What Are Chargebacks and How Do They Work?
A chargeback is a powerful tool that consumers can use to protect themselves from shady transactions and fraud. In short, it is a way for customers to dispute a transaction and request a refund from the merchant. But for crypto businesses, chargeback crypto procedures can be a real headache. These disputes may seem small, but they can add up quickly, chipping away your hard-earned profits. In fact, fraudulent transactions alone cost businesses billions of dollars each year.
In this article, we will touch on chargebacks in the crypto world while explaining how the chargeback process works in practice, the main reasons for chargebacks, and how chargebacks impact crypto businesses. Moreover, we will share with you the most effective ways to protect your business from financial losses caused by chargebacks. However, let us first figure out what a chargeback is in crypto.
What is a crypto chargeback?
A chargeback in the crypto world refers to the process of reversing a transaction on the blockchain. This can occur if the customer believes the transaction was unauthorized/fraudulent or if the product or service was not as described or not delivered.
Different from traditional chargebacks, the process of reversing a transaction on the blockchain is more complex. The decentralized nature of blockchain technology makes it difficult to reverse transactions, and the process can take time and effort.
As a business owner accepting crypto payments, it is essential to understand the chargeback cryptocurrency process in the crypto world clearly. This includes awareness of the risks and challenges associated with accepting crypto payments and implementing robust security measures to protect your business from fraud.
How does a crypto chargeback work?
The process typically begins when a consumer contacts their bank or credit card issuer to report that a transaction was unauthorized or describe another reason for this issue. The issuer will then investigate the claim and, if it is determined to be valid, will initiate the chargeback process.
The chargeback crypto process typically involves five key steps:
- The issuer contacts the acquiring bank (the bank that processes the merchant’s transactions) to request a refund for the disputed transaction.
- The acquiring bank contacts the merchant to notify them of the chargeback and request any relevant documentation or evidence.
- The merchant can dispute the chargeback by providing documentation or evidence that the transaction was authorized and that the goods or services were as described.
- The issuer will review the evidence provided by the merchant and the consumer and decide whether to refund the transaction.
- If the decision is made to refund the transaction, the funds will be returned to the consumer, and the merchant may be assessed a chargeback fee.
It is worth noting that chargebacks can be time-consuming and costly for merchants, and they may ultimately result in the merchant losing the sale as well as the chargeback fee. Additionally, chargebacks can put merchants at risk of fraud and chargeback abuse, which is why many merchants prefer to avoid them altogether by offering a clear refund policy or using a payment processor specializing in high-risk or cryptocurrency transactions.
Timeframe for chargebacks
The timeframe for a chargeback can vary depending on a number of factors, including the payment method used, the issuer’s policies, and the complexity of the dispute.
In the case of traditional payment methods like credit cards, chargebacks are typically initiated within 120 days of the transaction date, known as the “chargeback window.” However, the timeframe for the resolution of a chargeback can be longer.
For example, once a chargeback has been initiated, the issuer typically has 30 to 45 days to investigate the claim and decide whether to refund the transaction. After that, the merchant may have the opportunity to dispute the chargeback, which can take an additional 30 days or more.
What are the reasons for a chargeback?
In the world of cryptocurrency, chargebacks can occur for various reasons, such as fraud, technical issues, or disputes between buyers and sellers.
Fraudulent transactions
As for crypto businesses, fraudulent transactions can be a major concern. These types of transactions occur when a customer disputes a charge they did not authorize or make using a stolen credit card or personal information. Fraudulent transactions can happen in multiple ways, such as through online scams, phishing attempts, or skimming at point-of-sale terminals.
Not only do fraudulent transactions result in lost money, but they can also lead to costly chargeback fees and potential fines from the issuer. These fees, which range from $20 to a whopping $100 per chargeback, are used to cover the expenses of processing and investigating disputes. And if your business deals with many such fraudulent transactions, your expenses can be mind-blowing.
Furthermore, if a merchant is found to have processed a high number of fraudulent transactions, they may be placed on a “high-risk” list and may have difficulty finding a payment processor willing to work with them in the future.
Technical issues
Chargebacks can occur due to several technical issues, including processing errors, system failures, gateway issues, and integration issues.
- Processing errors can occur when mistakes are made during the processing of a transaction, such as incorrect data entry or authorization issues.
- System failures, such as server outages or network disruptions, can prevent transactions from being processed correctly and result in chargebacks.
- Payment gateway issues, like connectivity problems or system upgrades, can cause disruptions in the processing of transactions and lead to chargebacks.
- Incorrect integration of the merchant’s systems with the payment gateway can also lead to errors in the processing of transactions and result in chargebacks.
Customer disputes
Another common reason for chargebacks is customer disputes. This can occur when a customer is not satisfied with a purchase and requests a refund or exchange, but the merchant is unwilling or unable to provide one. In these cases, the customer may initiate a chargeback to resolve the dispute.
These types of chargebacks can be caused by various factors, such as a lack of clear communication between the merchant and the customer, a mismatch between the customer’s expectations and the actual product or service received, or dissatisfaction with the quality of the goods or services.
Merchants should also be prepared to provide good customer service and be willing to go the extra mile to ensure customer satisfaction. They should also be prepared to listen to customer feedback and use that feedback to improve their products and services.
