Most consumers and business owners don’t know what a chargeback is. That’s a good thing. A chargeback is a transaction that a consumer has successfully disputed with their credit card company or bank that results in the merchant refunding the charge back.

Let’s imagine that your credit card number is stolen and someone buys a meal at a restaurant with it for $100. You notice this on your credit card statement and call the number on the back of your card and let them know that you didn’t eat at that restaurant. In most cases, the credit card company will ask you if you if you attempted to resolve the issue directly with the merchant and if you have, they will cancel your credit card and send you a new one. They also remove that amount from your statement so you don’t have to pay it while they investigate the validity of your claim.

From the merchant side, they get notified with the details of the disputed transaction. The merchant has a fairly short amount of time to provide proof that the cardholder did make the purchase. Clearly this can be difficult if records are not kept in an organized way. Typically, the only proof that is available is the signed credit card slip. If the merchant provides this to the card issuer, they will attempt to confirm that the signature matches. Less than 25% of disputed charges are found in the favor of the merchant. In the event that the dispute is upheld, the card issuer withdraws the disputed amount from the merchant’s bank account and may also add a penalty of $20 to as high as $100.

Have you noticed that it is more and more common for you to not have to sign anything after using your credit card? Or if you are asked to sign, it is on one of those machines that rarely captures your signature accurately? Now the merchant’s one rather weak form of proof either doesn’t exist or is so inaccurate it would actually help the customer’s claim, not the merchant’s! Merchants are faced with more and more challenges because not only has there been a large increase in the number of stolen identities, but people are now disputing transactions that they actually did make just so that they don’t have to pay for them! This fraud, known as “friendly fraud,” represents around 20% of all disputed charges. In this case, a customer may make an online purchase and then claim they never received it.

Chargebacks fraud cost merchants an average of 0.6-1% of their annual sales. This will increase because there have been so many large breaches of credit card information from large, popular stores. Although the merchants take the initial brunt of the loss, we all suffer the burden in the form of rising prices and eventually, a reduction in convenience as merchants begin to require a signature acknowledging delivery, a fingerprint or photograph as well as a signature when using a credit card, or other steps to increase their chances of winning a dispute claim.