Chargeback: What it is and how to protect your business

Published Friday 2 January 2026

Table of contents

• What is a chargeback?
• The effect of chargebacks on your business
• Chargebacks vs refunds: key differences
• Common reasons for chargebacks
• Understanding the chargeback process
• How to respond to and dispute chargebacks
• Preventing chargebacks from occurring
• Managing chargeback accounting and fees
• Protecting your business from chargeback fraud
• FAQs on chargebacks

Key takeaways

• Implement clear communication strategies by displaying return policies prominently, using recognisable business names on statements, and responding quickly to customer complaints before they escalate to chargebacks.
• Respond to chargebacks within 10–30 days by gathering comprehensive evidence including delivery proof, customer communications, and transaction records to dispute invalid claims through your payment processor.
• Prevent chargebacks by using advanced fraud detection tools, requiring CVV verification for online payments, and maintaining detailed records of all customer interactions and transactions.
• Record chargeback fees as operating expenses and write off disputed amounts as bad debt when you lose disputes, ensuring accurate accounting that reflects the true financial impact on your business.

What is a chargeback?

A chargeback is a payment reversal initiated by a customer's bank when they dispute a credit or debit card transaction. This process protects cardholders from unauthorised or problematic charges.

For small businesses, chargebacks create immediate financial consequences. You'll pay fees even if the chargeback is later reversed, and you risk losing both the product and the payment.

Chargeback managers have reported a rise of 76% in chargebacks year on year.

The effect of chargebacks on your business

Chargebacks create three major business risks: financial losses, payment processor penalties, and reputation damage.

Financial impact:

• Chargeback fees: $15–$50 per dispute, even if you win
• Lost revenue: You lose the sale amount plus the product
• Penalty threshold:Rates above 1% trigger additional fees or account termination

Operational impact:

• Time costs: Each dispute requires documentation and follow-up
• Payment processor risk: High rates can result in account closure
• Customer relationship damage: Disputes signal service problems

Chargebacks vs refunds: key differences

Refunds involve direct communication between you and your customer. You resolve the issue, return their money, and typically get your product back.

Chargebacks bypass your business entirely. The customer's bank reverses the payment first, then notifies you afterwards.

Key differences between refunds and chargebacks include:

• Control: Refunds let you manage the resolution process
• Timing: Chargebacks happen before you know there's a problem
• Cost: Refunds don't include extra fees, chargebacks do
• Relationship: Refunds preserve customer relationships, chargebacks don't

Are chargebacks or refunds better for merchants?

Ideally, your customer is happy with the goods or services they've bought so you don't lose out on income. But if not, a refund helps keep your relationship with the customer alive.

If the bank approves a chargeback or refund, you need to record it correctly so your figures stay accurate. Learn how to record chargebacks and refunds for GST in your accounts.

Common reasons for chargebacks

Three parties can initiate chargebacks: customers disputing charges, businesses correcting errors, or banks detecting fraud automatically.

The main reasons for chargebacks fall into four categories:

Fraud

• Unauthorised transactions on a card: The customer's card details are used without their knowledge, leading to what some card networks refer to as a “No Cardholder Authorisation” dispute
• Friendly fraud: A customer intentionally claims a legitimate purchase as fraudulent to avoid payment, but if a business can prove this, the ePayments Code states the cardholder is liable in full for the losses
• Business fraud: The business intentionally fails to deliver goods or services after receiving payment

Business errors

• Incorrect charges: If there's a mistake during the financial processing of a charge, the customer or the business will action a chargeback
• Damaged or incorrect goods: The customer receives defective goods, prompting them to file a chargeback (if they're unable to secure a refund due to a business's return policy)
• Failure to address customer complaints: If there's a missed complaint, a customer may request a chargeback if there's no resolution, for example a refund or adequate communication

Customer errors

• Unrecognised transactions: If a charge doesn't have a clear description or the business name is different to the one they know, the customer might not recognise a charge and ask for a chargeback
• Accidental double purchases: The customer might accidentally make multiple purchases or payments for the same item; either they'll request a chargeback or the business will organise one to cancel the additional transaction

Errors relating to subscriptions and recurring payments

• Unwanted subscriptions: A customer might have signed up to a subscription service unintentionally or forgotten about one
• Failure to cancel: If the customer asks to cancel a subscription or recurring charge, but the business fails to do so and charges continue, the customer might ask for a chargeback

Understanding the chargeback process

Customers have 60–120 days to request a chargeback, depending on their card provider. Visa, Mastercard, American Express (Amex), and Discover typically allow 120 days.

The chargeback process follows six steps:

1. The customer disputes the charge

The customer believes a charge on their card is invalid and contacts their bank to dispute it within the valid timeframe.

