Understanding disputes, claims, chargebacks, and bank reversals: A guide for SMBs

From a simple misunderstanding to an accidental human error, many businesses experience a customer dispute or complaint every so often. It can happen to a business of any size and in any industry.

Whether the customer claims their item was not received, or they declare the transaction was unauthorized or fraudulent, customer disputes are an inevitable part of running a business.

Instead of worrying about when you may face your next customer dispute, take a proactive approach by understanding the different types of disputes merchants can be faced with, including claims, chargebacks, and bank reversals. Plus, get helpful tips and strategies to manage and prevent them.

What is a dispute?

When a customer encounters a problem with a transaction, they can raise the issue with the seller by opening a dispute. The goal of the dispute process is to address issues before they escalate into a claim. It’s worthwhile for merchants to work with their customers to resolve disputes as it allows them to provide excellent customer service, solve the problem, and prevent it from worsening. It also helps businesses create loyal, long-term customer relationships and avoid negative reviews and potential legal issues.

Here’s an example: A customer purchases a rug from an online store. Upon receiving it, they notice a large stain along the left side. The customer contacts the company to request a refund or a replacement product. However, the company does not believe the product is damaged and refuses to provide a refund or replacement. Because the customer and the merchant cannot come to an agreement, the issue may be escalated to a claim.

What is dispute management?

Dispute management involves helping buyers and sellers arrive at a solution for a dispute that all parties agree with. The process can include identifying and addressing the issue, facilitating communication between the buyer and seller, and finding ways to resolve the dispute in a mutually satisfactory manner. Because every dispute is unique, solutions are likely to vary. Explore the dispute management process.

Types of disputes and reasons for them

Disputes come in many different forms, though the most common include the following:

• Item Not Received (INR): The buyer is claiming they ordered and paid for an item but didn’t receive it.
• Significantly Not As Described (SNAD): The buyer states the item they received is significantly different than they expected, based on the merchant’s description. For example, the buyer ordered a gold-foil mirror but received a blue polished silver mirror instead.

Dispute management: Business impact

While a single dispute is unlikely to create a significant impact on your business, it’s important to keep a close eye on your overall claim rate. The more claims filed against your business, the higher the likelihood that your account could be reviewed, your balances could be affected, and reserves or limitations could be put in place.

How to prevent disputes

Though disputes are sometimes unavoidable, there are steps you can take to better your odds of preventing them from occurring in the first place. Start by:

• Creating accurate, detail-rich item descriptions.
• Clearly communicating your shipping methods.
• Shipping items promptly and providing all necessary tracking information.
• Displaying customer service information, including contact numbers, email addresses, and helpline information — which gives buyers an easy way to get in touch should an issue arise.
• Outlining your refunds and returns policy to prevent complications and miscommunications.
• Remaining responsive. Buyers have a greater chance of growing frustrated and angry if they can’t get in touch with your support team to troubleshoot an issue.

Explore more ways to help manage risk for your business.

Handling claims: What are they?

When an agreement cannot be reached in a dispute between a buyer and seller, it can be escalated to a claim, in which the buyer requests a refund for the purchase from the payment processor. Buyers can also file claims (without first creating a dispute) if they suspect their account has experienced fraud.

When a dispute becomes a claim

What’s the difference between a dispute vs. claim? If a buyer dispute can’t be resolved, either party can escalate it to a claim. There is usually a 20-day period between when a buyer first opens a dispute and when it can be escalated to a claim. During this process, both the buyer and seller are typically asked to provide additional information before a decision from the payment processor can be reached.

Learn more about how to dispute a claim and resolving claims.

Reasons for claims

In addition to INRs and SNADs detailed above, another common reason for claims is due to a suspected unauthorized transaction. In other words, if the buyer's account was hacked or compromised, and someone made a purchase without the buyer's authorization, the account holder would be asked to file a claim. This type of complaint is resolved through the claims process, not via a dispute.

Chargebacks explained: Causes and prevention

A chargeback occurs when a customer asks their card issuer to reverse a charge that they believe was unauthorized, fraudulent, or otherwise incorrect. The card issuer will then investigate the charge and determine whether to initiate the refund.

When a payment is reversed, the merchant usually is required to refund the customer's money and may also be subject to additional fees or penalties. It's important for merchants to have a clear and fair refund policy in place to help avoid chargebacks, and to be prepared to respond to them if they do occur.

