Chargebacks: what they are and how to protect your business

Published Monday 11 May 2026

Table of contents

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

Key takeaways

• Respond to chargebacks within 10-30 days by gathering delivery proof, customer communications, and transaction records to dispute invalid claims through your payment processor
• Prevent chargebacks by displaying clear return policies, using recognisable business names on statements, and responding quickly to customer complaints before they escalate
• Use fraud detection tools, require card verification value (CVV) checks for online payments, and keep detailed records of all transactions and customer interactions
• Record chargeback fees as operating expenses and write off disputed amounts as bad debt when you lose disputes, so your accounts receivable stays accurate

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. It's a consumer protection mechanism that allows cardholders to recover funds from unauthorised or problematic charges.

For small businesses in Australia, 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.

The scale of the problem is growing. According to Mastercard and Datos Insights, there were 261 million chargebacks globally in 2025, projected to grow 24% to 324 million by 2028. In Australia, the ePayments Code administered by the Australian Securities and Investments Commission (ASIC) sets out the rules governing electronic payment disputes, including chargebacks.

The effect of chargebacks on your business

Chargebacks cost more than the disputed transaction amount. Every $1 lost to chargebacks costs between $3.75 and $4.61 in total when you factor in fees, lost goods, and operational costs.

Here's how chargebacks affect your business financially:

• Chargeback fees: $15-$50 per dispute, even if you win
• Lost revenue: you lose the sale amount plus the product or service
• Penalty threshold: chargeback rates above 1% can trigger additional fees or account termination from your payment processor

Chargebacks also create operational strain that affects your day-to-day:

• Time costs: each dispute requires documentation, follow-up, and communication with your payment processor
• Payment processor risk: consistently high chargeback rates can result in account closure
• Customer relationship damage: disputes signal service problems and can erode trust
• Cash flow disruption: reversed payments create unpredictable gaps in your revenue

Chargebacks vs refunds: key differences

Refunds are direct resolutions between you and your customer. You agree to return the payment, and you typically get the product back.

Chargebacks bypass your business entirely. The customer's bank reverses the payment first, then notifies you afterwards. This means you're often unaware there's a problem until the funds have already been withdrawn.

Here are the key differences between refunds and chargebacks:

• Control: refunds let you manage the resolution process directly
• Timing: chargebacks happen before you know there's a problem
• Cost: refunds don't include extra fees, but chargebacks do
• Relationship: refunds preserve customer relationships, while chargebacks can damage them

Are chargebacks or refunds better for merchants?

A satisfied customer is the best outcome, but if something goes wrong, a refund keeps your relationship with the customer intact. Offering a straightforward refund process also reduces the likelihood of a chargeback.

If the bank approves a chargeback or you issue a 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. Understanding the categories helps you prevent disputes before they happen.

The main reasons for chargebacks fall into four categories:

Fraud

Fraudulent chargebacks occur when card details are misused or a transaction is deliberately misrepresented.

• 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 under the ePayments Code
• Friendly fraud: a customer intentionally claims a legitimate purchase as fraudulent to avoid payment. 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

Mistakes on the business side can trigger chargebacks when customers can't resolve the issue directly.

• 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
• Failure to address customer complaints: if a complaint goes unresolved, a customer may request a chargeback when they can't get a refund or adequate communication

Customer errors

Sometimes customers initiate chargebacks because of simple misunderstandings or mistakes.

• Unrecognised transactions: if a charge doesn't have a clear description or the business name differs from what the customer expects, they might not recognise it and request a chargeback
• Accidental double purchases: the customer might accidentally make multiple payments for the same item, and either they'll request a chargeback or the business will organise one to cancel the additional transaction

Errors relating to subscriptions and recurring payments

Subscription-based businesses are particularly vulnerable to chargebacks from billing misunderstandings.

• 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 but the business fails to do so and charges continue, the customer might request a chargeback

Chargeback reason codes

Every chargeback is assigned a reason code by the card network. These codes classify why the dispute was filed and determine the type of evidence you need to fight it.

