What is a Chargeback?

charge - back
noun
A Transaction in which an Issuing Bank pulls funds from a Merchant back to a consumer. This usually occurs because the consumer escalated a dispute about a purchase to his or her bank for resolution.
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How Does a Chargeback Work?

When a consumer is either unhappy with a product or service or didn’t receive a product or service he or she purchased, the customer's last resort is to contact his or her bank or Credit Card company after trying to resolve the issue with a Merchant. The Issuing Bank or credit card company, as a last option, can issue a credit to the customer, called a Chargeback, compensating the consumer for his or her stated loss. Other reasons for a chargeback include bank processing errors, duplicate billing, identity theft, disputes over price charged and processed, or missed refunds.

Merchants may suffer heavy penalties for chargebacks. Chargeback processing is an expensive process for all parties involved, from the Issuing Bank to the Acquiring Banks, to the Payment Service Provider, and the fees charged to the merchant for each chargeback often reflects that. The card associations have strict rules about chargeback management which they require Banks, Payment Service Providers, and Merchants to follow. If a merchant receives too many chargebacks, it will no longer be given permission to accept credit cards from the card associations. It is always in a merchant’s best interest to issue a refund before a chargeback occurs.