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What Are Chargebacks and Why Should Merchants Try to Avoid Them?

What Are Chargebacks and Why Should Merchants Try to Avoid Them?

Credit card payments are now the proven way for businesses to generate most of their revenue from customers. Many business owners no longer accept a customer’s personal check, and cash is something we no longer desire to carry to pay for goods and services.

The bottom line is that with the popularity of credit card processing, we have become a cashless society. Using our credit cards to charge all that we buy has become the way to go in today’s world.

Out of this vast charging activity, some businesses have experienced something known as a chargeback. In this page, we will examine the chargeback process and explain why it is something every business owner should avoid.

When a customer challenges a charge that shows up on a credit card bill, it is referred to as a chargeback or a dispute. A chargeback helps consumers avoid fraudulent charges or aides them in disputing transactions in which they did not receive the intended good and services. Often, the process can be an expensive problem for businesses.

Chargeback High Risk Merchant Account


There Are Various Reasons Chargebacks Can Surface:

  • A customer may have been billed too much for an item.
  • A customer is not pleased with the quality of the purchased item.
  • A customer purchases another item and not the item they thought they were buying.
  • A customer is a victim of identity theft or other fraudulent activity.
  • A customer unknowingly signed up for auto billing or auto renewal.


It is quite easy for credit card holders to contest a charge. The business owner is the party who has the task of proving if the customer’s claim is legitimate. Banks normally get involved also in an effort to help decide if the customer has a valid claim.

If the business owner is unsuccessful and the consumer’s dispute is upheld, the business has to say farewell to the item that was sold as well as to the money from the sale. In addition, there is a chargeback fee that the processor charges the merchant for each chargeback that occurs in the prior month period.

Even if a contesting customer is not successful, the bank involved will deny payment for any chargebacks until the issue is completely resolved. With certain fees charged by banks and other concerns, it is easy to see how even disputes that favor the business owner can be costly.

Now, let’s take a closer look at chargebacks and how to avoid them.

Customers, in order to submit a dispute, are given 120 days from when the purchase of a product is made, or 120 days from the time they discover a problem with the product.

What this means is that whenever consumers think they have been wrongfully charged for something by a business, they can submit a dispute with their bank, allowing the chargeback process to begin.

When customers file disputes, it is highly likely that settlement of the disputes may take as long as a few weeks to two months on average.

PayPal has gone on record as advising that the entire process can take up to 75 days. During this time, money from the contested transaction is withheld from the merchant’s account.

Whenever a chargeback is launched, the bank involved issues a code to the merchant. The bank officials then tell the merchant the details of the dispute. The merchant’s bank, once a dispute is filed, will begin the process of making an effort to solve the problem.


Here Are Some Measures That a Business Owner Should Take to Help Avoid Chargebacks:

  • Merchants Should Be Quick to Respond: When merchants reply to chargebacks quickly, banks take notice. When merchants fail to respond right away and drag their feet, many disputes will end up in favor of the consumer.
  • Consumers Desire Quality Service and Clearly Worded Return Policies: The merchant’s return policies should be stated clearly when the sale is conducted. They have to be prepared to provide the best customer service they can. Consumers normally will go to a business first to resolve a problem. Refunding a customer is always less costly than if a customer is successful after filing a chargeback.
  • Business Owners Should Swipe Cards Whenever Possible: Businesses can avoid chargebacks by requiring that cards be swiped. It is always good to get signatures as well.
  • Merchants Should Use Address Verification Service: The Address Verification Service (AVS) is an anti-fraud instrument that compares a consumer’s name, legal address and zip code with data on file with the credit card company. Matches imply the likelihood that a legitimate sale occurred.
  • CVV/CVC Codes Help Prevent Fraud: It is wise for merchants to require customers to enter the 3 digit security code found on the back of their card when ordering products online. This helps by ensuring that the individual using the card has the card in hand and isn’t using a stolen an account number.
  • There’s Nothing Like Communication: Finally, merchants should communicate with customers. Consumers like to be made aware of the status of what they order. When they are aware, then they will be less likely to dispute a charge.


Most low risk processors will only allow a business to have a low chargeback percentage. Typically, half of a percent is the limit they will allow. High risk processors will allow chargeback ratios to go up to 2 or 3 percent on average.

Processors also look at chargeback percentage based on dollar volume and based on transaction count. It is important to note that either volume based or transaction based chargebacks are reviewed when they are gauging the risk level.


Why Flow Payments

We have a vast number of banks and processors that we have built strong relationships with over the years. Our experience in hard to place high risk merchant accounts allows us to carefully guide each merchant to the correct merchant account that matches their business needs. Call Flow Payments to get your free quote today!   


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