What is a chargeback? A guide for small businesses

Published Thursday 2 April 2026

Table of contents

• What is a chargeback in accounting?
• Chargebacks vs refunds: key differences
• The effect of chargebacks on your business and finances
• Common reasons for chargebacks
• Who is involved in the chargeback process?
• Understanding the chargeback process
• Preventing chargebacks from occurring
• How to dispute and resolve chargebacks
• Why chargebacks are important for businesses
• Manage chargebacks with confidence
• FAQs on chargebacks

Key takeaways

• Respond to chargeback disputes within the required timeframe (typically 10-30 days) and gather strong evidence like proof of delivery, customer communications, and transaction receipts to maximise your chances of winning the dispute.
• Prevent chargebacks by using clear business names on card statements, implementing fraud detection tools, and maintaining transparent billing and refund policies that customers can easily understand.
• Keep your chargeback rate below 1% of total transactions to avoid penalties, higher fees, or potential account termination from payment processors.
• Record chargeback fees as operating expenses and document all transactions thoroughly to support future disputes and maintain accurate financial records.

What is a chargeback in accounting?

A chargeback is a reversal of a credit or debit card payment, typically initiated when a customer disputes a transaction as incorrect or fraudulent. The process protects cardholders from liability for charges they didn't authorise.

Chargebacks can happen for several reasons:

• fraudulent activity on the card
• billing errors by the business
• customer dissatisfaction with products or services

For small businesses, chargebacks carry real costs. You pay a fee if the bank grants a chargeback, and you risk losing both the payment and your goods.

Chargebacks vs refunds: key differences

You process refunds directly with your customer. You return the payment, and ideally receive your goods back.

Chargebacks bypass you entirely. The customer contacts their bank, which reverses the transaction first and only lets you dispute it afterwards. Some customers use chargebacks to avoid dealing with a business directly, even when a refund would be more appropriate; in fact, 84% of consumers find chargebacks simpler to process than direct merchant refunds.

Here are the four main differences:

• Financial impact: Refunds typically don't incur extra fees, while chargebacks involve processing costs and potential penalties.
• Resolution time: Refunds are much quicker, while chargebacks take longer because they involve banks and dispute processes.
• Rules and policies: Refunds depend on your return policy, while chargebacks follow strict card network rules and timelines.
• Reputation risk: High chargeback rates can damage your standing with payment processors, while refunds don't carry this risk.

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 you approve a refund, you'll need to account for it so your figures are correct.

The effect of chargebacks on your business and finances

Chargebacks create real costs for small businesses beyond the lost sale. They affect your finances, your time, and your standing with payment processors.

Here's how chargebacks can hurt your business:

• Direct financial loss: You lose the payment, often the goods, and pay a chargeback fee
• Administrative burden: Disputes take time to investigate and respond to
• Reputation damage: Frequent chargebacks can flag your business as high-risk
• Payment processor penalties: High chargeback rates can lead to extra fees or account termination

Most payment processors set the threshold at around 1% of transactions. Exceed this rate, and you may face penalties or lose the ability to accept card payments altogether.

Common reasons for chargebacks

Chargebacks typically happen because of fraud or errors, whether on the customer's side, the business's side, or both. Understanding the common causes helps you prevent them.

Customers initiate most chargebacks, though businesses can request them too. Banks may also trigger a chargeback automatically if their systems detect fraud.

Here are the main categories.

Fraud

• Unauthorised transactions on a card: Someone uses the customer's card details without their knowledge, leading to a dispute
• Friendly fraud: A customer intentionally claims a legitimate purchase as fraudulent to avoid payment, and for e-commerce and retail businesses, this can account for 40–75% of chargebacks.
• 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 request a chargeback
• Damaged or incorrect goods: The customer receives defective goods, prompting them to file a chargeback if they can't get 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 from the one they know, the customer might not recognise a charge and ask for a chargeback. Research shows that confusing merchant names cause about 25% of these "unrecognized transaction" disputes.
• 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. They might then dispute the charge and call it fraudulent
• 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

Who is involved in the chargeback process?

Understanding who's involved helps you navigate disputes more effectively. Four parties play a role in every chargeback:

• Customer (cardholder): The person who made the purchase and disputes the charge
• Business (merchant): You, the seller who received the payment
• Payment processor (acquirer): The service that processes your card transactions
• Customer's bank (issuer): The bank or card provider that issued the customer's card

Understanding the chargeback process

The chargeback process follows a standard sequence, though timelines vary by payment processor. Customers typically have 60 to 120 days to file a dispute, with some card networks allowing up to 120 days for a cardholder to initiate a chargeback. Visa, Mastercard, Amex, and Discover generally allow up to 120 days, depending on the situation.

