What Is a Chargeback?

A chargeback is what occurs when a credit or debit cardholder successfully receives a transaction refund (or reversal) after disputing a transaction.

Chargebacks were originally conceived to refund customers who had been the victims of fraud. However, there are various other reasons why cardholders dispute transactions. These situations can also result in the issuing bank or card issuer granting a chargeback.

For example, customers may dispute a transaction due to goods not being received or arriving damaged or faulty. Disputes can also arise due to accidental duplicate payments, or payments made in error.

In addition, chargebacks often occur in cases of accidental or deliberate friendly fraud. Incidents can range from people using the dispute process instead of trying to seek a refund from a company, right through to individuals dishonestly claiming not to have received goods and services.

Chargebacks create a complex problem for businesses, with financial, administrative, and reputational impacts. Fees and investigative costs mean that each dollar claimed in chargebacks typically costs a business $2.40. Furthermore, a high ratio of chargebacks can result in penalties being imposed by merchant service providers. In extreme cases, these penalties can include the removal of the ability to accept card payments.

According to ChargebackHelp, the total cost of chargebacks each year is estimated at more than $30 billion.

How Do Chargebacks Work?

A chargeback process usually works by a cardholder disputing a transaction with their bank or credit card company. However, sometimes chargebacks can also be initiated by financial institutions themselves, for issues such as technical errors with authorizations, or known processing problems.

Upon being notified of a disputed transaction, the issuer performs an initial assessment of the case. This is to determine whether the cardholder has a legitimate reason to qualify for a chargeback. The assessment typically involves the cardholder explaining the circumstances around the transaction and their reasons for disputing it.

If a chargeback is granted, the issuer often grants a provisional refund to the cardholder immediately. Meanwhile, they contact the acquiring bank (that’s the bank used by the merchant who put the payment through in the first place). Ordinarily, the funds are debited back from the merchant’s account at this point.

The merchant then has the choice of accepting the chargeback or disputing it via a process called representment. In the case of complex disputes, this can mark the start of a drawn-out “back and forth” process between issuer and acquirer, with both the merchant and cardholder being asked to provide further information and evidence to back up their respective cases. In some chargeback disputes, this can involve an arbitration process.

The process broadly completes with one of two outcomes: Either the cardholder is re-credited the money (because the merchant accepts the chargeback without dispute or loses the appeal), or the chargeback is denied and the initial transaction remains valid.

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Who Participates in the Chargeback Process?

A 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.

What Is the Process of Chargebacks?

The chargeback process breaks down as follows:

  1. A cardholder disputes a transaction and files a chargeback request with their bank or card company (the issuer).
  2. The issuer sends the chargeback request to the acquirer.
  3. The acquirer forwards details of the chargeback to the merchant. 

At this point, what happens next depends on whether the merchant accepts the chargeback or decides to contest it.

If the merchant accepts the chargeback:

  1. The merchant automatically “loses” the chargeback case. They lose the funds initially deposited into their account and any related charges and fees.
  2. The customer receives a full refund via their issuing bank.

If the merchant contests the chargeback:

The merchant provides evidence to their acquiring bank to prove that the initial transaction was genuine and valid. This is usually sent along with a “rebuttal letter”.

The acquirer forwards the evidence to the issuing bank.

  1. The issuing bank reviews the evidence and – if the case is straightforward – finds in favor of either the merchant or the cardholder.
  2. If the case remains under dispute, it can enter a pre-arbitration stage, followed by an arbitration stage where the card network gets involved and provides a final decision.

Handling chargebacks is expensive and resource-intensive for merchants. Acquiring banks and card companies impose charges for processing chargebacks – sometimes running to $100 or more – and there’s also time-consuming and costly admin to think about.

In some (but not all) cases, acquirers refund processing fees when chargeback decisions go in the merchant’s favor. However, due to the administrative burden, chargebacks are considered expensive to deal with – even in cases where the merchant “wins”.

Chargebacks Vs Disputes

While disputed transactions and chargebacks are often mentioned together, it’s worth noting that they’re not the same thing.

A chargeback may occur because a customer has disputed a transaction. However, it is up to the issuer to determine whether or not a chargeback process should be initiated as a result of the disputed transaction.

In turn, a chargeback may or may not result in a chargeback dispute. These disputes only occur in situations where the merchant decides to appeal against the chargeback and begin the representment process.

