How Credit Card Chargebacks Work and Protect Consumers

I imagine Amazon needs quite a few resources to photograph and document every single delivery in front of every single door, everywhere in the world.

They do it to protect themselves against credit card chargebacks from consumers disputing transactions as unauthorized or fraudulent — which laws originating in the 1970s give them every right to do.

A credit card chargeback is a payment reversal initiated by a cardholder to dispute a merchant transaction.

Problems arise for merchants when shoppers use those laws mistakenly or abuse them because they’re out for something, with one estimate putting the cost of chargebacks at $54.5 billion annually.

Although the chargeback process may have some unintended economic costs, it protects consumers from credit card fraud by providing a structure for handling disputes. That’s why I’m here to show you that the chargeback process is about understanding our rights and responsibilities as cardholders.

Legislation addressing chargebacks took shape in the 1970s, when the credit card industry was beginning to explode. Banks mailed unsolicited live credit cards to millions in the 1960s, leading Congress to protect consumers from offers whose implications they may not have fully understood.

Now, digitization has transformed financial services, and credit cards are almost a necessity. Although we may still worry about criminals stealing our physical cards from our purses and wallets, we also have to deal with sophisticated identity theft schemes and tricks like using AI impersonations to phish for card details.

But the law and the major card issuers give us ample power to fight back when we see a statement transaction we believe to be fraudulent. Here’s how:

Initiating a Chargeback

The first step in every chargeback process is recognizing you have a problem.

My intuition tells me that many, if not most, cardholders ignore their credit card statements and activity logs. If you’re not looking there for evidence of a transaction you can’t remember making, you’ll never find it.

When you find such transactions, your card company needs to know. Contact the company that issued your card, not one of the big brands like Visa, Mastercard, Amex, or Discover — those big brands operate the networks the issuers use.

The easiest way to instigate a chargeback is typically to call the service number on the back of your card. If you don’t have your card, and you’re in front of a screen, you can initiate a dispute via your issuer’s app or website.

After ensuring your dispute has merit, the issuer will likely issue a conditional credit for the amount you owe, forcibly withdrawing the money from the merchant’s acquiring bank to make good on the transaction.

That’s the law, and it gives consumers plenty of leverage with merchants.

Merchant’s Response

At this point, you’ve got a card issuer and a merchant spending time and resources to sort out the problem.

Your issuer assigned a chargeback reason code and submitted whatever data it had to the merchant. Whether you claimed the transaction was fraudulent, the merchant made an error, the purchased item never arrived, or something else, the merchant now has limited time to respond.

The first decision a merchant must make regarding a chargeback is whether to dispute the dispute. Fighting back is the usual choice, given that accepting the justification in the reason code generally means losing the sale without recovering the merchandise.

The amount of response time the merchant receives depends on several factors, including stipulations from the networks and issuing bank, the nature of the purchase, and the reason for the dispute. Merchant return policies and even state and local laws can be factors, as can unforeseen events like natural disasters and disease epidemics.

Remember COVID? The networks relaxed chargeback rules for consumers and merchants during the pandemic. Now that we’re back to what passes for normal, merchants generally get between 20 and 45 days to respond.

This is also known as a representment case. The merchant’s response may include shipping and delivery confirmations, emails and texts between the two parties, and any other relevant information.

Dispute Resolution

In another advantage to the consumer, it’s up to the issuer to determine who wins. Some who look closely at these types of things see issuers as biased against merchants because the consumers are their customers.

I think the reality is more complex, but if you see the lack of an impartial third party as a limitation in the system, that also sounds reasonable.

Your credit card issuer determines who wins chargeback disputes.

If the issuer rules in the merchant’s favor after looking at all the evidence, it upholds the charge and withdraws your conditional credit, returning the transaction to the status quo. Finding in the consumer’s favor, however, gives the merchant’s acquiring bank one last chance to review the evidence before deciding whether to continue.

Arbitration and court cases may arise if either party chooses to continue the dispute. But most cases end here.

