A chargeback is a payment dispute process where a cardholder asks their issuing bank to reverse a card transaction. If the dispute is accepted, the transaction amount is taken from the merchant and returned to the cardholder.
When a cardholder disputes a transaction, the issuer, acquirer, merchant, and card network may all take part in the review process. The merchant can usually respond with evidence to prove that the transaction was valid.
An incorrect charge can happen for a variety of reasons. The most common categories are fraud, customer disputes, processing errors, and chargeback misuse.
A cardholder may file a chargeback if their card data was stolen and used without permission. In this case, the dispute is based on an unauthorised transaction.
Chargebacks can also occur due to friendly fraud. This is when a real customer makes a purchase and later disputes it, claiming they did not authorise the payment, did not receive the product, or were charged incorrectly. If a transaction is confirmed as fraudulent or unauthorised, the merchant usually loses the dispute, and the funds are returned to the cardholder.
A customer may dispute a payment if the product or service was not delivered, was delivered only partially, or did not match the description on the merchant’s website.
This can also happen when customers misunderstand shipping terms, refund policies, subscription rules, or billing conditions.
Some chargebacks are caused by payment or billing mistakes. For example, a customer may be charged twice, charged the wrong amount, or billed after cancelling a subscription.
Chargebacks are usually initiated by cardholders through their issuing bank. The merchant cannot initiate a chargeback, but they can respond to the dispute by submitting evidence through their acquirer or payment provider.
The main parties in the chargeback process are:
Chargeback timelines are set by card networks and depend on the transaction type, dispute reason, and scheme rules. In many cases, cardholders have a limited period after the transaction or expected delivery date to file a dispute, while merchants also have a limited time to respond with evidence.
Because timelines vary by card network and reason code, merchants should monitor chargeback notifications closely and respond as early as possible.
Both chargebacks and refunds involve returning funds to a customer, but there are essential differences between the two.
For a refund, the customer contacts the merchant directly, and the merchant returns the funds via the original payment method or another agreed-upon process. This scenario is more beneficial for both parties because the buyer gets their money faster, and the seller gets their item back, avoiding high chargeback fees and maintaining their reputation in the payment processor.
With a chargeback, the customer disputes the transaction through their issuing bank. If the dispute is accepted, funds may be withdrawn from the merchant while the case is reviewed.
Refunds are usually faster, cheaper, and easier to manage. Chargebacks can lead to extra fees, operational work, lost goods or services, and higher risk scores with acquirers or payment providers.
The exact process depends on the card network and the reason for the dispute, but a typical chargeback flow includes several steps.
First, the cardholder contacts their issuing bank and disputes the transaction. The issuer reviews the claim and may open a chargeback case.
The dispute is then passed through the card network to the merchant's acquirer or payment provider. The merchant receives a notification and can either accept the chargeback or submit evidence to challenge it.
Evidence may include order details, delivery confirmations, customer communications, acceptance of the refund policy, device data, transaction logs, or proof that the service was provided.
If the issuer or card network accepts the merchant’s evidence, the chargeback may be reversed. If not, the funds remain with the cardholder, and the merchant may also pay chargeback-related fees.
Chargebacks create losses for online businesses. Chargebacks can be costly for merchants because they may involve lost revenue, chargeback fees, shipping costs, operational costs, and a higher risk of account restrictions if dispute rates become too high. Merchants cannot eliminate chargebacks completely, but they can reduce them by improving payment security, customer communication, billing transparency, and post-purchase support.
Useful practices include:
Chargebacks affect more than one transaction. High chargeback rates can increase processing costs, create operational workload, damage relationships with acquirers, and lead to stricter monitoring from payment providers or card networks.
For PSPs and payment businesses, chargeback management is also part of risk operations. They need to monitor dispute rates across merchants, identify risky patterns, support evidence collection, and help merchants reduce preventable disputes.
