As a small business owner in the UK, if you accept card payments, it's essential to understand the credit card chargeback process. Chargebacks can be a headache for small businesses, but they are a necessary part of protecting consumers and preventing fraud.
In this guide, we'll explain what chargebacks on credit card are and provide some tips for how small businesses can reduce the risk of chargebacks, including:
- What is a credit card chargeback?
- How does a credit card chargeback work?
- Credit card chargeback time limit
So here’s everything you need to know about credit card chargebacks in the UK.
What is a credit card chargeback?
So, what is a credit card chargeback? A credit card chargeback is a process that allows a consumer to dispute a transaction with their credit card issuer. If the issuer finds that the dispute is valid, they will reverse the transaction and refund the consumer's account. This can be problematic for small businesses, as chargebacks can result in lost revenue, additional fees, and damage to their reputation.
There are several reasons why a consumer might initiate a chargeback, including:
- Fraudulent transactions - If a consumer's credit card is stolen or used without their permission, they can initiate a chargeback to recover the funds.
- Non-delivery of goods or services - If a consumer pays for goods or services but doesn't receive them, they can initiate a chargeback to recover the funds.
- Defective or damaged goods - If a consumer receives goods that are defective or damaged, they can initiate a chargeback to recover the funds.
- Duplicate transactions - If a consumer is charged multiple times for the same transaction, they can initiate a chargeback to recover the duplicate charges.
Reducing the Risk of Chargebacks
There are several steps that small businesses can take to reduce the risk of chargebacks:
- Be transparent - Make sure that your return and refund policies are clear and easy to understand. Provide detailed information about your products and services, including pricing and shipping information.
- Keep accurate records - Keep detailed records of all transactions, including receipts, invoices, and shipping information. This will make it easier to respond to chargeback disputes.
- Respond quickly - If a consumer contacts you with a problem, respond quickly and professionally. Try to resolve the issue as quickly as possible to prevent the consumer from initiating a chargeback.
- Use fraud prevention tools - Use tools like AVS (Address Verification System) and CVV (Card Verification Value) to verify that the customer's billing address and security code match the information on file with their credit card issuer.
- Use a card payment processor with chargeback protection - Some card payment processors offer chargeback protection services that can help small businesses reduce the risk of chargebacks.
Credit card chargebacks can be a challenge for small businesses in the UK, but they are a necessary part of protecting consumers and preventing fraud. By being transparent, keeping accurate records, and responding quickly to consumer complaints, small businesses can reduce the risk of chargebacks and protect their bottom line.
How does a credit card chargeback work?
The next question for UK small businesses is ‘how does a credit card chargeback work’? When a customer initiates a chargeback, the credit card issuer will investigate the dispute. They will typically request evidence from both the customer and the merchant to determine the validity of the dispute. This evidence can include transaction receipts, shipping and delivery information, and communication between the customer and the merchant.
If the issuer determines that the dispute is valid, they will reverse the transaction and refund the customer. The issuer will also charge a chargeback fee to the merchant's bank account, which can range from £15 to £100 depending on the issuer.
If the merchant disagrees with the chargeback, they can dispute it with the issuer by providing additional evidence. However, this process can be time-consuming and may not always be successful.
As a small business owner, it's also important to understand Section 75 protection, which is part of the Consumer Credit Act 1974, and can make the card provider jointly liable for compensating the customer, alongside the retailer or supplier, in certain circumstances.
Section 75 protection applies when a customer uses their credit card to purchase a product or service that costs over £100 and up to £30,000. If the product or service is faulty, the company breaches their contract with the customer, or fails to deliver what was promised (known as misrepresentation), the customer may be entitled to some or all of their money back. This protection even applies if the company has gone out of business and ceased trading.
Customers may also be able to claim if they only used their credit card to pay for part of the cost of the purchase. However, it's important for customers to provide evidence to support their claim, such as the retailer's terms and conditions, or details of the transaction.
It's worth noting that there can be complex legal and factual issues that arise in Section 75 claims, and each case will depend on its own facts. As a business owner, it's important to be aware of this protection and to respond promptly and professionally to any customer complaints or disputes.
Section 75 protection does not apply in all situations. For example, it may not apply if:
- The goods or services are purchased on other credit arrangements that do not involve a credit card or other regulated credit agreements, such as money transfers, credit card cheques, unregulated credit from retailers, or cash withdrawals.The contract with the retailer is not with the cardholder, such as when the cardholder pays for something on behalf of someone else.
- The goods or services are bought through a payment processor, such as PayPal, Amazon Marketplace (when buying third-party goods through Amazon), or an agent like Expedia. However, these organisations may have their own payment protection systems in place that customers can check directly.
- The purchase is made with a gift card, even if the gift card was paid for with a credit card. However, if the gift card is valued at over £100 and the customer is unable to use it (for example, if the company has gone out of business), they may be able to recover the cost of the gift card through Section 75.
Credit card chargeback time limit
There is a credit card chargeback time limit in the UK. According to the rules set by the Payment Card Industry Data Security Standard (PCI DSS), the chargeback process must be initiated within 120 calendar days from the date of the original transaction.
This means that a customer has up to 120 days from the date of purchase to dispute the transaction and request a chargeback from their credit card issuer.
It's important to note that this time limit may vary depending on the policies of individual credit card issuers, and some may have shorter timeframes. As a merchant, it's important to keep detailed records of all transactions and respond promptly to any customer inquiries or complaints to help prevent chargebacks.
When making a chargeback claim, the bank will initiate a refund request from the merchant. However, it is not guaranteed that the merchant will accept the request or that the bank will be able to successfully recover the funds.
On the other hand, when requesting a refund directly from the merchant, the responsibility lies solely on them to refund the money owed to the customer without involving the bank. This is why customers are recommended to first request a refund from the merchant before proceeding with a chargeback claim.
If a customer has already received a full refund directly from your business, they are not eligible to make any further chargeback or Section 75 claims. However, if a customer paid for a purchase using a credit card and then had to spend additional money as a result of a disputed payment, they may be entitled to make a Section 75 claim to recover these extra costs.
For example, if a customer had used a credit card to purchase airline tickets from a company that subsequently went out of business, they may need to buy replacement tickets to get home. In this scenario, the customer could potentially make a Section 75 claim to recover the cost of the replacement tickets.
Typically, customers have a window of 120 days after a purchase to initiate a chargeback claim. However, they are advised to refrain from filing a claim until they have attempted to obtain a refund directly from the merchant.
In the event that they are dissatisfied with the merchant’s response or believe that they may be going out of business, it is usually recommended to file a chargeback claim promptly. While the claim will still be addressed even if the retailer goes out of business, there is no guarantee that a refund will be granted.