Find out more about disputed charges.

2. The issuing bank evaluates the dispute

The issuing bank decides whether the reason is valid. If they find in favour of the customer, they grant a chargeback.

3. The issuing bank gives provisional credit

The bank credits the customer for now and contacts the merchant's acquirer. This credit will be reversed if the chargeback is denied at a later stage.

4. The acquirer notifies the merchant

The merchant's acquirer debits the merchant's bank account and charges them a chargeback fee. The fee covers the payment processor's admin costs.

5. The merchant responds

The merchant then decides whether to accept or dispute the chargeback. They must reply within the allocated time (usually 10–30 days, depending on the payment processor) or they could be charged a non-response fee. For instance, Visa gives merchants 20 days to respond, while Mastercard users have 45 days.

6. The dispute resolution process

If the merchant disputes a chargeback, they must give evidence to support their position, like proof of delivery, communications with the customer that prove they received the item, photographs, and sales receipts. The merchant provides the evidence to the merchant's acquirer, who passes it to the bank for review. The bank ultimately decides whether to uphold or reverse the chargeback.

If a bank upholds the chargeback, the customer gets to keep the amount and the payment processor may charge the merchant a chargeback fee. But if the dispute is resolved in favour of the merchant, the bank returns the amount and any fees incurred during the process.

How to respond to and dispute chargebacks

To dispute a chargeback, follow these three steps:

Step 1: Respond quickly

Contact your payment processor within 10–30 days (timeframes vary by provider). Missing this deadline means automatic loss of the disputed funds.

Step 2: Gather evidence

Collect documentation proving the transaction was legitimate:

• Delivery proof: Shipping receipts, delivery confirmations
• Customer communication: Emails, chat logs, phone records
• Transaction records: Receipts, signed contracts, authorisation forms

Step 3: Submit your case

Your payment processor forwards your evidence to the customer's bank for final decision.

Record and manage chargeback fees in accounting

If you don't win the dispute or decide not to challenge the chargeback, it's usual practice to record chargeback fees as operating expenses (bank fees). You may need to write off the chargebacks themselves as bad debt expenses, which the ATO allows if the debt has been written off as bad or has been overdue for 12 months or more, among other conditions.

Preventing chargebacks from occurring

Preventing chargebacks saves you time, money, and customer relationships. Focus on these three prevention strategies:

Communication strategy:

• Clear policies: Display return, refund, and billing policies prominently
• Transaction descriptions: Use recognisable business names on statements
• Customer service: Respond quickly to complaints before they escalate

Security strategy:

• Fraud detection: Choose payment processors with advanced security tools
• Verification: Use CVV checks and address verification systems

Process strategy:

• Credit control: Establish clear payment terms and follow-up procedures
• Documentation: Keep detailed records of all customer interactions

Managing chargeback accounting and fees

Keeping your books accurate is essential when dealing with chargebacks. When a chargeback occurs, you need to account for the reversed sale, any associated fees, and the potential loss of revenue.

If you accept a chargeback or lose a dispute, you should record the chargeback fee as an operating expense, similar to other bank fees. The original sale amount may need to be written off as a bad debt.

Protecting your business from chargeback fraud

Some chargebacks are invalid and result from fraud, which can hurt your business. It's helpful to understand the difference between 'true fraud', where a stolen card is used, and 'friendly fraud', where a customer disputes a legitimate purchase.

You can take steps to protect your business from both:

• Use clear billing descriptors on bank statements so customers recognise your business name
• Always require the card verification value (CVV) for online payments
• Keep detailed records of every transaction, including customer communications and proof of delivery
• Be cautious of unusually large orders or orders with different billing and shipping addresses

Using accounting software helps you track expenses and reconcile your accounts, so you always have a clear view of your business's financial health. Try Xero for free.

FAQs on chargebacks

Here are answers to some common questions you may have about chargebacks.

How does a chargeback work in Australia?

In Australia, a customer starts a chargeback by contacting their bank. The bank then reviews the claim and, if it seems valid, contacts your business's bank. Your business is then given a set timeframe to provide evidence to dispute the claim. The process is governed by the rules of the card network, like Visa or Mastercard, and is also regulated under Australia's ePayments Code, which was last updated in June 2022.

How long does a business have to respond to a chargeback?

The time you have to respond varies depending on the card network, but it's usually between 20 and 45 days. It's important to act quickly, as failing to respond in time means you automatically lose the dispute.

What happens if a business ignores a chargeback?

If you ignore a chargeback request, you automatically accept it. The disputed funds are permanently taken from your account, you will be charged a fee, and the incident will count against your business's chargeback rate. This can harm your relationship with your payment processor.