Payment Chargebacks

A chargeback is the reversal of a payment, initiated when a cardholder disputes a transaction with their issuing bank.

A payment chargeback is a transaction reversal initiated when a cardholder or bank account holder disputes a payment with their issuing bank. Chargebacks serve as a consumer protection mechanism, allowing customers to recover funds from fraudulent, unauthorized, or disputed transactions. However, for merchants, chargebacks can lead to revenue loss, additional fees, and potential account risks.

Understanding how chargebacks work for both card payments and bank account transactions is essential for businesses looking to minimize disputes, manage risks, and protect revenue.

How the Chargeback Process Works

1. Chargebacks for Cards (Credit & Debit)

Chargebacks for Visa, Mastercard, and other card networks allow customers to dispute transactions, triggering an investigation process by the issuing bank.

1. Dispute Initiation – The cardholder contacts their issuing bank, citing fraud, unauthorized charges, billing errors, or dissatisfaction with the product or service.
2. Investigation – The bank reviews the dispute and issues a provisional credit to the cardholder while the case is being assessed.
3. Merchant Response – The merchant is notified and must provide evidence (e.g., invoices, receipts, shipping details) proving the transaction’s legitimacy.
4. Resolution – The bank evaluates the evidence and makes a final decision. If the merchant's proof is insufficient, the chargeback is upheld, and the funds remain with the cardholder.

Impact on Merchants: High chargeback rates can lead to increased fees, penalties, or account termination by payment processors.

2. Chargebacks for Bank Accounts (ACH & EFT Returns)

For bank account transactions, such as ACH (U.S.) and EFT (Canada), chargebacks occur when a customer requests a reversal due to an error or unauthorized debit.

1. Customer files a dispute with their bank, citing reasons such as insufficient funds (NSF), unauthorized transactions, or duplicate payments.
2. The bank investigates and reverses the transaction if the claim is valid.
3. Merchant Notification – The merchant may receive a notice and have an opportunity to challenge the dispute if sufficient proof is available.
4. Final Decision – The bank either upholds or denies the chargeback, impacting the merchant’s account standing.

Impact on Merchants: Bank chargebacks can lead to increased fees, account holds, or stricter risk monitoring by financial institutions.

Common Causes of Chargebacks

Card Payment Chargebacks:

• Fraudulent Transactions – Unauthorized card use, including stolen or compromised card details.
• Product/Service Issues – Non-delivery of goods, defective products, or services not as described.
• Billing Errors – Duplicate charges, incorrect amounts, or subscription disputes.

Bank Account Chargebacks (ACH/EFT):

• Insufficient Funds (NSF) – The account doesn’t have enough funds to cover the transaction.
• Unauthorized Debits – Transactions processed without proper consent.
• Bank Processing Errors – Mistaken withdrawals or incorrect account details.

How to Prevent Chargebacks

Implementing proactive fraud prevention, strong authentication measures and clear communication can help minimize disputes and protect revenue. Here are key strategies to reduce chargebacks:

• Use advanced fraud detection tools such as bank account verification, biometrics tools, and transaction risk analysis.
• Verify account balance for ACH and EFT using open banking payments to prevent NSF transactions.
• Enable pre-authorized debits (PAD) with digital authorization to obtain explicit consent before debiting customer accounts.
• Enable two-factor authentication (2FA) for high-risk transactions.
• Utilize tokenization to replace sensitive card and bank account details with secure, one-time-use tokens to minimize data exposure.
• Offer real-time payment tracking so customers can monitor their transactions and reduce disputes over non-receipt of funds.
• Monitor chargeback trends to identify recurring issues and address them proactively.

For merchants using VoPay’s payment technology, automated fraud detection, secure payment APIs, and real-time transaction monitoring can help reduce the risk of chargebacks while ensuring smooth payment processing.