Take a look at common reasons for chargebacks, including:

• Item is not received by a customer.
• Customer doesn’t recognize the transaction.
• Item is defective or damaged.
• Customer is charged more than once.
• Transaction was made fraudulently.

How to prevent chargebacks

When it comes to chargebacks, it’s more important to prevent them than fight them. That’s because every chargeback affects your total chargeback ratio, which determines your standing with credit networks. The more chargebacks you receive as a seller, the higher the likelihood that you may be flagged as a higher-risk merchant.

Preventing chargebacks is similar to disputes and claims — you’ll want to maintain strong communication, ship orders promptly, and create a clear return and refund policy, among other strategies.

Learn more about chargebacks here.

Chargebacks vs. disputes

A dispute is the initial step where a cardholder contests a transaction, typically due to issues such as unauthorized charges, product not received, or dissatisfaction with the product or service. A chargeback is the subsequent process initiated by the issuing bank if the dispute cannot be resolved between the customer and the merchant.

Disputing a transaction simply means the customer is questioning a charge on their account. Chargebacks, on the other hand, involve the actual reversal of funds from the merchant's account back to the customer.

What is a chargeback reversal?

If a merchant appeals a chargeback and wins, a chargeback reversal will occur – in which the issuing bank restores the funds back to the merchant.

What is a bank reversal?

A payment reversal, also known as an ACH return or bank reversal, is a request to cancel a transaction and return the funds to the original payment method. This request may be made by the customer or the bank and is often triggered by suspicions of unauthorized use of a bank account.

How to prevent bank reversals

One of the best ways to prevent bank reversals is to review orders for signs of fraud or suspicious activity. Here are strategies you can leverage to identify and prevent potential risks:

• Keep an eye out for transactions that show unusual patterns, such as large orders, shipping to high-risk locations, or requests to change the shipping address after payment.
• Make sure your business name is clearly displayed on invoices, so customers can easily recognize charges or settled transactions.
• Contact customers before orders are shipped to confirm order details and give them an opportunity to catch any mistakes or errors.

Learn more about how to avoid reversals.

Managing disputes, claims, and bank reversals: Tips

Looking for strategies to manage disputes, claims, and bank reversals? Check out these tips:

How to respond to disputes?

Though you can’t avoid experiencing a dispute, you can control how you respond to it. Below are four constructive communication tips:

• Be open: Approach the dispute with an open mind. Listen patiently and try to understand the buyer’s perspective. Use this as an opportunity to address and resolve the dispute before it escalates.
• Show respect: Be respectful and express to the buyer that you’re both on the same side.
• Stay focused: Resist negativity and remain focused on the goal of finding a solution that works for both parties.
• Think big picture: While you may disagree with your customer, remember that if you give them a break, you increase the odds of building better customer relationships and loyalty in the future.

Technically speaking, you can choose to respond to a dispute in a few different ways, including:

• Reply: This involves responding to the buyer and entering any relevant information depending on their initial dispute.
• Accept: Accept the buyer’s dispute and solution.
• Challenge: Challenge the buyer’s dispute with relevant information.

Learn more about resolving payment disputes.

How to manage claims?

Managing and preventing claims is similar to that of disputes. No matter the problem, creating and maintaining clear communication policies will increase your odds of avoiding or working through a claim successfully.

How to manage bank reversals?

Understanding how to reduce payment reversals is key to managing and preventing them later. Here are some quick tips:

• Submit transaction information properly.
• Use clear billing descriptors.
• Process authorization reversals quickly to increase customer satisfaction.
• Link your authorization request to future transaction messages to establish clear communication.

Learn more about managing bank reversals.

Financial impact: Recovering from disputes and chargebacks

Sometimes experiencing a dispute or chargeback is unavoidable. Looking ahead, consider implementing safeguards to help protect your business in the future. As a friendly reminder:

• Analyze transactions and orders for potentially suspicious activity.
• Clearly indicate your company name on invoices to avoid customer confusion.
• Reach out to the customer before a product ships to confirm order details.

You can also leverage PayPal for dispute and risk management. PayPal can help merchants manage fraud, reduce disputes, claims, and chargebacks, and expand their operations safely. Our fraud detection tools may also help you protect your business from existing and evolving threats. Browse more of our resources to help your business manage risk here.