Types of Chargebacks

There are many situations that can lead to the initiation of a chargeback process. They include:

  • Cases of criminal fraud, involving transactions the cardholder had no knowledge of. 
  • Unrecognized transactions. These can sometimes be cases of accidental friendly fraud, such as where a customer forgets they made a transaction or doesn’t recognize the company name showing on their statement.
  •  Unauthorized transactions made by additional cardholders, or accidental online (or in-game) purchases made by children using their parents’ accounts. 
  • Intentional cases of friendly fraud, such as where an individual claims not to have received goods that were sent, or experiences “buyer’s remorse” and attempts a chargeback on a non-refundable product in a last-ditch attempt to get their money back.
  • Disputes around products ordered online that didn’t arrive. 
  • Disputes around faulty, defective, or counterfeit goods.
  • Disputes around recurring subscription payments and installment arrangements. 
  • Disagreements around deposits and non-refundable bookings, often involving travel and vehicle hire.

The above is not an exhaustive list. Anything that causes a cardholder to feel that funds have been taken from their card when they shouldn’t have been can result in a request for a chargeback.

Card networks use a system of chargeback reason codes to categorize chargebacks processed through their systems. For example, Visa would use code 13.3 (Not as Described or Defective Merchandise/Services) for the scenario of faulty goods, as described above. Mastercard uses code 4854 for disputes around installment billing.

Why Is It Important to Protect Against Chargebacks?

If you run a business, it’s important to protect against chargebacks as they can have serious consequences. Not only is there the initial loss of revenue, there are also all the related fees. On top of that, there are the costs (and resource implications) of administering and disputing the chargebacks.

In addition, all businesses that accept card payments are expected to stay below a certain chargeback rate threshold. Companies that have an excessive ratio of chargebacks as a proportion of their total payments are considered high-risk by their card service providers and networks.

Businesses that exceed expected thresholds can be placed under programs such as the Visa Dispute Monitoring Program (VDMP). This can result in financial penalties, onerous reporting requirements, and, ultimately, the risk of being banned from taking card payments.

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How to Prevent Chargebacks

Here are some proactive ways to reduce the burden of chargebacks for your business:

1. Ensure your business is responsive and contactable.

A huge number of chargebacks are avoidable. Many situations should be dealt with via refunds and direct negotiations with customers. They shouldn’t reach the stage where a customer feels compelled to contact their bank.

In many cases, customers dispute a transaction because they believe they have no other option. Companies offering good quality customer service and reliable contact methods can head off many issues before a chargeback process begins.

2. Provide clear contract terms.

Many chargebacks happen due to unclear terms and conditions around recurring payments and confusing subscription models. It’s crucial to resist the temptation to use borderline deceptive sales methods and to hide details of renewals in the small print. These are almost certain to result in a high ratio of chargebacks.

3. Secure your payment infrastructure.

You can reduce chargebacks due to criminal fraud by bolstering your fraud protection infrastructure. Steps range from mandating the use of systems such as 3D Secure to using dedicated fraud prevention software that can spot unusual patterns of activity and suspicious transactions.

4. Ensure your company name appears correctly on customers’ statements.

Your billing descriptor is the wording that appears on customers’ bank and credit card statements when you take a payment from them. It’s essential to ensure that this is what customers expect to see and that it allows them to identify your company. This is particularly important when working with subsidiaries and holding companies. Unrecognized names can lead to confusion and payment disputes.

5. Effectively log customer activity.

Ensuring your organization’s systems have detailed transaction logs can help in cases where you need to dispute chargebacks. The clearer the evidence you can provide to your acquirer, the more likely you are to succeed in fighting chargeback claims.


Who is responsible for chargebacks?

The primary responsibility for administering, defending, and disputing chargebacks falls to the merchant who put the initial payment through. While both the issuing and acquiring banks are involved in the process, it is the merchant that bears the ultimate responsibility and the most significant risk of financial loss.

How much does a chargeback cost a business?

It’s widely estimated that each dollar in chargebacks costs merchants $2.40. This means that a $100 chargeback can cost a business $240. Some estimates are even higher than this.

Can a merchant refuse a chargeback?

While a merchant cannot outright refuse a chargeback, they can dispute one via a representment process. When this happens, the issuing and acquiring banks gather evidence and rule on whether the chargeback should stand. In some cases, this results in a full arbitration process and the involvement of the card network. A merchant cannot directly refuse a chargeback without participating in this process.


  • Tidal Commerce: What Is a Chargeback Fee? Causes, Risks, & Prevention
  • ChargeBackHelp: Breaking Down the True Cost of Chargebacks
  • NerdWallet: What Is a Chargeback? What Business Owners Need to Know 

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