Presented by Xsolla.

There are a number of costs to account for when operating a video game business. These can range from expenses like employee salaries and software licensing fees to chargebacks and refunds.

Chargebacks and refunds are often overlooked since they occur after your customer has already purchased one of your products or services. In other words, unlike the majority of your resources which go into making a great game or getting the word out about it, these costs of business happen post-sale and can occur without any warning.   

To save you time, resources, and frustration, we’ve rounded up some best practices on how to manage chargebacks and refunds, which you can learn more about by downloading this free e-book. The e-book also includes charts and diagrams that make understanding these costs much easier.

In the meanwhile, feel free to brush up on the fundamentals, reference the glossary at the end for definitions, and discover how these costs can affect your business.

What is a chargeback? 

A chargeback is a forced transaction reversal initiated by an issuing bank. Put less technically, it’s the result of a process that involves a cardholder contacting their bank to request a reversal of funds for a payment they made to buy one of your products or services. Sounds like a form of consumer protection, right? That’s correct!

In 1974, the United States federal government enacted the Fair Credit Billing Act (FCBA) as a way of protecting consumers from unfair credit billing practices. Prior to this legislation, customers who paid with credit cards were vulnerable to unauthorized or fraudulent charges, charges made in the wrong amount, charges for goods and services not received, and many other unfair credit billing practices.¹ With the introduction of the FCBA, however, customers gained a system to protect themselves from those unlawful practices. That system, which still exists today, is the chargeback process.  

Credit Card Chargebacks

Chargebacks provide cardholders with protection, allowing them to contact their banks directly and request a reversal of funds when a business commits an unfair credit billing practice. Once a request is made, the issuing bank begins an investigation with the acquiring bank to determine if there is sufficient evidence to support the customer’s chargeback claim. If the issuing and acquiring banks find sufficient evidence during a dispute that the business violated the FCBA, then the issuing and acquiring banks would uphold the customer’s claim. In doing so, the issuing bank reverses the amount owed to the customer directly from the business’ bank account. On top of that, the business pays additional operational costs to the acquiring bank for representation in the dispute.

PayPal Chargebacks and Disputes

Unlike the credit card schemes, PayPal gives customers and businesses an opportunity to communicate directly with one another via the PayPal Resolution Center, a digital space on their website, in a separate process called a PayPal Dispute. This process lets businesses help resolve their customers’ concerns before they need to initiate the credit card chargeback process. During a PayPal Dispute, the funds in question are held temporarily by PayPal. If the customer and the business are unable to come to an agreement, the customer still has the right to file a dispute and initiate the chargeback process. The PayPal chargeback process is identical to the credit card chargeback process described above except that PayPal takes the place of the acquiring bank.

What is a refund?

Refunds are less complicated than chargebacks and are something you’ve probably dealt with regularly, perhaps having made a number of refunds yourself as a customer. A refund is a request made by a cardholder to a business to cancel a payment and return the amount paid to the cardholder. In other words, it’s a transaction cancellation which a business may initiate in accordance with its refund policy and any applicable regulations.

How chargebacks can impact business

Chargebacks can greatly hinder your business in the following ways.

How refunds can impact business

Refunds can also slow business down but to a much lesser degree.

Set yourself up for success

Chargebacks and refunds occur after a customer has bought your product or service. These two overlooked costs of business slowly but surely cut away at your revenue while adding to your operational expenses. Xsolla has been dealing with chargebacks and refunds for 14 years, so we can help you work through the details to reduce operational costs and improve customer satisfaction. To get essential information on best practices for managing chargebacks and refunds, download this free e-book from Xsolla’s video game experts.

Sources

Glossary

Acquiring bank: A financial institution that maintains a business’ bank account. Also known as an acquirer or a merchant bank, it processes credit card transactions on behalf of a business.  

Chargeback: A chargeback is a forced transaction reversal initiated by an issuing bank. Put less technically, it’s the result of a process that involves a customer contacting their bank to request a reversal of funds for a payment they made to buy a business’ product or service.

Credit card scheme: These are the companies (Visa, Mastercard, American Express, Discover) that regulate credit card usage and serve as technical providers. Credit card schemes are the bridge between the businesses that accept a credit card and the banks that issue credit cards to consumers.  

Dispute: A dispute is a filed claim submitted by the cardholder. Initially, it is received by the issuing bank, and this institution determines whether the dispute has merit to initiate a chargeback.

Issuing bank: A financial institution that issues credit cards to consumers on behalf of credit card schemes (Visa, Mastercard, American Express, etc.). Also known as an issuer or a customer bank.  

Refund: A refund is a request made by a cardholder to a business to cancel a payment and return the amount paid to the card holder. In other words, it’s a transaction cancellation which a consumer may or may not initiate by contacting the business in accordance with its refund policy.

Win rate: The probability that a business will win against a dispute.