It is crucial to note that a customer dispute can happen even when the merchant has done nothing wrong, so it is always better for the merchant to take a proactive approach to customer satisfaction to reduce the chances of customer disputes and chargebacks.
Impact of chargebacks on crypto businesses
Chargeback crypto procedures can have a significant impact on crypto businesses, as they can lead to financial losses and damage to the business’s reputation.
One of the biggest impacts of chargebacks on crypto businesses is financial loss. When a chargeback occurs, the business loses not only the amount of the disputed transaction but also any fees associated with the chargeback process. This can add up to a significant loss for businesses that experience a high number of chargebacks. Additionally, chargebacks can also lead to increased fees from payment processors, as many processors charge higher fees for businesses that have a high chargeback rate.
Another impact of chargebacks on crypto businesses is damage to the business’s reputation. Crypto businesses, in particular, are already facing a lot of skepticism and mistrust, and chargebacks can further harm the reputation of these businesses. For example, when a customer disputes a transaction, it can lead to negative reviews and complaints, which can harm the reputation of the business.
Chargebacks can also lead to increased fraud, as fraudsters may use chargebacks to get free tokens. Moreover, chargebacks can also be a tool for fraudsters to launder money.
In general, chargebacks significantly impact crypto businesses, including financial losses, damage to reputation, and increased fraud. Any crypto business should take the necessary steps to protect itself and its customers from chargebacks.
The most effective strategies to prevent chargebacks
Prevention and mitigation of crypto chargebacks are important for any business that accepts credit or debit card payments.
One strategy to prevent chargebacks is to ensure that the customer’s billing information is accurate and up-to-date. This includes their name, address, and card details. It is also important to clearly display the terms and conditions of the purchase, as well as any refund or cancellation policies. By providing clear and detailed information, businesses can reduce the likelihood of disputes and chargebacks.
Another strategy is to implement fraud prevention measures. This can include using tools such as address verification systems (AVS) and card verification values (CVV) to verify the customer’s identity and card details. Additionally, businesses should monitor transactions for signs of fraud, such as large purchases or multiple transactions from the same IP address.
In the event of a chargeback, businesses need to respond quickly and provide any relevant information to the bank or credit card issuer. This can include proof of delivery, a transaction receipt copy, and other relevant documentation. By providing the necessary evidence, businesses can increase the chances of winning the dispute and avoiding a chargeback.
In addition, businesses can also sign up for chargeback alert services which will give them time to react before the chargeback is initiated, and in some cases, merchants can also negotiate with the customer or the bank to resolve the chargeback.
The importance of chargeback prevention and mitigation cannot be overstated for businesses. By proactively implementing prevention strategies and promptly addressing disputes, you can minimize the financial hit of chargebacks and uphold your reputation as a reliable and trustworthy business. Therefore, it is essential to take chargeback prevention and mitigation seriously to protect your bottom line and your reputation.
Utorg and zero chargebacks
As a business owner, you understand the headaches and financial losses that come with chargebacks. They can damage your reputation and erode the trust you've built with your customers. But what if there was a solution to protect your crypto business from chargebacks? Introducing Utorg — the ultimate remedy for your chargeback woes.
As a licensed fintech company, Utorg provides top-notch fiat-to-crypto gateway services in 187 countries. And with our track record of zero chargebacks during our time in the crypto market, you can trust that we know how to keep your business protected. How?
- First of all, all our users should complete a mandatory procedure of identity verification, commonly known as KYC (Know Your Customer). After going through the verification, it is becoming obvious the person’s real identity.
- Secondly, we implement 3-D Secure check, meaning that a user should personally confirm the payment via an online banking app or with the help of a confirmation code sent on the phone. The bank then authenticates the cardholder and provides Utorg with evidence of the online purchase.
- And finally, let us not forget the power of blockchain technology. All transactions are recorded and kept in our secured database, making it easy for us to prove that the authorized person made the transaction.
Do not let chargebacks control your financial future. Take action today and start protecting yourself from the financial risks of fraudulent transactions. Just with one simple integration within 24 hours, you will get all the preventive measures and an additional source of passive income. Interested? Contact us and book your free demo.
FAQ
1. What is a chargeback in crypto?
A chargeback in crypto refers to the process of reversing a transaction on a blockchain. It is typically initiated by the buyer or the recipient of the funds and occurs when they dispute the transaction and request their funds to be returned. This process is not a feature of all blockchains, and it depends on the specific blockchain implementation and the service providers.
2. How does a chargeback work?
It typically involves the buyer or recipient disputing the transaction and requesting that their funds be returned. The service provider or cryptocurrency exchange will then investigate the dispute and decide whether to reverse the transaction. This process can involve using smart contracts or other decentralized tools and may take some time, but not always guaranteed.
3. What are the main reasons for chargebacks?
The main reasons for chargebacks include disputes over the amount charged, dissatisfaction with a product or service, and unauthorized transactions. Fraudulent activity is also a common reason for chargebacks.
4. Can you do chargebacks on a credit card?
Yes, chargebacks can be done on credit card transactions. The process and procedure for chargeback may vary depending on the policies of the bank and credit card issuer, but generally, the customer will need to provide some form of evidence to support their claim, such as a receipt or proof of purchase. It is important to note that chargebacks are not always granted, and merchants may also have the opportunity to provide evidence or dispute the chargeback.