Now, let’s get into the primary reasons consumers and businesses encounter chargebacks. The system evolved so consumers and merchants could have a structured way to communicate about transactions that did not go as planned.

The rise of eCommerce in the 2000s put more impetus behind chargebacks and raised consumer awareness of how to use them. The modern chargeback process protects consumers by protecting digital transactions.

Fraudulent Transactions

Fraudulent transactions are chief among them. Recent industry research projects that issuers, merchants, and acquiring banks stand to lose $397.4 billion to card fraud over the next decade.

That figure is down from previous estimates amid a gradual global decline in fraud as the industry improves how it protects itself and its customers.

Old-school card-present fraud (where someone steals your physical card or your credentials at the point of sale) produces a declining percentage of fraudulent transactions — something like 25% to 35%, depending on what you read on the web.

EMV chips and contactless transactions use encryption to eliminate skimming or using counterfeit cards. However, many point-of-sale systems globally don’t support EMV, leading issuers to produce EMV cards with magnetic stripes that make them more compatible, but leave them vulnerable.

Meanwhile, fraudsters have turned card-not-present fraud into a war of escalation, but the good guys are gaining ground.

We don’t know how long that will last, however. Scams like phishing now incorporate AI, including voice impersonations, to increase psychological pressure on unsuspecting victims. And identity theft can lead to account takeovers and synthetic identities that extend the damage.

Billing Errors

Humans had a much bigger role in processing transactions when the chargeback system first took shape.

But people who check their credit card statements and transaction logs regularly still find evidence of humans in the system, such as incorrect billing amounts, duplicate transactions, and charges for goods not ordered or received.

In fact, the efficiencies of global eCommerce make it quite likely you’ll eventually do business with a small company (maybe even a sole proprietorship) located thousands of miles away that tracks sales on a spreadsheet and hand-stuffs shipping envelopes in a converted garage. 

The person doing that work may make a mistake from time to time!

Quality Disputes

That said, we’ve all worked with merchants who have overpromised or underdelivered.

The rise of eCommerce also gave merchants even more opportunities because now we make purchase decisions based on photos and reviews.

Consumers may have different ideas about what constitutes receiving the product they intended to purchase. 

The chargeback process also gives shoppers leeway to dispute transactions when products and services don’t meet their expectations, are significantly different from what they thought they were ordering, or are damaged or defective.

We just saw how the chargeback system protects consumers from merchants who may overpromise or underdeliver and from transactions that don’t go as expected. However, I also found that more consumers than ever are finding loopholes in the system to take advantage of.

Now, let’s look at those loopholes to understand their implications for merchants and the economy as a whole. As the chargeback system protects consumers, it also leaves itself open to exploitation.

Potential Misuse

Consumers may misuse the chargeback system intentionally and unintentionally. Intentional misuse constitutes chargeback abuse. The reason Amazon and other eCommerce retailers photograph and document their deliveries is to prevent customers from claiming they never received the item.

Porch pirates aside, photographic evidence of a successful delivery is hard to dispute. Shoppers may also dispute charges for purchases they regret — which may not surprise you, given that eCommerce makes buying as simple as a few clicks or taps.

Consumers also use chargebacks to circumvent onerous return policies and to double-dip by returning items for refunds while simultaneously angling for a charge reversal. There’s no end to our creativity when it comes to making money.

Unintentional misuse constitutes friendly fraud, and it’s a huge problem. That’s when some sort of household miscommunication or misunderstanding occurs that leads a cardholder to believe there’s been a mistake.

You’ll find a lot of stats for this online, but an article by Mastercard puts friendly fraud at 70% of total consumer chargeback fraud. People are ordering so much online that they don’t know how to keep track of it.

Financial Impact on Businesses

That tells you that once you get used to dialing a number to instigate a chargeback dispute, it can be hard to stop. In other words, it may be too easy for consumers to engage with the system. But that’s a story for another day.

Another article from Mastercard puts the average merchant charge for handling each chargeback dispute at between $15 and $70. It’s certainly an incentive for businesses to provide the best possible service because the merchant is generally out the merchandise and the revenue every time a customer wins a chargeback dispute.

