Chargebacks

What Is a Chargeback?

A chargeback occurs when a credit or debit cardholder receives a refund after disputing a transaction. Originally built to protect customers from fraud, chargebacks now happen for many reasons — including undelivered orders, damaged goods, duplicate payments or accidental purchases. In these situations, the issuing bank may approve the dispute and reverse the transaction.

Chargebacks can also stem from friendly fraud, where customers bypass the merchant and dispute a valid charge, either by mistake or intentionally.

For businesses, chargebacks bring financial and operational stress. Every $1 lost can cost $2.40–$4.60 once fees and investigation time are included. High chargeback ratios may also trigger penalties from payment providers or even the loss of processing privileges.

To limit these risks, many merchants use chargeback management tools to track disputes, detect patterns and automate resolution, reducing workload and protecting revenue.

How Do Chargebacks Work?

A chargeback begins when a cardholder disputes a transaction with their bank. In some cases, banks may also initiate chargebacks themselves due to processing errors or authorization issues.

Once the dispute is filed, the issuing bank reviews the claim to decide whether the cardholder has a valid reason. If approved, the issuer typically issues a provisional refund and sends the chargeback to the merchant’s acquiring bank. The disputed amount is usually withdrawn from the merchant’s account at this stage.

The merchant then chooses whether to accept the chargeback or contest it through representment, providing evidence that the transaction was legitimate. Complex cases may escalate into an extended exchange between issuer and acquirer, and in some situations, go to arbitration where the card network makes the final decision.

Ultimately, the outcome is one of two:

• the cardholder keeps the refund, or
• the chargeback is reversed and the original transaction stands.

Who Participates in the Chargeback Process?

A standard chargeback process involves four participating parties. In the event of arbitration being reqA standard chargeback process involves four participating parties. In the event of arbitration being required, a fifth can become involved. The parties are as follows: cardholder, issuer, acquirer, merchant and card network.

Let’s take a look at the dynamic each one of them has throughout the process:

• The cardholder kicks off the process by logging the initial dispute and requesting their money back. They may also play a part in providing information and evidence to support their case.
• The issuer (i.e. the cardholder’s bank or card company) processes the chargeback request and handles communications with the acquirer.
• The acquirer (the merchant’s bank or card service company) handles communications with both the issuer and the merchant.
• The merchant (the business that processed the transaction and initially received the funds) hears from their acquirer once the chargeback process is initiated. They then have the choice of accepting or disputing the chargeback. Like the cardholder, they are expected to provide information and evidence to support their case.

These are the typical parties involved in the chargeback process. However, the card network (e.g. Visa or Mastercard) may also be involved in the process if the chargeback case becomes contentious and an outcome cannot be agreed. In this instance, the card network can become involved in an arbitration process where it has the final say on the decision. The card network will impose fees for getting involved in the process.

Step-by-Step Chargeback Process

1. The cardholder files a dispute: The cardholder contacts their issuing bank or card company to challenge a transaction. The issuer reviews the claim and initiates a chargeback request.
2. The issuer notifies the acquirer: Once the chargeback is raised, the issuing bank sends the dispute details to the merchant’s acquiring bank.
3. The acquirer informs the merchant: The acquirer forwards the chargeback information to the merchant, who must decide how to respond.
4. The merchant chooses to accept or contest the chargeback
   • If accepted: The merchant automatically loses the case. The disputed amount and any related fees are withdrawn from their account and the customer receives a refund.
   • If contested: The merchant submits evidence and a rebuttal letter to their acquirer, proving the transaction was valid. The acquirer passes this evidence to the issuer for review.
5. The issuer reviews the evidence: The issuing bank assesses the merchant’s evidence and decides whether to favor the cardholder or the merchant.
6. The dispute escalates if unresolved: If neither side accepts the decision, the case can move to pre-arbitration and then arbitration, where the card network makes the final ruling.
7. Final outcome and costs: Regardless of the result, managing chargebacks is expensive and time-consuming for merchants. Fees can exceed $100 per case and even when merchants win, administrative costs make the process burdensome.

Chargebacks vs. Payment Disputes

Although payment disputes and chargebacks are often mentioned together, they are not the same thing. A dispute starts when a customer challenges a transaction. The issuing bank then reviews the claim and decides whether to turn it into a chargeback. A chargeback dispute happens only if the merchant contests that chargeback and enters the representment process.

Types of Chargebacks

Chargebacks can occur for many reasons, including:

• Criminal fraud: Unauthorized transactions the cardholder didn’t make.
• Unrecognized transactions: Often friendly fraud, where the customer forgets a purchase or doesn’t recognize the merchant name.
• Unauthorized use: Purchases made by additional cardholders or children using a parent’s account.
• Intentional friendly fraud: False claims like “item not received” or “non-refundable product dissatisfaction.”
• Product issues: Items not delivered, defective or counterfeit goods.
• Billing disputes: Recurring payments, subscriptions or installment charges.
• Deposits and bookings: Non-refundable deposits or cancellations, common in travel and rentals.

Card networks classify chargebacks using reason codes. For example, Visa uses code 13.3 for “Not as Described or Defective Merchandise,” while Mastercard uses 4854 for installment billing disputes.

Why Chargebacks Matter for Businesses

Chargebacks can have serious financial and operational consequences for businesses. Beyond the initial loss of revenue, there are processing fees, administrative costs and the time spent managing disputes. Manual handling can quickly overwhelm teams — which is why automated chargeback management solutions are becoming essential. They streamline dispute handling, reduce human error and help recover lost revenue more efficiently.

Every business that accepts card payments must also maintain a low chargeback rate. Exceeding the threshold can label a company as high-risk in the eyes of card networks and payment providers. Those that breach limits may be enrolled in programs like the Visa Dispute Monitoring Program (VDMP), facing penalties, strict reporting and even the loss of payment processing privileges.

FAQs

Sources

• Tidal Commerce: What Is a Chargeback Fee? Causes, Risks, & Prevention
• Clearly Payments: Credit Card Fraud Statistics in 2024 for USA