merchant is 100% liable for any type of mishaps that could take place.

During physical transactions, where both the cardholder and the card are present, it is the credit card institutions who take sole responsibility in cases of chargebacks. However, during online CNP transactions, merchants are solely responsible.

Unfortunately, there is no way out for a merchant in any of the two cases- actually fraud or a malicious attempt by the cardholder. And, if merchant fails to provide enough proof to back up the transaction, he has to face the consequences. Moreover, shipping charges involved to ship the products also go down the drain.

Credit card institutions usually favor cardholder’s concerns and focus on keeping them happy. This is simply because they want their customers to keep going back to them (and not lose their clientele) so that customers keep using their cards to make purchases. These institutions value their cardholders’ best interests, such that any form of dissatisfaction or complaint usually results in chargebacks – all at the expense of honest merchants.

Chargebacks are not only responsible for bringing losses in financial aspects. Multiple chargebacks filed against single merchant has even worse consequences on the part of the merchant.

Following are some of the consequences that a merchant may have to face after multiple cases of chargebacks against him

  1. The credit card instituition may blacklist the merchant.
  2. The merchant’s online account may get terminated.
  3. Multiple chargebacks potentially ruin the reputation of an online store.
  4. Sales drop because merchants have to manage various procedures related to chargebacks.

Accepting Responsibility on Both Sides

Awareness about chargebacks is a must on both the sides- merchant’s as well as consumer’s. It is responsibility of both of them to accept consequences for the actions involved in the process.

Merchants’ Responsibilities

Merchants should take care that they are eliminating the risk of chargebacks, both legitimate and illegitimate. This can be done by,

  • Offering attentive customer service.
  • Providing high quality products and services.
  • Keeping proper return and refund policies in place.
  • Attending to transaction details. (this can drastically decrease friendly fraud)

By taking the necessary steps to detect fraud, merchants can identify transactions that could potentially lead to chargebacks. Preventing these fraudsters from making purchases reduces the risk of a resulting chargeback.

Preventing chargebacks is a way to go. But sometimes these are inevitable and the only thing merchants should resort to- Fighting chargebacks.

When more and more merchants dispute over false claims byt cardholders, banks become aware. This can go a long way in getting false chargebacks filed in future. It also helps educate consumers about what is a chargeback and when it should safely be used.

Cardholders’ Responsibilities

Cardholders have to be aware of one fact- Holding a card is a privilege and, not a right. This privilege comes with its own set and responsibilities and understanding how chargebacks work, is one of them.

Consumers should file a chargeback only in truly dire situations. They are the last resort, not the first action to take when seeking a refund. Consumers can’t impose chargebacks carelessly as this is harms merchants on more than one scales.

Hopefully, with proper education about what a chargeback is, both merchants and consumers can see a decline in the number of faulty chargeback claims.

Retain More Customers by Providing Multiple Currency Options For Checkout

When everyone seems to shop online, why are 67.45% shopping carts abandoned? This is about people. Different people, different approaches! You may have made peace with the fact that you cannot satisfy every buyer. However, you can follow a certain set of established tactics to grow your international business to highest bounds.

Experts keep telling you that localizing your global business is very important. It is, for two obvious reasons.

  1. To make people buy products from your online store.
  2. To keep people stuck to your store so they keep coming back.

So, why do people want your international store to look and feel like their local online store? Because, this provides them a comfortable, easy to browse user experience. Research shows that 20% of people abandon their carts because price is presented in foreign countries.

Buyers Behavior Chart

Of course, this is not the only motivation for localizing your store, there are many others. One being the headache of converting foreign currency prices unto your own currency, and other being the issue of its acceptance with banks. We have a solution for this problem, so let’s dive deeper into it.

Switching between currencies

One thing is for sure- People want their buying experience to be simple and convenient. You show them product prices in foreign currencies. It is the feasible way since you are selling in multiple countries. Here you are ignoring one simple possibility. Not all the people may care about converting the price every time just to figure out how much they are paying. Also, all banks have different policies when it comes to accepting payments in foreign currencies. The return and refunds become another severe issue.

Shipping and Tax charges are the extra money

Figuring out the amount is not the only problem. Sometimes it is about buyers feeling that they are paying more than they should. And it gets worse when your store is showing prices on products page in customer’s local currency.

If the buyer saw a product’s price on product page in his local currency, and is all geared up to buy and went to checkout. How heart breaking it must be for him to realize that he has to calculate shipping rates and taxes on his own? Moreover, the psychological effect of this currency auto-switch is that they feel you are charging extra under the sheets of foreign currency. This is where the feeling of being deceived comes in picture. And a customer lost once, is a customer lost forever!

What is the solution?

There are many apps to show the prices on your store in buyers’ local currency. These apps critically locate buyers and show currency accordingly. But as soon as they proceed to checkout, the prices get converted into store’s default currency.

You have to ensure that buyers see prices in their local currency at checkout. This can be achieved in many ways. The one obvious way is by establishing multiple stores. When you set separate store for each country, you can set currency under that country. Setting up and maintaining many stores come with its own set of issues as shown here.

Shopify currently has no other app that lets you display price in buyers’ local currency at checkout. There are many apps that can let customers set currency on product page. Then at checkout page, the prices get converted to store’s currency. Hence, the ideal situation implies one store, one currency (store’s default currency) at checkout.

Our mCheckout App lets you do one simple job of providing prices in buyers’ location currency at checkout page.

Along with this, it takes care of refund and returns in the same currency previously used by the buyer. Also, you may wonder that for all the different currencies, you will need various coupon codes and discount offers. Wonder no more! All Shopify coupon and discount code generators are compatible with our app.

This app supports custom credentials with USPS, Canada Post, UPS, or FedEx to display calculated rates at checkout. The app works on all plat.forms (operating system) without needing any modifications

How does our app work?

It is important to note that the visible work of our app essentially starts from Cart page.

At cart page, buyer gets two options in terms of currency. Either he can choose to proceed with store’s default currency or the alternate currency that was selected by the app (through location) or the user (manual input).

The working of the app is not limited by just setting the price in particular currency. It also lets buyers pay in that currency. And why is this an added benefit? When users pay in foreign currency, they end up paying additional amounts to bank for foreign exchange.

As mentioned above, not all banks support money exchange in all currencies. This serves as a hurdle in your store growth as it drives foreign buyers away from your store. But with our app, as you are offering them to accept payment in their currency, this issue is eliminated.

How can our mCheckout App help your international business?

People are reluctant to buy when they see prices in foreign currencies. We provide you with an app that lets you set country wise currency at checkout. What’s more? If for once, a customer is hooked up at your store, he is bound to come back. This ensures long term buyers for your store.

Let us know how you have been tackling this multi currency issue at checkout till now. And if you are still waiting for an ideal solution, use our app and convert more buyers today.

If you have got any issues with our app, we are always here to help you.


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