Home » What Is a Chargeback? Dispute and Prevention Tips for Merchants

Chargebacks are a frustrating reality for many businesses, particularly those in high-risk industries. Understanding how they work is the first step to minimizing their impact. 

Essentially, a chargeback occurs when a customer disputes a transaction, requesting their bank or card issuer to reverse the payment they made. These disputes often stem from misunderstandings, fraud, or dissatisfaction with a purchase. But no matter the reason, they can be costly for merchants.

Beyond the initial loss of revenue, chargebacks come with additional fees and could damage your business’s reputation. If you experience too many chargebacks, your payment processor may increase your fees or even cut off your ability to process payments altogether.

In this guide, we’ll walk you through the entire chargeback process, show how to dispute them, and outline steps you can take to prevent chargebacks in the future. 

Let’s dive straight in.

How does a chargeback work? Here’s the typical chargeback process

Chargebacks can feel like a complicated maze, but at the core, it’s a structured process involving several key players:

• Cardholder: The person who made the purchase and is initiating the dispute.
• Merchant: The business that received the payment and is now facing the chargeback.
• Issuer: The cardholder’s bank, which issued the credit or debit card used for the purchase. They review the cardholder’s dispute and ultimately determine if the chargeback is valid.
• Acquirer: The merchant’s bank, which processes payments on the merchant’s behalf. The acquirer is responsible for receiving the chargeback from the issuer and notifying the merchant.
• Processor: The payment processor facilitates the transfer of funds between the merchant, acquirer, and card networks. They handle much of the back-and-forth communication during the chargeback process.
• Card network: Visa, Mastercard, and other card networks create the rules governing chargebacks and oversee the process. They also handle arbitration if disputes escalate.
• Arbitrators: In cases where neither the cardholder nor the merchant is satisfied with the issuer’s decision, the dispute may escalate to arbitration, where a neutral party or the card network itself makes the final ruling.

The typical chargeback dispute process looks something like this:

1. Customer initiates a chargeback: A cardholder contacts their issuing bank to dispute a transaction. This could be because they didn’t recognize the charge, didn’t receive the goods, or believed the transaction was fraudulent.
2. Issuer reviews the dispute: The issuing bank will investigate the cardholder’s claim. If they find the claim valid, they will file a chargeback and temporarily return the disputed funds to the cardholder.
3. The merchant gets notified: The acquirer, acting on behalf of the merchant, is informed of the chargeback. The merchant is typically given a deadline to either accept the chargeback or provide evidence to dispute it.
4. The merchant initiates a dispute: If the merchant believes the chargeback is unwarranted, they can gather evidence such as transaction records, delivery confirmations, or communication logs and submit it through their acquirer to the issuer.
5. Issuer’s final decision: The issuing bank reviews the merchant’s evidence and decides whether to uphold the chargeback or reverse it in the merchant’s favor.
6. Arbitration (if necessary): If the merchant and cardholder continue to dispute the outcome, the case may go to arbitration, where the card network or an arbitrator will make the final decision. This is usually the last resort, as it involves additional fees for both parties.

At the end of this process, the merchant either regains the disputed funds or loses them. Getting familiar with the chargeback process helps merchants better navigate disputes and improve their chances of winning chargebacks.

The most common reasons for chargebacks

While some chargebacks are legitimate, many are the result of misunderstandings and other avoidable issues. Here are the most frequent reasons merchants face chargebacks:

• Fraudulent transactions: The cardholder claims they did not authorize the transaction. This can happen due to identity theft, stolen card details, or genuine mistakes where the cardholder didn’t recognize the purchase. This is considered friendly fraud. 
• Item not received: The customer claims they never received the product or service. This can result from shipping issues, miscommunication, or delivery delays.
• Product not as described: The product they received didn’t match the description provided at the time of purchase. This can include differences in quality, features, or functionality.
• Technical issues: Sometimes, chargebacks occur due to duplicate transactions, incorrect billing amounts, or other technical errors during the payment process.
• Customer dissatisfaction: In some cases, a customer might not be satisfied with the service or product and opt to file a chargeback rather than pursue a return or refund.
• Subscription cancellations: If a customer forgets to cancel a subscription and is charged, they may dispute the transaction as unauthorized, even if they agreed to the terms initially.
• Unclear billing descriptors: If the billing information on a customer’s statement doesn’t clearly identify the merchant or the purchase, the cardholder may not recognize the charge and dispute it.

