What is a chargeback and how does it work?

Every merchant experiences a chargeback every so often. It’s not a pleasant experience, but it’s part of doing business, both online and in person. Credit card chargebacks and debit chargebacks have been in existence for many years, but with ecommerce there are more opportunities for disputes. To get ahead of the game, here are the key chargeback definitions you should know.

What is a Chargeback?

A chargeback is the act of a customer filing for the return of their funds directly with the bank. When a buyer makes a purchase, they pay the required amount of money for the transaction. But, on occasion, the customer will request the money back from the merchant. This can happen for several reasons, the top three being payment processing error, fraud, and commercial disagreement.

Credit card chargeback is considered a consumer protection. In Brazil, for example, chargeback is supported by the consumer protection code, a code that will ensure the product is returned to the customer if any problem or a fraud is detected. A merchant who has a great refund process avoids chargebacks by ensuring that the customer does not feel the need to make a chargeback.

How Does a Chargeback Work?

After a purchase has been made, the customer will contact the bank and ask for the money back. Before the chargeback request becomes official, it must fulfill the criteria established by the bank. The chargeback request can happen for a number of reasons, yet it is the responsibility of the issuing bank to inform the merchant of the request alongside a reason code. One possible problem at this point in the procedure is that the reason code might not always be accurate. When the chargeback refers to commercial disagreement or auto-fraud, it can be disputed so as to help the merchant recoup the money.

Reason Code

In order to track chargebacks and understand them, the bank assigns reason codes. These codes are not universal. It is estimated that there are more than 65 different reason codes for chargebacks. These codes provide insights into why disputes happen in the first place

Monitoring frequent codes and taking action on the most cited reasons will help merchants keep a low risk score and reduce monetary loss due to chargeback.

If you want to have a global business, all steps of a cross border transaction need to be identified and sometimes adapted to make sure the customer will have a good experience when making an international purchase online. Take a look at what you need to consider to expand your business cross-border.

When someone makes a purchase, there’s a system that carries the money from the buyer’s account to the merchant’s account. With cross-border payments, it becomes more complex. International transactions require a change of currency, foreign transaction fees and dealing with an exchange rate. To navigate through these channels, a banking system ushers the money along.

In every cross-border payment, banks and a group of varying domestic entities work together to transfer funds. When a purchase is made, a “correspondent bank,” or the entity requesting the money, speaks with the “respondent bank,” which represents the entity buying something.

Throughout the major cities of the world, each bank has a counterpart in another city. So funds will first leave the buyer’s bank and go to that bank’s counterpart in the merchant’s country to prepare for remittance. The merchant’s bank will then receive the remitted funds, and they will be settled into the merchant’s account. These banks often work with others to transfer the money, which often involves more than four banking locations dealing with one another, navigating currencies, varying taxes, and transaction fees. Because there are so many entities working on a single purchase, the process can be slow.

What are the Fees Associated With Cross-border Transactions?

There are numerous costs when it comes to cross-border transactions. Most of them are absorbed by bank fees, which are more costly than any other part of the transaction. So while cross-border payments are costly, they are in such high demand, that they grow.

Cross-border transactions affect individuals as well as companies. Remittances are often sent from an immigrant family living in developing countries. These kinds of transactions are also subject to cross-border payment fees.

Other processing fees include a cross-border fee, which varies. This fee is a percentage that applies to a consumer’s purchase made with a foreign credit card. This rate can vary between credit cards, so it’s difficult to know what percentage will be charged in a transaction.

The biggest unknown taxes, as each country has its own tax system. Taxes apply to everything, and that means more than just sales tax. Value Added Tax (VAT), customs duty rates are applied to shipments. These all vary from country to country.

Finally, each country has its own currency, which means exchange rates must be calculated. While not an actual fee, the rate is in constant flux, so it’s important to keep tabs on what is being purchased. This affects the consumer when it comes to actually buy the goods, but if the merchant is obtaining any services across borders, then it applies to them, as well.