What Is a Chargeback and How Does It Work (2024)

Small BusinessOperationsFraud and Risk Management

Chargebacks can occur when selling online as a small business. Learn more about chargebacks and how to avoid them.

What are chargebacks?

A chargeback occurs when customers report or dispute a charge with their debit or credit card issuer, causing them to issue a refund.

Chargebacks are typically initiated by the original buyer. Although they do not have to pay a chargeback fee to start the chargeback process, they must file the dispute within a specific time frame — usually between 60 and 120 days after the transaction date.

Chargeback example

Here’s a quick example of how a chargeback works: Say a buyer purchases a large, six-foot standing mirror on their credit card. A week later, the mirror arrives shattered. The customer then decides to file a chargeback request with the bank that completed the transaction — in this case, the credit card issuer.

If the claim gets approved, the customer receives the amount back in full to their original form of payment. However, if the merchant disagrees with what is stated in the claim, they can defend it.

Chargebacks vs disputes vs other terms

What is a chargeback dispute? Before we discuss the specifics of chargebacks, it’s helpful to first understand some common terms you may encounter in the process:

• Chargeback or chargeback dispute: A claim against a transaction initiated by a customer with their bank, resulting in a forced payment reversal.
• Pre-arbitration (pre-arb):When the customer challenges a chargeback won by the business for a second time.
• Retrieval:A request initiated by a customer for more information about a charge.

What is the difference between chargebacks and refunds?

So what does it mean to dispute a transaction? Though chargebacks and refunds both involve the return of funds for a transaction, there are some major differences.

Refunds are always led by the merchant and are considered voluntary. By issuing a refund, both the customer and merchant can bypass the need to get the debit or credit card issuer involved.

In the case of the standing mirror, the buyer could have contacted the merchant directly, requesting a refund for the damaged item. If the merchant agreed, the buyer would receive the refund to their form of payment some days later.

However, if the buyer had trouble reaching the merchant or the merchant disagreed with the damage claim, the buyer could then escalate the dispute into a chargeback with their credit card issuer.

Reasons for chargebacks

There are numerous reasons for chargebacks, such as if a customer:

• Doesn’t receive the item they ordered and paid for
• Received a damaged or defective item
• Doesn’t recognize the debit or credit card charge
• Is charged more than once for an item
• Claims their form of payment was used to purchase an item fraudulently without their permission or authorization

To help avoid and prevent potential cases of chargebacks, find out more about disputes.

How do chargebacks work?

What happens during a chargeback? Though the chargeback process can vary depending on the debit or credit card issuer handling the case, the chargeback process generally follows these steps:

1. A customer issues a chargeback with their bank.
2. You (the merchant) are notified of the chargeback and can either accept it or dispute it.
3. If you choose to dispute the chargeback, the customer’s bank will review the case and provide a ruling.
4. If you win the case, the disputed amount will be returned to you. If you lose or accept the chargeback, the customer will receive the funds.

Why do chargebacks matter for merchants?

Chargebacks not only hurt your bottom line, but they can also hurt your business by:

• Incurring fees and costs:When you deal with a chargeback, you may be subject to additional charges from card issuers.
• Impacting your chargeback ratio:Whether you win or lose a chargeback request, it will affect your chargeback ratio, which, in basic terms, determines your standing with credit networks. The more chargebacks you encounter as a seller, the higher the likelihood they flag you as a higher-risk merchant.
• Damaging your reputation:Working out a problem directly with a customer can lead to a better overall purchase experience and increased loyalty. Refunds help you avoid the lengthy process of a chargeback as well as the potentially negative impacts on your reputation as a merchant.

There are ways to win chargeback disputes. Learn how to manage chargebacks.

How often do merchants win chargeback disputes?

While there is no clear data on how often merchants win chargeback disputes, rates depend on the following:

• The customer experience you provide (e.g., is it easy for customers to obtain a refund?)
• The nature of your business (e.g., are you selling goods or services?)
• The quality of evidence and documentation you can provide to support your case
• The effectiveness of your chargeback management and response procedures

Chargeback protection for merchants

Chargeback protection for merchants can help minimize the financial impact of chargebacks by leveraging tools to help detect fraud, reduce customer friction, and contest cardholder queries.

Learn more about risk management solutions.

Fraudulent chargebacks: What is friendly fraud?

Also known as friendly fraud, chargeback fraud happens when a customer purchases items with a card online and then disputes the charge with their bank—even when they don’t have a legitimate reason.

Here’s an example: After purchasing a mirror online, the buyer receives the item but later claims that the mirror was never delivered, initiating a fraudulent chargeback to obtain a refund while keeping the mirror.

Sometimes cases of friendly fraud can be accidental or unintentional. For instance, perhaps the customer didn’t recognize the company name on the bill and then disputed the transaction as fraud.

Understanding the legitimacy of cases like this can be critical in how you respond to a chargeback claim – and help prevent chargebacks as a merchant. Discover how to help protect your business from potential fraud.

What is a credit card chargeback?

A credit card chargeback refers to the chargeback dispute process initiated by a cardholder through their issuing bank or credit card company. Once the dispute is investigated, the transaction may be reversed.

What is a return item chargeback?

Despite its name, a return item chargeback isn’t a chargeback. Instead, customers receive notification of a return item chargeback if they lack the funds in their account to cover a withdrawal or the amount issued in a check.

How to prevent chargebacks as a merchant

Even if you win a chargeback dispute, your chargeback ratio can be impacted. That’s why it’s crucial to prevent chargebacks in the first place by:

• Creating a clear return policy.
• Providing contact information, so customers can quickly get in touch with you before disputing a transaction.
• Optimizing the customer service experience and responding to customers quickly and efficiently.
• Delivering on product/premises.
• Making your business name clear on invoices, so customers know precisely who is billing them and for what.
• Creating a resolution center and resolution policy that is easily accessible to customers.
• Analyzing transactions and orders for potentially suspicious activity.
• Confirming an order or transaction with a customer before it ships.

Learn more about payment disputes, what they are, how to respond and ways to resolve them.

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