Key takeaways:
- Chargebacks are designed to protect consumers but can cause significant financial loss and operational disruption for merchants, especially small businesses.
- Preventing chargebacks requires clear product information, responsive customer service, and up-to-date security measures like SSL certificates and fraud detection tools.
- Timely, well-documented merchant responses and proactive communication with customers improve the chances of successfully disputing chargebacks and protecting revenue.
Chargebacks were created as a consumer protection tool. They give customers a way to dispute fraudulent or incorrect charges but also create risks for merchants. When a dispute is filed, banks investigate the claim and merchants must respond with evidence to defend the sale.
For small businesses, chargebacks can mean more than just lost revenue. They can disrupt cash flow, increase fees, and harm your reputation with both customers and payment processors.
In this guide, we’ll explain what a chargeback is, how the process works, why they happen, and what you can do to handle and prevent them.
What is a chargeback?
A chargeback occurs when a credit or debit cardholder asks their bank to reverse a transaction because they believe something went wrong. This could be due to fraud, an error, or dissatisfaction with the purchase. The funds are returned to the customer when approved and deducted directly from the merchant’s account.
Chargebacks were introduced by major card networks such as Visa and Mastercard as a consumer protection tool. The system allowed customers to dispute unauthorized charges or billing errors without relying solely on the merchant. This protection was first formalized in 1974 under the Truth in Lending Act in the United States, later expanded through the Fair Credit Billing Act.
Although the process has evolved with the rise of online shopping, the purpose of chargebacks has stayed the same. They exist to protect cardholders from fraud and unfair transactions.
Is a chargeback good or bad?
For consumers, chargebacks are a safeguard. They protect against fraud, billing errors, and merchants who fail to deliver. For businesses, however, chargebacks can mean lost revenue, fees, and reputational damage. Excessive chargebacks can even cause a merchant to be labeled “high risk” or lose the ability to process card payments.
What is an example of a chargeback?
Here are a few common scenarios where a chargeback might occur:
- A customer disputes a fraudulent purchase that they didn’t authorize.
- A buyer pays for an item that never arrives.
- A cardholder notices they were billed twice for the same transaction.
How does a chargeback work?
A chargeback dispute can be stressful. Merchants want to prove a sale was legitimate, while customers want to correct a charge they believe is wrong. The process is designed to let both sides provide evidence before the bank decides.
The typical steps are as follows (but could vary by bank or card network):
- Customer disputes a transaction
- Card issuer investigates
- Merchant receives notification and responds
- Issuer decides
- Resolution
Step 1. Customer disputes a transaction
The process begins when a cardholder notices a problem on their statement. They contact their bank to dispute the charge and explain why they believe it’s invalid. Reasons may include fraud, billing errors, or not receiving what was purchased.
Step 2. Card issuer investigates
The bank reviews the claim and looks at transaction details such as receipts or proof of delivery. Sometimes, the bank issues a temporary credit to the customer’s account during the investigation.
Step 3. Merchant receives notification and responds
If the claim seems valid, the bank notifies the merchant. At this stage, merchants can challenge the dispute through “representment,” submitting evidence like receipts, tracking numbers, or communication records. Depending on the card network, merchants typically have between 7 and 30 days to respond.
Step 4. Issuer decides
The bank considers evidence from both the customer and the merchant. They apply card-network rules (Visa, Mastercard, American Express, Discover) to decide the outcome. This decision determines whether the chargeback will be upheld or denied.
Step 5. Resolution
Once the decision is made, the dispute is closed with one of two outcomes:
- Chargeback upheld. The cardholder’s claim is accepted, and the transaction is reversed. Funds are returned to the cardholder, and the merchant loses the payment. In most cases, the merchant also pays a chargeback fee.
- Chargeback denied. The dispute is rejected, and the original transaction stands. The merchant keeps the payment, and the cardholder remains responsible for the charge.
This final step brings closure to the dispute and helps maintain trust in the payment system by ensuring fairness for both sides.
Chargeback vs. refund
Both refunds and chargebacks give customers their money back, but the process and impact are very different. Understanding the distinction helps customers know which option to choose, and helps merchants handle disputes more effectively.
| Refund | Chargeback |
| Initiated by the merchant at the customer’s request | Initiated by the customer through their bank |
| Direct process between the customer and the business | Involves the bank and the card network |
| Quicker, easier, and less costly for merchants | More formal, slower, and comes with fees for merchants |
| Used when the product is defective, misrepresented, or unwanted | Used when the merchant is unresponsive or the charge seems fraudulent |
In short, a refund is the more straightforward solution. A chargeback should be reserved for cases when a refund is impossible or fraud is suspected.
