Is a Return Item Chargeback Cause for Merchant Concern?
You may be surprised to learn that a return item chargeback isn’t really a chargeback at all. At least, not in the way we normally talk about them here.
With a standard chargeback, a customer files a dispute against a merchant to recover funds. This is an interaction between a cardholder and a merchant, centered on a payment card transaction. In contrast, a return item chargeback is something a bank issues to their own customer. It retrieves funds from a bank customer’s account after a deposit from a third party is rejected, and doesn’t even involve a credit or debit card at all.
Bottom line: the word “chargeback” is used to label two different processes that have little to do with each other.
So, if a return item chargeback isn’t a payment card chargeback, do merchants need to worry about them at all? For the most part, the answer is “no.” That said, it’s still a good idea to understand what they are and how they work. With that in mind, let’s take a high-level look at their functions and usage.
Understanding Return Item Chargebacks
If you’re like most merchants, just saying “chargeback” out loud can cause a spike in your stress level. The word carries many connotations, some of them seemingly contradictory, and nearly all of them with negative implications.
This reaction is understandable: as a rule, chargebacks do nothing but eat up time, effort, and revenue. It’s natural to be on-guard, assuming that a return item chargeback is just one more way for customers and card issuers to steal your revenue. Fortunately, that’s not the case.
The best way to explain what return item chargebacks are, is by first examining what they’re not. When we use the word “chargeback,” we’re most often referring to a forced transfer of funds from a merchant to a consumer. Designed as a consumer protection device, chargebacks serve as a last resort for cardholders who are victims of fraud or dishonest merchants.
If a customer disputes a payment card purchase, but cannot resolve the issue by dealing directly with the merchant, the bank may initiate a chargeback. At that point, the cost of the transaction is transferred directly from your account to the cardholder’s account. You usually have no input on this decision; in fact, you may not even know about it until you’re notified after the fact.
Chargebacks are part of the card-processing agreement. They’re also a federally-mandated customer right. Thus, your only options for responding to a chargeback are to fight the case, or simply accept it as a cost of doing business. In both scenarios, you may sacrifice some revenue, and are hit with additional fees.
Despite the name, however, a return item chargeback is not a credit card transaction dispute. Using the word “chargeback” in the name makes it sound like a transaction dispute, but here the process does not revolve around credit cards. Also, any fees are paid by consumers, not merchants.
Return Item Chargebacks Vs. Overdrafts and NSFs
- Return Item Chargeback
Return Item Chargeback is a fee assessed to a banking customer who attempts to deposit or cash a third-party check, but said check is rejected. These fees occur as debits to the consumer’s checking account, and differ from payment card chargebacks, (which are made as debits from the merchant’s account).
[noun]/* rɪˈtɜrn • aɪtəm • tʃɑːrdʒ bæk/
To illustrate this concept, let’s look at Bank of America’s Personal Account Fee Schedule (updated at the end of 2019), under “Other Account Fees and Services: Miscellaneous.” Here, BoA defines a return item chargeback fee as a charge applied “each time a check or other item that [Bank of America] either cashed for you, or accepted for deposit to your account, is returned to us unpaid.”
If you think that sounds like a bounced check fee, you’re not far off. The difference mostly depends on whether the check was written to fulfill a debt, or was deposited or cashed.
Most people understand a bounced check: a customer writes a check to your business to pay for a purchase. If the check doesn’t clear, the bank can either pay the item and overdraw the account (making it an overdraft item), or return the item unpaid (marked “NSF,” or “Non-Sufficient Funds”).
Either response results in a penalty fee to the consumer, and if your bank has to “bounce” the check, there may be a fee assessed to your merchant account, as well. However, none of these charges are considered return item chargeback fees.
A return item chargeback is a completely different animal; one where the merchant is rarely part of the equation. Here, the customer goes to their bank and deposits or cashes a check from a third party. If that check bounces, it’s labeled a return item chargeback, and the customer is hit with a fee.
Typically, these fees run less than fees for overdrafts or NSFs, but the merchant isn’t fined because no sales transaction took place. The only way a merchant is really involved in a return item chargeback would be if the merchant was the third-party writing the check that bounced. This illustration shows the difference more clearly:
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The Confusing World of Bank Jargon
While it’s a pain that a bank would use a variation of the same term for two different things, they’re hardly the only culprits. Here are a handful of the terms different banks use to refer to what is commonly known as a return item chargeback:
- Deposited item returned
- Cashed item returned
- Rejected check
- Deposited check returned unpaid
- Rejected item chargeback
- Return of deposited or cashed item
- Chargeback against cashed or deposited item returned
… and there are many more. In fact, BoA itself also uses two other terms (deposited item returned fee, cashed item returned fee) for variations of the same process!
Lack of standardized nomenclature is confusing enough. But, when one of those common terms is used for both a customer checking issue and as well as an unrelated, merchant-oriented process, it only makes matters worse. It would easy to pay too much—or not enough—attention to the wrong issue if you don’t have a full understanding of both terms.
Some Chargebacks Really ARE Trouble
Despite what many people think, return item chargebacks are between customers and their banks. They consist of debits to a consumer’s checking or savings account. Thus, they are not related to credit cards and have no bearing on the merchant.
The chargebacks that merchants need to be concerned about are payment card chargebacks…and those can cause untold financial damage. Chargebacks are debits made on the merchant’s account. They can be compounded by administration and penalty fees and a loss of merchandise. And, while they can be triggered by criminal fraud or by merchant error, chargebacks are most commonly the result of friendly fraud.
It’s good that merchants don’t need to worry about return item chargebacks, but it hardly negates the fact that chargebacks are a real and growing threat to merchants’ revenue and long-term viability. At Chargebacks911®, we work with merchants to create sustainable chargeback management strategies. We also do our best to help non-industry people interpret the stress of confusing banking jargon and simplify the complex, multifaceted layers of codes and regulations associated with chargebacks.