Mastercard estimates chargeback disputes cost merchants between $15 and $70 each.

Chargeback protection solutions abound at price points for all businesses, but a merchant’s best defense may be high standards. Chargebacks lead to bad reviews. Chargeback fees and penalties can accumulate quickly, harming profitability.

Acquiring banks aren’t too happy when merchants they’re trying to serve muck up the works with frequent chargebacks. Merchants who engage with customers in disorganized ways that lead to a higher-than-average chargeback rate can expect higher-risk status, higher processing fees, and even account termination.

Long Resolution Times

The chargeback process can take weeks or even months to resolve, and that, in and of itself, carries a cost. Although merchants have a relatively limited time to respond to dispute instigations, consumers generally have up to 120 days to start the process.

That means four months may elapse from a product delivery date to the start of a chargeback dispute.

• Consumer initiation: 120 days
• Merchant response: 20 to 45 days
• Issuer review: 30 to 45 days
• Final resolution: 30 to 90 days

The stakes can be high because there’s seemingly no limit to what consumers are willing to charge on their cards. The resolution process can be a period of uncertainty that ties up time and resources.

None of us could buy anything online if the risks of eCommerce were greater for merchants than the rewards. However, chargeback costs impact smaller merchants much more significantly than eCommerce behemoths like Amazon.

Consumers should concentrate on understanding and managing the chargeback process responsibly to protect their online shopping lives with the least possible negative impact on the system.

Monitor Your Statements

Like everything else in life, using financial services to your advantage requires you to invest the time and energy to get things right.

That starts with regularly monitoring your credit card statements or transaction logs and getting a handle on your household’s online purchases.

So, get to know your statements and logs. Bookmark your financial accounts and remember the logins and passwords.

Develop a household policy on purchases to track everyone and everything. Be a responsible financial consumer and report unauthorized transactions or delivery mix ups as soon as they pop up.

The chargeback system can’t protect us if we don’t use it. Letting fraudulent activity sit on your record until it damages your credit score — or worse — isn’t the way to go.

Understand Merchant Policies

While you’re at it, develop a better understanding of who you’re working with out there. I’ll bet most merchants fear chargebacks more than working with dissatisfied customers.

That means really digging into your merchant’s return and other customer-satisfaction policies and guarantees. People create companies to serve other people, so contacting your merchant should be your first step when you find something amiss, not instigating a chargeback dispute.

Track what you spend and where. Understand how to communicate with your merchant about products, services, and policies. Track and save your transactions and be ready with documentation to resolve your case quickly.

The chargeback system exists for a reason, but it doesn’t solve every problem. Merchants are often willing and able to step in before chargebacks become a factor.

Use Security Features to Prevent Fraud

Finally, understand and use the security features the financial system provides. You wouldn’t hit the highway without a seatbelt, would you?

Ensure you only browse encrypted websites to keep malware at bay. Watch for insecure public wifi to mitigate against snooping.

Adopt two-factor authentication to minimize unauthorized logins, and passkeys to protect against password cracking. Use the articles and resources you’ll find here at CardRates.com or elsewhere to educate yourself about the many anti-fraud solutions on the market.

Do it because the law only gets you so far. In contrast to unreasonable expectations, using strong anti-fraud measures and monitoring for suspicious activity is a real-world remedy for eCommerce mistakes.

When you think about it, it’s a wonder the system works as well as it does. Chargebacks arose as banks discovered the profit-making power of credit cards, and consumers began to experience the fallout after the industry explosion of the 1960s.

Under the constant push of digital transformation, it really didn’t take all that long for small local charge card operations to coalesce into the massive international credit card networks we have today.

Those networks connect consumers and merchants worldwide by providing a web of trust that allows everyone to participate on the same terms, bound only by mutual expectations.

Think about that the next time you see your Amazon driver taking that quick photo before walking back to the delivery truck. That picture may give consumers and merchants peace of mind in the global marketplace.