What Is a Chargeback and Why Every Business Owner Should Care

Understanding chargeback fundamentals and the four critical types can help you stop revenue loss before it starts

With over £1 billion stolen through payment fraud in 2024 and global chargeback volume projected to hit £33.79 billion by 2025, understanding chargebacks has become essential for every business accepting card payments.

This comprehensive guide covers everything you need to know about chargebacks. You’ll learn what they are, how they work and the different types affecting businesses. We’ll explain the costs, timelines and key differences between chargebacks, disputes and refunds.

Finally, you’ll discover proven strategies to manage and reduce them effectively.

What Is a Chargeback?

A chargeback is a payment reversal initiated by a customer’s bank that removes funds from your merchant account and returns them to the cardholder. This process occurs when customers dispute transactions with their card company, claiming they didn’t authorise the purchase, never received goods or services or experienced billing errors.

Originally created as a consumer protection mechanism in the 1970s, chargebacks were designed to increase confidence in card payments by providing customers with recourse against merchant fraud or errors. The system gives cardholders the right to dispute transactions and receive provisional refunds while banks investigate their claims.

When a chargeback occurs, you lose both the transaction amount and any goods or services provided. You also face additional fees and administrative costs.

Chargeback vs. Dispute vs. Refund

Chargebacks involve the card network and banks removing funds from your account after a customer files a formal complaint. You have limited time to respond with evidence and the process can take months to resolve. Failed chargebacks result in permanent revenue loss plus penalty fees.

On the other hand, disputes refer to the broader category of customer complaints about transactions including both formal chargebacks and pre-dispute inquiries. Some disputes can be resolved before becoming chargebacks through direct communication with customers or their banks.

Refunds are voluntary returns of money that you initiate and control. You decide whether to approve them, can negotiate partial amounts and avoid chargeback fees entirely. Refunds preserve customer relationships and demonstrate good service while chargebacks suggest problems with your business practices.

Debit Card vs. Credit Card Chargebacks

Credit card chargebacks offer stronger consumer protections under regulations like Section 75 in the UK. Customers have up to 120 days to file disputes for most issues and banks typically side with cardholders during investigations. The process involves your acquiring bank, the customer’s issuing bank and the card network.

Debit card chargebacks operate under different rules with shorter timeframes and varying protection levels. Customers often have just 60 days to report unauthorised transactions. The process moves faster but offers fewer dispute categories. Banks may require customers to attempt resolution with merchants first.

Both types follow similar investigation procedures but credit card disputes generally provide more time for evidence submission and customer advocacy. Your response strategies remain largely the same regardless of card type.

Four Types of Chargebacks Every Business Should Understand

Not all chargebacks are created equal. Each type stems from different causes and requires distinct approaches to prevent and defend against.

The four main chargeback types represent the most common scenarios you’ll encounter. Some result from genuine fraud or errors while others stem from customer confusion or deliberate abuse.

1. Criminal Fraud Chargebacks

Criminal fraud chargebacks occur when unauthorised individuals use stolen payment information to make purchases. The legitimate cardholder discovers these transactions later when reviewing statements and immediately disputes them with their bank.

These chargebacks typically happen to online retailers, subscription services and businesses processing card-not-present transactions. Criminals often target high-value items they can quickly resell or digital services with immediate delivery.

Key indicators include unusual shipping addresses, first-time customers making large purchases, orders placed during off-hours and mismatched billing and shipping information. The cardholder may have no knowledge of your business.

2. Merchant Error Chargebacks

Merchant error chargebacks result from processing mistakes, billing problems or service failures on your part. Common examples include duplicate charges, incorrect amounts, unclear billing descriptors, shipping delays or products not matching descriptions.

Any business can experience these but they’re particularly common among subscription services, restaurants and retailers with complex billing systems. Service-based businesses also see them when deliverables don’t meet customer expectations.

These disputes are often legitimate customer complaints about real problems. The customer contacted their bank because they couldn’t resolve the issue directly with you or didn’t know how to reach you.

3. Friendly Fraud Chargebacks

Friendly fraud occurs when customers dispute legitimate transactions they actually made and received. This might happen because they forgot about recurring subscriptions, don’t recognise your billing descriptor, experienced buyer’s remorse or found disputing more convenient than requesting refunds.

This type affects virtually all businesses, representing roughly 75% of ecommerce chargebacks. Subscription businesses, online retailers and companies with unclear refund policies see the highest rates.

Customers may genuinely not remember making purchases, especially for small recurring charges or purchases made by family members. Others deliberately abuse the chargeback system to receive free goods while keeping their purchases.

4. Authorisation Chargebacks

Authorisation chargebacks happen when transactions are processed without proper approval from the card issuer or when authorisation codes are invalid, expired or manually entered incorrectly.

These primarily affect businesses processing high transaction volumes, those with manual card entry processes or merchants using outdated payment terminals. Restaurant and retail locations with poor connectivity also experience these issues.

The technical nature of these disputes means they often result from system errors, staff training gaps or equipment problems rather than customer complaints. They’re usually preventable through proper payment processing procedures.

How Does a Chargeback Work?

The chargeback process involves multiple parties and follows strict timelines set by card networks. Understanding each stage helps you prepare appropriate responses and evidence:

1. Initial dispute filing: Customer contacts their issuing bank claiming a transaction problem. The bank reviews the complaint and may attempt to resolve simple issues directly with you through pre-arbitration
2. Chargeback initiation: If pre-arbitration fails or the issue seems serious, the bank files a formal chargeback through the card network, immediately removing funds from your account
3. Merchant notification: Your acquiring bank or payment processor notifies you of the chargeback, typically providing 20-45 days to respond with evidence depending on the card network and dispute type.
4. Evidence submission: You gather relevant documentation and submit a response through your payment processor. Missing this deadline results in automatic loss of the dispute.
5. Bank review: The issuing bank reviews your evidence and decides whether to reverse the chargeback or proceed with the customer’s claim.
6. Final resolution: Successful defence returns the funds to your account. Failed disputes become permanent losses, often with additional penalty fees.

