What Is A Chargeback?

A chargeback is a forced refund to a consumer's credit card. Charge backs usually happen because of fraudulent use of  a credit card, or because of some perceived failure on the merchant's part.

How Do Chargebacks Work?

When a credit card holder requests a refund from the credit card company, the credit card company evaluates their request, and, if approved, takes the money out of your merchant account. The credit card company normally gives you a specified amount of time to dispute the claim. If you can convince the credit card company that the chargeback is not justified, the money will be put back into your merchant account.

Why are Chargebacks Bad?

Banks normally charge a hefty fee for each chargeback, so you lose the original amount of the transaction, as well as an additional fee.

In addition, banks really get nervous when they start seeing chargebacks. Get too many, and they might close your merchant account.

How to Avoid Chargebacks

As I mentioned earlier, most chargebacks happen because of credit card fraud. It follows that the best way to avoid one is to avoid the other.

There are two main ways to avoid credit card fraud.

The first is known as AVS-or Address Verification. Most gateways offer this feature. Basically, the gateway will check that the address given during the sales transaction matches the address on file for that card. If the addresses don't match, the transaction is denied.

The second method is to require the security code - or CVV2 Code - to be provided by the buyer. This is intended to verify that the card is actually in the buyer's posession.