For businesses, a chargeback on a credit card purchase a customer has made can be stressful. It can mean losing money and often not knowing why a customer decided to order the chargeback instead of returning a product or trying to resolve the dispute with the business. Over time, chargebacks can severely impact the bottom line of any business, especially those that already limit revenue potential by operating as a cash-only business instead of accepting cards. Businesses typically incur a chargeback fee that can range from $15 to $100, depending on the payment processing provider. According to a report by LexisNexis, businesses pay an average of $3.75 for every $1.00 in chargebacks, highlighting the significant financial impact of chargebacks on businesses.
Understanding what is a chargeback on a credit card is an important part of personal finance, as it helps individuals make informed decisions about credit management and financial planning.
Unfortunately, some customers do not understand how they work, which means they get used incorrectly. In some cases, chargebacks are the result of chargeback fraud or friendly fraud, where customers dispute legitimate transactions, either mistakenly or intentionally, causing additional challenges for businesses. Intentionally filing a fraudulent chargeback can have negative consequences, including potential impacts on a person’s credit score. Fraudulent purchases are a primary reason for chargebacks, as they allow consumers to reverse transactions that appear on their accounts due to unauthorized activity.
Clerical mistakes, such as being charged multiple times for the same purchase or ongoing charges for a canceled subscription, can also lead customers to file chargebacks, whereas clearly labeled pricing strategies like cash discount programs to offset processing costs can reduce confusion and disputes.
What is a Credit Chargeback?
Credit card chargebacks, by definition, are a process whereby a customer disputes a credit card transaction and gets their money refunded by their bank or credit card company. Originally, this process was designed to protect consumers from unauthorized or fraudulent transactions. Credit card chargebacks protect all credit card users from fraud and illicit activity, including fraudulent transactions, on their credit cards. In fact, it’s what makes credit cards more secure. If your credit card is used without permission for a fraudulent transaction, then your money will be refunded by the credit card company. Credit card chargebacks also protect credit card users from unscrupulous businesses. Common reasons for chargebacks include unauthorized transactions, non-delivery or defective items, billing errors, and canceled subscriptions. For example, if you purchase an item from an online store and the store closes before delivering your order, this non-delivery can lead to a chargeback and a refund dispute. In these scenarios, chargebacks give customers an option — they don’t have to lose money or take a business to court to get their funds back.
Understanding Chargeback Reasons
Chargebacks can arise for a variety of reasons, and recognizing these causes is key for both merchants and customers to navigate the chargeback process effectively. One of the most common triggers for credit card chargebacks is the appearance of unauthorized charges on a customer’s credit card statement. When cardholders spot a transaction they don’t recognize, they may suspect fraudulent activity and quickly file a chargeback to protect their credit.
Billing errors are another frequent source of chargebacks. These can include being charged the wrong amount, duplicate processing of a single purchase, or being billed for items that were never received. Even small mistakes on a card statement can prompt customers to dispute a charge, especially if they feel their concerns aren’t addressed promptly by the merchant.
Disputes over the quality or delivery of merchandise and services also lead to chargebacks. If a customer is dissatisfied with a purchase—whether due to a defective product, non-delivery, or a service that didn’t meet expectations—they may turn to their credit card provider for a resolution. In these cases, the chargeback serves as a form of consumer protection, ensuring that customers are not left out of pocket for unsatisfactory transactions.
By understanding the main chargeback reasons—unauthorized charges, fraudulent activity, billing errors, and disputes over purchases—businesses can take proactive steps to reduce the risk of chargebacks and maintain positive relationships with their customers. Regularly reviewing credit card statements and addressing customer concerns quickly can help prevent unnecessary disputes and protect both parties involved.
The Chargeback Process
In a chargeback, the credit card customer does not visit the store or business to dispute the charge. Instead, the process begins when the customer files a chargeback request with their cardholder’s bank (also known as the issuing bank). Cardholder questions about unfamiliar or unauthorized transactions can lead to a formal dispute, which initiates the chargeback process. The cardholder’s bank receives the dispute, initiates the process, and temporarily holds the disputed funds. The merchant’s bank receives the chargeback request from the issuing bank and requests evidence from the business, such as signed sales receipts or other documentation, to address the customer’s claim and handle the chargeback claim.