Card networks assign specific reason codes to categorise each dispute type and define the required evidence. Understanding these codes is crucial for building effective responses.

Notably, you’ll be charged with chargeback fees regardless of whether you win or lose. Payment processors collect these fees to cover administrative costs and network charges.

Beyond direct fees, you face indirect costs including lost revenue, shipped inventory, processing time and potential account restrictions. High chargeback ratios can trigger expensive monitoring programmes or account termination.

But how long do chargebacks take? The entire chargeback process usually takes 60 to 90 days from initial filing to final resolution. Complex cases involving multiple rounds of evidence can extend to six months or longer.

You typically receive 20 to 45 days to respond with evidence, depending on the card network and dispute type. Missing these deadlines results in automatic losses.

A Chargeback Management Blueprint to Protect Revenue

Understanding chargebacks is just the beginning. Protecting your business requires systematic management approaches that prevent disputes, improve defence success rates and reduce operational costs.

These five strategies transform reactive chargeback handling into proactive revenue protection.

Each strategy targets specific aspects of chargeback management, from fraud detection and evidence collection to team training and technology deployment. Together, they create a comprehensive blueprint that grows with your business.

1. Build Your Chargeback Management Framework

A proper framework starts with a consistent process for every dispute. Create templates for each card-network reason code, automate the collection of order details, shipping tracking and customer communications and feed everything into case-management software that flags approaching deadlines.

Missing a deadline means automatic loss, so set up real-time alerts and daily triage dashboards. Start small: test the workflow with one product line, refine your evidence checklists, then expand company-wide.

Within a few months, you’ll transform a reactive scramble into a predictable system that protects revenue and feeds insights back into your broader fraud and customer experience strategies.

2. Use Fraud-Detection Tools and Velocity Checks

You can stop most disputes before they become chargebacks by layering fraud controls at checkout and behind the scenes.

No single control covers every gap; combining several creates overlapping barriers that fraudsters can’t easily bypass.

Your essential toolkit should include 3-D Secure 2.0 for risk-based authentication built for mobile, device fingerprinting to recognise returning devices and spot anomalies and AVS plus CVV checks for quick cardholder data validation.

Add velocity rules that track purchase frequency, value and location changes alongside machine-learning anomaly detection fed by real-time transaction data.

When a transaction passes 3-D Secure, the card issuer—not you—takes liability for unauthorised fraud. Version 2.0’s frictionless flow means most low-risk customers never see a challenge screen, protecting sales without increasing abandonment.

Test different risk thresholds, then adjust rules so high-value or cross-border orders always trigger extra authentication while repeat customers move smoothly through checkout. Match these controls to your business type. High-ticket retailers benefit from mandatory 3-D Secure; digital-goods platforms may rely more on velocity scoring.

3. Implement Evidence Collection Systems That Win Disputes

Dispute outcomes depend on your paper trail, not your arguments. When alerts arrive, you need evidence ready. Building case files reactively rarely works.

Start by matching your evidence to reason codes. Fraud claims need 3-D Secure results, IP addresses and device fingerprints. Product-not-received cases require signed delivery receipts and tracking data.

Then, you need to make the collection automatic across all systems. Set your gateway, CRM and shipping platforms to capture transaction timestamps, AVS responses, customer emails and courier updates as they happen.

Store this data in a searchable repository tagged by order ID, reason code and submission deadline. Capturing records when they’re generated eliminates last-minute scrambling and keeps you compliant with card-network requirements.

With this, you turn raw data into dispute victories through quality control. Run monthly documentation audits, maintain completeness checklists and keep staff trained on changing requirements. Track your evidence completeness against win rates to find gaps, refine collection processes and protect more revenue.

4. Deploy Proactive Customer Communication Strategies to Prevent Disputes

Friendly fraud causes about three-quarters of ecommerce disputes, often because cardholders don’t recognise transactions on statements or can’t reach you for quick answers. Clear, timely communication turns these potential disputes into simple service interactions.

Focus on that critical moment when purchases show up on customer statements. Make your billing descriptor match your website name, include a phone number or short URL and send immediate email receipts reinforcing this information.

You can follow up with shipping updates or service-access instructions so customers can track their order progress. For subscription businesses, send renewal reminders with easy cancellation links to prevent “forgotten charge” disputes.

When your support team can solve issues with goodwill refunds before frustration builds, you protect both revenue and customer relationships. Offer live chat during business hours, self-service cancellation tools and social messaging connected directly to knowledgeable agents.

Put refund and return policies in plain language where customers can easily find them.

Track your progress by monitoring support contact rates, refund volumes and dispute counts monthly. Declining numbers prove that investing in clarity and accessibility costs far less than fighting preventable disputes.

5. Establish Rapid Response Protocols for Time-Critical Dispute Management

Visa gives you just 20 days to contest a dispute while Mastercard usually offers 45 days—and your acquirer might shorten that to a seven-day internal deadline before withdrawing funds. Missing any cutoff gives the issuer an automatic win, so speed is your first defence.

Grade every new case as soon as it arrives. Rank disputes by potential loss, recovery likelihood and approaching deadline. High-value, high-win prospects go straight to experienced analysts; low-value claims history shows you rarely win can default to automated refund rules.

This triage approach lets you protect revenue without stretching your team too thin.

Time-sensitive escalation paths keep cases from falling through cracks. Assign a primary owner for each case and a backup who steps in when the owner is unavailable. Set calendar reminders that trigger at key points—receipt, evidence gathering, submission and final confirmation.