Why Chargebacks and Disputes Occur in Card Payments
Introduction
If you use a credit or debit card for your online purchases, you may have been involved in a dispute and chargeback. If you’re a merchant accepting payments online, you’ve definitely been involved in disputes and chargebacks. But what does each term mean? Why do chargebacks and disputes occur?
In this post, I will:
- Explain what chargebacks and disputes are and why they happen
- Discuss how merchants could respond
- Propose how the rise of non card payment methods (bank transfers, real time instant transfers, crypto payments) might help merchants.
1/ What Is a Dispute? What is a Chargeback?
A dispute is a disagreement between a customer and a merchant about the quality or quantity of goods or services received. The dispute occurs when a customer initiates action against the merchant, via their bank (the one that issued the customer’s card). A dispute can be won or lost (leads to a chargeback).
A chargeback is the process resulting from a dispute where refunds are reversed and move from the merchant back to the customer. A chargeback is a process resulting from a dispute.
Why Do Chargebacks and Disputes Occur?
There are a few different reasons why chargebacks and disputes might occur.
- Fraudulent purchase: One of the most common reasons is that a purchase was fraudulent. For example, if someone makes a purchase with a stolen credit card, the rightful owner of the card might dispute the charge.
- Product/service issues: Another common reason is that there is a problem with the purchased product or service. This could be due to a defective product, misaligned expectations, and/or poor customer service.
- Other: Finally, there are more nefarious reasons, like where a customer obtains the good or service but still initiates a dispute to avoid paying for it.
2/ How should merchants response?
Merchants bear a heavy responsibility. Card issuers tend to put the responsibility of proof on merchants to submit evidence to contest the dispute. Merchants have to submit dispute evidence via their payments partner, and the issuing bank is the ultimate arbitrator. The issuing bank weighs between the case presented by the cardholder (the customer of the bank) and the merchant.
This is a burden for merchants on top of regular business operations, so some may choose to not contest the dispute if it’s too much work. However, as an online business scales, chargeback costs scale too. Merchants should work with their payments partner to manage chargebacks — see examples here from Stripe and Adyen.
3/ What about non card payments?
Disputes can also occur in non-card payments (bank transfers, instant real time payments) but are much less common (closer to zero) [1]. Non card payments could be a way for merchants to lower their costs and prevent disputes. I’ve witnessed how frustrating disputes are for merchants, especially when consumers take advantage of it. 2 ways that non card payments might help —
- Non card payments reduces the burden of merchants in managing chargebacks (less disputes). For example, crypto payments offer the merchant the promise that once the payment is made, it is final and immutable. No chargebacks.
- Non card payments tend to be cheaper than cards (less middle men networks of Visa/MC etc). The cost of acceptance for local banking rails / real time payments is usually cheaper than card acceptance, making them attractive to merchants.
Conclusion
Chargebacks and disputes in card payments are confusing and frustrating, but it’s important to understand why they exist and what you can do to protect your business. The cards payment system was built around consumer protection against fraud (to make it attractive for consumers to shop online, and for banks and payment networks to benefit). Hence the current dispute processes/outcomes favor the consumer. In the future, non card payments might tip the scale a bit more towards the merchant.
[1] Personally I thought disputes were zero for instant payments e.g., sending a Paynow (Singapore), Pix (Brazil), Promptpay (Thailand), PayID (Australia) payment. I’ve since learned its not always 0, as someone could technically still go to their financial institution to dispute the payment. However it is rarer than in card payments.