The business that sold the product or service being disputed will have a set time limit—typically 12 business days—to provide receipts and other evidence that they provided the product or service. Chargebacks involve strict time limits for both consumers and merchants, and missing these deadlines can affect the outcome of the dispute. If the business cannot supply sufficient evidence, the issuing bank (customer’s bank) debits the amount of the disputed charge from the company’s account and the disputed funds are returned to the customer. During the investigation, a chargeback is typically a temporary credit issued by the card issuer, which may become permanent if the dispute is resolved in the customer’s favor. The business may also have to pay dispute fees or additional service fees from their payment processor for handling chargebacks, increasing the overall cost.
The business is given a reason code that explains why there’s a dispute, such as billing issues, fraud, or non-receipt of goods. Businesses must respond to the customer’s claim and formally dispute the chargeback request by submitting evidence to the merchant’s bank, which then forwards it to the issuing bank for review. When providing evidence, businesses should first determine the legitimacy of the dispute, identifying whether it is due to credit card fraud or a customer service issue. The issuing bank or credit card company makes the final decision on the chargeback dispute, determining whether the disputed funds remain with the customer or are returned to the merchant. This process—how chargebacks work—includes the initial transaction, dispute filing, review by the cardholder’s bank and merchant’s bank, and a final decision, with businesses having the opportunity to contest chargebacks.
The chargeback process can take several weeks to months to resolve, while refunds are typically processed within three to seven business days. Debit card chargebacks follow a similar process but may have different protections and timelines compared to credit cards. Processing chip cards (EMV) is important to reduce liability for fraudulent transactions and chargebacks, especially since the EMV liability shift has impacted how credit card fraud and chargeback abuse are handled within the broader credit card processing system.
There’s a lot at stake for the company. If they lose the chargeback dispute process, they lose the money from the transaction and may have to pay additional fees. Also, if they acquire too many chargebacks, then credit card providers will charge them ever-higher fees. Most companies go to great lengths to prevent chargebacks and, in some industries with elevated dispute rates, may even need to open a high risk merchant account. They offer guarantees and return policies to encourage customers to resolve disputes directly with them instead of their credit card provider.
Using a single platform, such as Stripe, can help businesses manage fraud prevention and dispute handling more efficiently by consolidating tools and streamlining the process, so it’s important to avoid unreliable credit card processors that add risk and hidden costs.
If you’d like to accept credit card payments at your company, contact Velocity Merchant Services for a free discussion. Our glossary of credit card processing terms can also help you get familiar with key concepts before you choose a solution. Let our team help you find the right services. Keep your customers happy and your business thriving.
Credit Card Refund and Chargeback Difference
Although both a credit card refund and a chargeback result in money being returned to the customer, the way each process works—and the impact on merchants—are quite different. A credit card refund is typically initiated by the merchant when a customer returns a product, cancels a service, or there is a billing error. In this case, the business processes the refund directly through their payment system, and the customer sees the credit appear on their credit card statement, usually within a few business days. This process is straightforward, cooperative, and generally does not involve additional fees or penalties for the merchant.
On the other hand, a chargeback is initiated by the customer through their credit card issuer or bank, not the merchant. This usually happens when the customer is unable to resolve a payment dispute directly with the business, suspects fraudulent activity, or believes there has been an unauthorized charge. The chargeback process is more formal and involves the card issuer investigating the claim, often requiring the merchant to provide evidence that the original transaction was valid. If the bank determines the customer’s claim is valid, the disputed amount is forcibly withdrawn from the merchant’s account and credited back to the customer. Additionally, merchants may face a chargeback fee and potential damage to their reputation or relationship with their payment processor, making it crucial to understand credit card fees and how to spot a good deal when selecting a provider.
In summary, while both a credit card refund and a chargeback return funds to the customer, a refund is a proactive, merchant-driven solution, whereas a chargeback is a last resort initiated by the customer’s bank or credit card company, especially when there is disagreement about who should bear credit card processing fees. Understanding the main difference between these two processes can help both merchants and customers resolve payment disputes more efficiently and avoid unnecessary complications, particularly when managing different debit vs. credit transaction fees.