Each major card network uses its own coding system. Here are the main categories:

Visa reason codes

Visa groups its reason codes into four broad categories:

• Fraud (codes 10.1-10.5): unauthorised transactions, including card-not-present fraud and counterfeit cards
• Authorisation (codes 11.1-11.3): transactions processed without proper authorisation or after a declined authorisation
• Processing errors (codes 12.1-12.7): duplicate processing, incorrect amounts, or late presentment of transactions
• Consumer disputes (codes 13.1-13.9): goods or services not received, defective merchandise, or cancelled recurring transactions

Mastercard reason codes

Mastercard organises its reason codes into four categories:

• Authorisation (codes 4807-4812): transactions processed without valid authorisation
• Cardholder disputes (codes 4853-4860): goods not as described, services not rendered, or credit not processed
• Fraud (codes 4837-4871): unauthorised transactions and fraudulent activity
• Point-of-interaction errors (codes 4831-4834): processing mistakes at the point of sale

American Express reason codes

American Express uses alphanumeric codes across these categories:

• Fraud (codes F10-F29): fraudulent transactions and missing imprints
• Authorisation (codes A01-A08): invalid authorisation or expired cards
• Processing errors (codes P01-P23): duplicate charges, incorrect amounts, or currency errors
• Customer disputes (codes C02-C32): goods or services issues, cancelled subscriptions, or credit not received

Discover reason codes

Discover categorises its reason codes into these groups:

• Fraud (codes UA01-UA12): unauthorised transactions
• Processing errors (codes DP, IN, AP): duplicate processing, late presentment, or non-receipt of information
• Service and goods disputes (codes RM, RG, RN2): merchandise not received, goods returned, or services not rendered
• Authorisation (codes AT, DA): declined authorisation or no authorisation obtained

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. In Australia, the Australian Financial Complaints Authority (AFCA) can also assist consumers with payment disputes.

Find out more about disputed charges.

2. The issuing bank evaluates the dispute

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

3. The issuing bank gives provisional credit

The bank credits the customer temporarily and contacts your bank (the acquirer). This credit will be reversed if the chargeback is denied at a later stage.

4. The acquirer notifies the merchant

Your bank debits your account and charges you a chargeback fee. The fee covers the payment processor's administrative costs for handling the dispute.

5. The merchant responds

You then decide whether to accept or dispute the chargeback. You must reply within the allocated time or you could be charged a non-response fee. Visa gives merchants 20 days to respond, while Mastercard allows 45 days.

6. The dispute resolution process

If you dispute a chargeback, you need to provide evidence to support your position. This might include proof of delivery, customer communications confirming they received the item, photographs, and sales receipts.

You provide the evidence to your bank, which passes it to the customer's bank for review. The bank ultimately decides whether to uphold or reverse the chargeback.

If the bank upholds the chargeback, the customer keeps the amount and your payment processor may charge you an additional fee. If the dispute is resolved in your favour, the bank returns the amount and any fees incurred during the process.

How to respond to and dispute chargebacks

Acting quickly is the single most important factor in winning a chargeback dispute. Missing your response deadline means automatically losing the disputed funds.

Follow these three steps to dispute a chargeback:

Step 1: Respond quickly

Contact your payment processor within 10-30 days (timeframes vary by provider). Check the reason code assigned to the chargeback so you know exactly what type of evidence to gather.

Step 2: Gather evidence

Collect documentation proving the transaction was legitimate:

• Delivery proof: shipping receipts, delivery confirmations, and tracking numbers
• Customer communication: emails, chat logs, and phone records showing the customer acknowledged receipt
• Transaction records: receipts, signed contracts, authorisation forms, and invoices

Step 3: Submit your case

Your payment processor forwards your evidence to the customer's bank for a final decision. The bank reviews everything and either upholds the chargeback or reverses it in your favour.

Record and manage chargeback fees in accounting

If you don't win the dispute or decide not to challenge the chargeback, 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.

Chargeback thresholds and monitoring program

Card networks set chargeback thresholds to identify businesses with excessive dispute rates. Exceeding these thresholds triggers penalties, increased fees, and potential loss of card payment processing.

What is the 1% chargeback threshold?

Most card networks flag businesses when their chargeback rate exceeds 1% of total transactions. This means if you process 1,000 transactions in a month, more than 10 chargebacks could place you into a monitoring program.

The chargeback rate is calculated by dividing the number of chargebacks in a given month by the total number of transactions processed during that period.