By being aware of these common reasons for chargebacks, you can take proactive steps to prevent them.

When and how to dispute a chargeback as a merchant

Disputing a chargeback can be time-consuming. But it can also help you recover lost revenue and avoid further financial penalties. So, when is it worth fighting a chargeback? 

You should dispute a chargeback when you have strong evidence that the transaction was legitimate, such as proof that the customer received the goods or services. It’s also worth disputing if the chargeback resulted from a misunderstanding or customer error (a.k.a. “friendly fraud”). Similarly, if the product was as described and the customer’s claim is inaccurate, disputing should help you recover lost revenue and protect your business.

However, in some cases, disputing a chargeback isn’t worth it. If the customer didn’t receive the product or there was a legitimate billing or shipping error on your part, it’s better to accept the chargeback. Additionally, if you lack the necessary documentation or if disputing would take more time and resources than the chargeback is worth, it’s better to let it go.

If you decide that disputing the chargeback is the right choice, you’ll need to follow a structured process to give yourself the best chance of success. Below are the steps you’ll need to take.

Step 1: Check the chargeback reason code

Each chargeback comes with a specific code that explains why the chargeback was filed. Carefully review this code, as it will give you insight into the dispute and help you decide whether it’s worth fighting. Common chargeback reason codes include “fraudulent transaction,” “product not received,” or “billing error.”

Step 2: Gather supporting evidence

Once you’ve decided to dispute the chargeback, you’ll need to gather all relevant documentation to support your case. This can include:

• Transaction records
• Proof of delivery (shipping confirmations, tracking numbers)
• Communication with the customer (emails, chat logs)
• Product descriptions or service agreements
• Refund or cancellation policies

Step 3: Submit your response within the deadline

Work with your payment processor or acquirer to submit your evidence to the issuing bank. The evidence should be clear, well-organized, and directly address the chargeback reason. The more compelling your documentation, the higher your chances of winning.

Keep in mind that chargebacks come with strict deadlines for responding, which vary depending on the card network and payment processor. Missing this deadline can result in an automatic loss of the dispute. 

Step 4: Await the decision

Once your response is submitted, the issuing bank will review the evidence from both sides and make a decision. If the bank rules in your favor, the chargeback will be reversed, and the funds will be returned to you. If not, you may still have the option to escalate the case to arbitration, although this step should be considered carefully due to additional fees.

Ways to prevent future chargebacks

Preventing chargebacks is crucial for maintaining a healthy bottom line and keeping your payment processing relationship in good standing. While it’s impossible to avoid chargebacks entirely, there are several proactive steps you can take to reduce their frequency.

Review your most common chargeback reason codes

A great first step in reducing chargebacks is to analyze and understand the most common reason codes associated with your disputes. By regularly reviewing these codes, you can pinpoint patterns and recurring issues. 

For instance, if you notice that many chargebacks are due to claims of “product not received,” it might signal problems with your shipping process. On the other hand, a high volume of “fraudulent transaction” claims could indicate gaps in your fraud prevention measures. 

Due to the sheer number of transactions, high-volume merchant accounts are often battling a higher number of chargebacks. However, they can use this tip to identify issues early — and take targeted action to address the root causes of chargebacks and reduce their occurrence.

Implement fraud prevention tools

Fraud is one of the leading causes of chargebacks, costing businesses $20 billion in 2023 alone. Merchants can reduce their risk by implementing different fraud prevention tools:

• Use address verification systems (AVS): This compares the billing address provided by the customer with the one on file with the card issuer.
• Implement card verification codes (CVV): Require customers to provide the three or four-digit CVV code from the back of their card during online transactions to ensure they physically possess the card.
• Use 3D Secure (3DS): 3DS provides an additional layer of security by requiring the customer to authenticate the transaction via a password or biometric confirmation (e.g., fingerprint or facial recognition).
• Monitor for suspicious behavior: Use fraud detection software to flag potentially fraudulent transactions, such as unusually large orders, multiple failed payment attempts, mismatched billing information, or purchases from high-risk locations.
• Negative list: This is a regularly updated list of customers who have filed a dispute in the past. It can be integrated with your payment system and flag orders made by those customers. This way, you can automatically cancel them or perform a manual review before approval. 

