In the simplest terms, a chargeback is the reversal of a credit card payment directly from the issuing back. Basically, it’s a refund that you as the merchant didn’t initiate and is typically as a result of a dispute between the merchant and the customer who purchased goods or services with their credit card.
Chargeback System: Intent vs. Practice
Chargebacks were initially invented to help protect consumers from dishonest merchants. Bank credit card usage exploded in 1974 when the Fair Credit Billing Act of 1974 was enacted. It’s no surprise that the hero of the act and subsequent increase in credit card usage was the chargeback.
In all cases except fraud, the customer is required to attempt reconciliation with the merchant first.
Sadly, this isn’t always the case and some consumers have learned how to utilize the chargeback as a weapon to victimize merchants via “Friendly Fraud”.
Friendly Fraud – On the Rise
Friendly Fraud, aptly referred to as Chargeback Fraud, is when a consumer abuses the chargeback process. They purchase goods and services using their bank credit card, and then claim those legitimate purchases are fraudulent.
While the chargeback was a very important tool in creating consumer comfort in utilizing credit card payments, related legislation hasn’t kept up with the changing payment landscape.