Visa's VAMP program

Visa operates the Visa Acquirer Monitoring Program (VAMP), which monitors chargeback and fraud rates across merchants. If your chargeback ratio exceeds Visa's thresholds, consequences can include:

• Monthly monitoring fees applied to each chargeback
• Escalating fines that increase the longer you remain above the threshold
• Mandatory remediation plans requiring you to demonstrate how you'll reduce disputes
• Potential termination of your ability to accept Visa payments if rates don't improve

What happens if you exceed thresholds?

Exceeding chargeback thresholds creates a cascade of problems for your business:

• Your payment processor may increase your processing fees or hold a percentage of your revenue in reserve
• You could be placed on the Terminated Merchant File (TMF), making it difficult to open new merchant accounts
• Your acquirer may require you to use chargeback management tools at your own expense
• In severe cases, you lose the ability to accept card payments entirely

Keeping your chargeback rate well below 1% protects your business from these consequences. Regularly reviewing your bank reconciliation helps you catch disputes early.

Preventing chargebacks from occurring

The most effective way to handle chargebacks is to prevent them. A proactive approach saves you time, money, and customer relationships.

Focus on these three prevention strategies:

Communication strategy:

• Display return, refund, and billing policies prominently on your website and at the point of sale
• Use recognisable business names on statements so customers can identify your charges
• Respond quickly to complaints before they escalate into disputes

Security strategy:

• Choose payment processors with advanced fraud prevention tools
• Require CVV checks and address verification systems for all online transactions

Process strategy:

• Establish clear payment terms and follow-up procedures as part of your bookkeeping processes
• Keep detailed records of all customer interactions, including delivery confirmations and signed agreements

Managing chargeback accounting and fees

Accurate bookkeeping 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, 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.

Using accounting software helps you track these expenses, categorise chargeback fees separately from regular bank charges, and maintain accurate financial records. This makes it easier to identify patterns, calculate your true chargeback costs, and prepare for tax time.

Protecting your business from chargeback fraud

Chargeback fraud falls into two categories: true fraud, where a stolen card is used without the cardholder's knowledge, and friendly fraud, where a customer disputes a legitimate purchase to avoid payment.

You can take steps to protect your business from both types:

• Use clear billing descriptors on bank statements so customers recognise your business name
• Always require the 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
• Send order confirmation and shipping notification emails for every transaction
• Consider using 3D Secure authentication for online payments to add an extra layer of verification

As digital payment trends continue to evolve, staying across the latest security tools helps you reduce fraud risk. Using accounting software to reconcile your accounts regularly means you'll spot unusual transactions quickly.

Manage chargebacks and protect your cash flow with Xero

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FAQs on chargebacks

Here are answers to common questions about chargebacks in Australia.

How does a chargeback work in Australia?

A customer starts a chargeback by contacting their bank to dispute a transaction. The bank reviews the claim, and if valid, contacts your bank. You then have a set timeframe to provide evidence to dispute it. The process is governed by card network rules (Visa, Mastercard, and others) and regulated under Australia's ePayments Code, administered by ASIC. If you can't resolve the dispute through the card network process, the Australian Financial Complaints Authority (AFCA) can step in.

How long do you have to dispute a chargeback in Australia?

Response timeframes depend on the card network. Visa gives merchants 20 days to respond with evidence, while Mastercard allows 45 days. Your payment processor will notify you of the specific deadline when you receive a chargeback notification. Missing this deadline means you automatically lose the dispute.

What is friendly fraud?

Friendly fraud occurs when a customer disputes a legitimate purchase with their bank to avoid paying for it. The customer received the goods or services but claims otherwise. Under Australia's ePayments Code, if a business can prove the transaction was legitimate, the cardholder is liable for the full amount.

What is a chargeback threshold?

A chargeback threshold is the maximum chargeback rate a card network allows before placing a business into a monitoring program. Most networks set this at 1% of total transactions. Exceeding the threshold can result in additional fees, mandatory remediation plans, and in severe cases, losing the ability to accept card payments.

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're charged a fee, and the incident counts against your chargeback rate. A high chargeback rate can harm your relationship with your payment processor and put you at risk of account termination.

Can you prevent chargebacks entirely?

You can't eliminate chargebacks completely, but you can significantly reduce them. Use clear billing descriptors, maintain strong customer service, keep detailed transaction records, and implement fraud prevention tools like CVV verification and 3D Secure authentication. Having a straightforward refund process also encourages customers to contact you directly instead of going through their bank.