The right fraud prevention measures not only help reduce chargebacks but also build trust with customers by providing a safer shopping environment.

Ensure accurate production descriptions

Provide clear, detailed, and accurate descriptions of your products or services. Make sure your website, product pages, and any promotional materials clearly outline key features, specifications, and limitations.

Include high-quality images, videos, and, where relevant, customer reviews to set proper expectations. If a product varies by size, color, or functionality, clearly communicate those differences up front.

In other words, product details should always match what the customer receives.

Clearly outline your shipping, return, and refund policies 

Many disputes arise because customers feel uncertain about how long shipping will take, what their timeline and options are for returning a product, or whether they can get a refund. Outline these policies clearly on your website and during checkout.

On top of that, you should:

• Proactively communicate delays: If shipping delays occur, keep customers informed and update delivery estimates to avoid dissatisfaction.
• Have proof of delivery: Use tracking numbers and require signatures for high-value orders. Having proof that an item was delivered can be crucial in disputing chargebacks related to non-delivery claims.
• Enforce return processes: Before issuing a refund, ensure that the customer follows the proper return procedure, which could include returning the item or proving the reason for dissatisfaction.

The clearer and more accessible all of these policies are, the less likely customers will turn to chargebacks as a way to resolve issues.

Use transparent billing practices

One common problem is when a customer doesn’t recognize a charge due to unclear or misleading billing descriptors. To avoid this, make sure the business name that appears on customer billing statements matches the name they associate with your brand.

In addition, we recommend sending confirmation emails after every purchase. This can include receipts, shipping updates, and order confirmations. Basically, anything you can do to keep customers informed and prevent confusion.

Improve your customer service and dispute resolution

Strong customer service is one of the best ways to prevent chargebacks. When customers encounter an issue, they want a quick and easy solution. If they can’t reach you or are unsatisfied with how their problem is handled, they may turn to their bank for a chargeback instead of resolving the matter directly with you.

Here’s how responsive and helpful customer service looks like:

• Multiple communication channels — such as email, phone, and live chat — are available to customers.
• Staff is trained to handle disputes professionally and provide clear instructions for returns, refunds, or exchanges when necessary.
• If a customer expresses dissatisfaction or confusion about a transaction, your team proactively reaches out to resolve the issue directly rather than waiting for a chargeback to be filed.

Maintain detailed transaction records

Keep thorough records of all transactions, including communication with customers, shipping details, tracking information, and order history. This documentation can be used as evidence if a chargeback is disputed. 

Work with your payment processor

Your payment processor is a key partner in managing and preventing chargebacks. 

SecureGlobalPay can provide you with tools and insights to help you reduce chargeback risk, including real-time fraud detection, secure payment gateway, and chargeback alerts. Additionally, many processors offer chargeback management services that guide you through the dispute process, from responding to chargebacks to submitting evidence on your behalf.

Regular communication with your payment processor can also help you stay informed about industry trends, new chargeback rules, and emerging fraud threats. By leveraging their expertise and technology, you can streamline your chargeback handling and better protect your business from future disputes.

Implement Rapid Dispute Resolution (RDR)

Rapid Dispute Resolution (RDR) is a tool that allows merchants to set automated rules for resolving chargebacks. 

For example, by using RDR, merchants can preemptively accept certain chargebacks — especially those involving minor issues or low transaction amounts —  without going through the lengthy and costly chargeback dispute process.

Furthermore, RDR enables merchants and banks to share data in real time to resolve disputes before a chargeback is filed. This allows merchants to refund the customer directly, avoiding a formal chargeback.

Here at SecureGlobalPay, we recommend and offer these services to every high-risk merchant that we onboard. It’s a great way to avoid being shut down because of excessive chargeback rates.

Reduce and simplify chargeback processing with SecureGlobalPay

Managing chargebacks can be time-consuming and stressful, but SecureGlobalPay offers solutions to simplify the process and reduce their impact on your business. 

With our chargeback management tools, merchants can detect disputes early, respond quickly, and track the entire process through a user-friendly dashboard. We will help minimize your losses by providing advanced fraud prevention tools, real-time notifications, and guidance on gathering the right evidence to fight disputes.

By partnering with SecureGlobalPay, you get access to technology and dedicated support that will protect your business, streamline chargeback processing, and keep disputes to a minimum.

Learn more by reaching out to partners@secureglobalpay.net or fill out our online application form: