The term chargeback refers to the reversal of a financial transaction. This term is primarily used in relation to credit card transactions which are charged back from a merchant and credited back to the cardholder by a merchant acquirer or payment network.
Because credit card holders settle their debts to credit card issuers in arrears, they are able to dispute transactions which they believe to be incorrect or fraudulent before making their credit card payment.
The payment for a purchase is credited to a merchant by their merchant acquirer at the time that the purchase is made, with the money for the payment being fronted by the cardholder's issuer.
The cardholder can avoid paying for incorrectly-charged payments and duplicate charges or claim reimbursement for goods or services which were not delivered by filing a dispute against the merchant with their card issuer.
The card issuer will normally require cardholders to contact the merchant with their dispute directly. Only if the merchant does not cooperate with the cardholder will the card issuer – or in some cases the payment network or merchant acquirer – step in to mediate the dispute. If the merchant is found to be guilty, the money may be charged back from the merchant. The merchant may be charged an additional fee in addition to the amount transacted in order to cover the administrative cost of the chargeback.
Chargebacks can also affect cardholders in that, if a cardholder objects to a transaction and the issuer finds the objection to be unjustified, the issuer may charge the cardholder a penalty fee. Most Swiss issuers (including Viseca and Swisscard) high penalty fees to cardholders who make unjustified chargeback claims.
When processing applications for payment processing services by merchants, merchant acquirers normally assess the risk of chargebacks posed by a business. If the business is deemed to have a high risk of chargebacks, the merchant acquirer will charge it a high mid-qualified merchant discount rate or non-qualified merchant discount rate to compensate for the possible additional administrative costs associated with managing disputes and chargebacks.
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