Now that we’ve seen how refunds differ from chargebacks, let’s examine why chargebacks occur in the first place.
Why do chargebacks happen?
There are plenty of triggers for chargebacks, each highlighting the need for vigilance in the payment process. Most disputes fall into four main categories:
- Fraudulent charges – unauthorized purchases
- Dissatisfaction with product or service – defective, misrepresented, poor quality
- Billing errors – double charge, wrong amount
- Service not delivered – paid for service or product not received
Let’s look at them in detail.
1. Fraudulent charges – unauthorized purchases
This happens when a cardholder claims that they never authorized a transaction. It’s common in cases of stolen or lost cards. It can also occur when customers use compromised card details for fraudulent online orders.
Example: A thief uses someone’s card number to buy electronics online without the cardholder’s knowledge.
2. Dissatisfaction with product or service – defective, misrepresented, poor quality
This occurs when there’s a mismatch between what was advertised and what was delivered, or when the product quality is poor.
Example: A buyer orders a “new” smartphone but receives a refurbished device that doesn’t match the description.
3. Billing errors – double charge, wrong amount
This includes being charged the wrong amount, twice for the same purchase, or other processing mistakes.
Example: A restaurant accidentally charges a customer’s card twice for the same meal.
4. Service not delivered – paid for service or product not received
A straightforward scenario where the customer paid but didn’t receive the product or service. This also includes services promised but not completed.
Example: A package never arrives, or a contractor takes payment but fails to complete the work.
Note: Subscription cancellations and refunds not processed are generally covered by billing errors or service-not-delivered disputes.
How does a chargeback affect your business?
Chargebacks, while protective for consumers, can have significant implications for merchants. How do chargebacks affect your business?
Here are the main ways they impact your business:
- Financial loss
- Increased processing fees
- Higher resource allocation
- Damaged brand reputation
- Operational disruption
- Potential for increased scrutiny
Financial loss
Each chargeback can lead to a direct financial hit. First, you lose the money from the sale as the disputed amount is pulled from the merchant’s account. If you’ve already sent out the product, you lose that too. Plus, it can come with additional chargeback fees, and these can really add up, making a dent in your profits.
Increased processing fees
If your business has a high number of chargebacks, payment processors may view you as a greater risk. This often leads to higher transaction fees. In severe cases, you could even lose your ability to accept credit card payments altogether.
Higher resource allocation
Responding to chargebacks requires time and effort. You need to allocate resources to gather evidence, communicate with banks, and handle the administrative aspects of disputing chargebacks. This is time and effort that could be spent on other areas of your business.
Damaged brand reputation
Too many chargebacks can hurt your reputation with both customers and partners. Shoppers may doubt the quality of your products or services, while banks and processors may classify you as high risk. Being flagged in this way can make it harder to secure processing services in the future and can result in account termination.
Operational disruption
Every time a chargeback pops up, you have to spend time and resources to look into it and come up with a response. Over time, the ongoing need to manage these disputes can slow down your operations, affecting your team’s productivity and possibly even your ability to meet customer needs or hit your business goals.
Potential for increased scrutiny
Excessive chargebacks may trigger closer reviews from regulators or card networks. This could mean audits, added compliance requirements, or stricter rules for how you manage transactions.
How to handle a chargeback as a merchant
When a chargeback happens, merchants are not powerless. When you act quickly and use the right strategies, you improve your chances of defending the transaction and protecting your business.
The key steps are:
- Gather and submit evidence quickly
- Communicate with the customer
- Understand issuer timelines
- Use your right to representment
Gather and submit evidence quickly
As soon as you receive notice of a dispute, collect all records related to the sale. This can include receipts, order confirmations, delivery tracking numbers, and any communication with the customer. Strong documentation helps prove that the transaction was valid.
Communicate with the customer
Sometimes, reaching out to the customer directly can resolve the issue before it escalates further. A quick phone call or email may clear up confusion, correct a mistake, or result in a refund that prevents a full chargeback.
Understand issuer timelines
Card networks give merchants a limited time to respond — typically between 7 and 30 days depending on the issuer. Missing the deadline often means losing the dispute automatically. Mark these deadlines carefully and act promptly.
