Chargeback: A Beginner's Guide

What is a chargeback?

A chargeback is a reversal of a card transaction initiated by a customer’s bank (the issuing bank) when a cardholder disputes a charge. Chargebacks were created to protect consumers from fraud, billing errors, and services or goods that were not delivered as promised. Rather than waiting for a merchant to refund a purchase, the cardholder can ask their bank to investigate and, if the dispute is valid, reverse the payment.

Who is involved?

• Cardholder: The customer who disputes the charge.
• Issuing bank: The cardholder’s bank that starts the chargeback process.
• Card network: Visa, Mastercard, American Express, etc., which define chargeback rules and timelines.
• Acquiring bank (acquirer): The merchant’s bank that receives the chargeback notice.
• Merchant: The business that originally received the payment and must respond to the chargeback.
• Payment processor/gateway: Facilitates communication and evidence exchange between merchant and acquirer.

Common reasons for chargebacks include:

• Fraudulent transactions: Unauthorized card use by someone other than the cardholder.
• Product not received: The customer claims goods or services were never delivered.
• Item not as described: The customer alleges that received goods differ substantially from the merchant’s description.
• Duplicate processing or incorrect amount: The cardholder was charged multiple times or for the wrong amount.
• Canceled recurring transaction: Ongoing subscription or recurring charges after cancellation.

How the process works (simplified):

1. The cardholder contacts their issuing bank to dispute a charge, providing reasons and any supporting information.
2. The issuing bank evaluates the claim and, if appropriate, issues a provisional credit to the cardholder while the dispute is investigated.
3. The chargeback is forwarded through the card network to the acquiring bank, which notifies the merchant and debits the merchant’s account for the transaction amount plus fees.
4. The merchant can accept the chargeback or contest it by submitting supporting evidence (called representment) to show the transaction was valid.
5. The issuing bank reviews the merchant’s evidence and decides whether to uphold the chargeback or reverse it. Card networks may allow additional arbitration if needed.

Timelines and fees vary by card network and dispute reason. Card networks set strict windows for when disputes must be filed and when merchants must respond. Merchants also typically face a chargeback fee charged by acquirers or processors, and a returned chargeback can still harm a merchant’s bottom line even if later reversed.

Impacts on merchants

• Direct financial loss: The original sale amount is reversed and the merchant may lose the product if it was shipped.
• Chargeback fees: Fixed fees for each dispute, regardless of outcome.
• Higher processing costs: A high chargeback rate can lead to increased acquirer scrutiny, higher fees, or even termination of merchant services.
• Operational burden: Time spent collecting evidence, responding to disputes, and managing representment reduces capacity for core business tasks.

Practical example

An online shopper orders a $120 pair of shoes but claims they never received the package. The shopper disputes the charge with their issuing bank. The bank provisionally credits the shopper while investigating. The merchant is debited and charged a fee. If the merchant can provide tracking showing delivery to the customer’s address and proof of signature, they may win the representment and recover funds. Without convincing evidence, the chargeback may stand.

Best practices for beginners

• Keep clear, organized evidence for every sale: order confirmations, tracking numbers, delivery signatures, refunds, and customer communications.
• Communicate proactively with customers: fast, empathetic customer service reduces disputes turning into chargebacks.
• Use fraud tools: AVS, CVV checks, 3D Secure, and fraud-scoring tools can lower unauthorized transaction risk.
• Ensure your product descriptions and policies are accurate and visible at checkout (shipping timelines, returns, and subscription terms).
• Monitor chargeback ratios and trends: card networks may flag merchants with high ratios (example threshold: 1% for Visa, though specifics change by program).

Common beginner mistakes include ignoring small chargebacks, not keeping evidence, unclear billing descriptors (which cause cardholders to not recognize charges), and failing to address customer complaints promptly. These mistakes make representment difficult and increase long-term costs.

Final note

A chargeback is an important consumer right and a standard part of card payments, but it can be costly and time-consuming for merchants. Understanding the rules, maintaining good documentation, and prioritizing customer service are the best first steps for any business new to card payments. With the right practices, merchants can reduce chargeback frequency and improve their chances of successful dispute resolution.