Use your right to representment
Merchants have the right to challenge invalid disputes through a process called representment. This allows you to resubmit the charge to the bank along with supporting evidence. If the bank agrees, the funds may be returned to you and the chargeback overturned.
While knowing how to respond is important, preventing chargebacks in the first place will save your business even more time and money.
How your small business can avoid chargebacks
Chargebacks can have negative effects for small businesses, counting in the cost of the original sale plus fees. Navigating chargebacks can feel overwhelming, but proactive measures can reduce the risk and protect your revenue. The goal is to make transactions clear, secure, and easy to resolve without escalation.
Here are practical ways to prevent disputes:
- Clear product information
- Provide detailed receipts and billing clarity
- Responsive customer service
- Fraud detection tools
- Update security measures
- Train staff
- Monitor transactions
- Follow up on purchases
- Encourage direct resolution
- Learn from chargebacks
- Monitor your chargeback ratio
Let’s take a closer look at each of these strategies and how they can help your business stay protected.
Tip #1. Clear product information
Ensure that all products or services are described accurately and comprehensively. Use clear images, detailed descriptions, and visible policies for shipping, returns, and refunds. Transparent communication sets customer expectations and reduces disputes.
Tip #2. Provide detailed receipts and billing clarity
Every transaction should come with a detailed receipt that includes a cost breakdown, contact details, and return policy. Use recognizable billing descriptors so customers don’t mistake your charge for fraud.
Tip #3. Responsive customer service
Offer fast and easy ways for customers to contact you. Quick responses can resolve complaints before they turn into disputes. Provide multiple channels (phone, email, chat) and consider automation for common requests.
Tip #4. Fraud detection tools
Use fraud prevention measures such as Address Verification Service (AVS), Card Verification Value (CVV), and 3D Secure. These tools add extra layers of validation and reduce unauthorized transactions.
Tip #5. Update security measures
Keep payment systems and website security current. Install SSL certificates and update encryption protocols. Regular security reviews help prevent data breaches that could trigger chargebacks.
Tip #6. Train staff
Educate your team to spot red flags, communicate clearly with customers, and process transactions correctly. Staff awareness is a frontline defense against disputes.
Tip #7. Monitor transactions
Regularly review orders for unusual activity, such as large purchases, repeated transactions, or high-risk locations. Flag and verify these before fulfillment to reduce fraud exposure.
Tip #8. Follow up on purchases
Send confirmation emails after orders and consider post-delivery check-ins. Follow-ups reassure customers and reduce misunderstandings.
Tip #9. Encourage direct resolution
Let customers know they can reach out directly for refunds or complaints. Resolving issues in-house is almost always easier and less costly than handling a chargeback.
Tip #10. Learn from chargebacks
When disputes do occur, respond quickly with all available evidence. Then analyze the cause of the chargeback and update your processes to prevent repeat issues.
Tip #11. Monitor your chargeback ratio
Keep an eye on your chargeback-to-transaction ratio. Excessive levels can lead to penalties or restrictions from payment processors. Staying below network thresholds protects your ability to accept cards.
No business can prevent chargebacks entirely, but you can lower the risk with clear policies, secure systems, and good communication. The goal is to protect revenue while keeping customers confident in every transaction.
Next, we’ll wrap up how to strike that balance and where Network Solutions can support you.
Protect your small business from chargeback disputes
Chargebacks serve an important role in protecting consumers, but for merchants they create real challenges. Every dispute means lost sales, added fees, and hours spent pulling together evidence. Too many chargebacks can even lead to higher processing costs or the risk of losing the ability to accept credit card payments.
The key is balance: give your customers the reassurance that their payments are safe while protecting your own revenue and long-term growth.
With the right tools in place, many disputes can be prevented before they start. Network Solutions provides website security, SSL certificates, and professional web design to help you reduce fraud, lower chargeback risks, and keep your business running smoothly.
Frequently asked questions
Merchants usually have between 7 and 30 days to respond, depending on the card network. Missing the deadline often results in losing the dispute automatically.
Yes. If your chargeback ratio rises above card network thresholds, your payment processor may classify you as high risk. This can mean higher fees or even losing the ability to accept card payments.
No. Chargebacks don’t appear on a customer’s credit report. However, if the underlying debt remains unpaid, it could eventually affect credit.
Clear product descriptions, visible return policies, secure checkout tools (like AVS and CVV), and responsive customer service all help reduce disputes.
If the merchant provides strong evidence and the bank rules in their favor, the original transaction stands. The customer remains responsible for the payment.