Here's how the process works.

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.

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 ten to 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. However, even with high-quality evidence, merchants often face 8.1–20% win rates. 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 keeps the amount and the payment processor may charge you a chargeback fee. But if the bank resolves the dispute in your favour, it returns the amount and any fees you incurred during the process.

Preventing chargebacks from occurring

Preventing chargebacks starts with clear communication and secure payment practices. Here are the key steps to reduce your risk:

• Communicate clearly: Set expectations throughout the buying process with transparent billing, return, and refund policies
• Use fraud detection: Choose payment processors with advanced security tools to catch suspicious transactions early
• Strengthen credit control: Implement clear payment terms and follow up promptly on outstanding invoices
• Make your business recognisable: Ensure your trading name appears clearly on card statements so customers recognise the charge
• Keep records: Document transactions, communications, and delivery confirmations to support any disputes

How to dispute and resolve chargebacks

Disputing a chargeback requires a prompt response with clear evidence. If your payment processor notifies you of a dispute, follow these steps:

1. Respond within the deadline: Contact your payment processor within the required timeframe, typically ten to 30 days. Missing this deadline usually means forfeiting the disputed funds.
2. Gather your evidence: Collect documentation that supports your case, such as proof of delivery, signed contracts, customer communications, and transaction receipts.
3. Submit your response: Send your evidence to your payment processor, who forwards it to the customer's bank for review.
4. Wait for the decision: The issuing bank evaluates the evidence and decides whether to reverse or uphold the chargeback. Complex disputes may be escalated to the card network for a final ruling.

Record and manage chargeback fees in accounting

Recording chargebacks in your accounts depends on whether you win or lose the dispute.

• Chargeback fees: Record these as operating expenses, typically under bank fees or payment processing costs.
• Lost chargebacks: Write off the transaction amount as bad debt expense if you don't recover the funds.
• Won disputes: Reverse any provisional entries once the bank returns the funds to your account.

If you're unsure how to categorise these transactions, a bookkeeper or accountant can help you set up the right accounts.

Why chargebacks are important for businesses

Managing chargebacks effectively protects your revenue, your reputation, and your ability to accept card payments. Here's why it matters:

• Improve customer satisfaction: Frequent chargebacks may signal problems with your products, services, or refund process that need attention
• Prevent fraud losses: Investigate each chargeback to catch scams early and recover revenue where possible
• Reduce financial impact: Avoid losing both the sale and the chargeback fee by responding promptly with strong evidence
• Protect your payment processor relationship: Keep your chargeback rate below 1% to avoid penalties or account termination
• Maintain your reputation: Low chargeback rates signal to processors and customers that your business is trustworthy

Stay compliant with Payment Card Industry (PCI) security standards and follow your card network's guidelines to minimise your risk.

Manage chargebacks with confidence

Staying on top of chargebacks means tracking disputes, recording fees accurately, and keeping your finances organised. Xero helps you manage all of this in one place, with clear reporting and real-time visibility into your cash flow.

Ready to simplify your financial management? Get one month free and see how Xero can help you run your business with confidence.

FAQs on chargebacks

Here are answers to common questions about chargebacks for small businesses.

How long do customers have to file a chargeback?

Customers typically have 60 to 120 days to file a chargeback, depending on the card network and the reason for the dispute. Visa, Mastercard, Amex, and Discover generally allow up to 120 days.

Can I get charged a chargeback fee even if I win the dispute?

Yes, most payment processors charge a fee when a chargeback is filed, regardless of the outcome. Some processors refund the fee if you win, but this varies by provider.

What's the difference between friendly fraud and true fraud?

True fraud happens when someone uses stolen card details without the cardholder's knowledge. Friendly fraud happens when a legitimate customer intentionally disputes a valid charge, often claiming they didn't make the purchase or didn't receive the goods.

How many chargebacks are too many for my business?

Most payment processors set the threshold at around 1% of total transactions. Exceeding this rate can result in higher fees, monitoring programmes, or account termination.

Do chargebacks affect my business credit?

Chargebacks don't directly impact your business credit score. However, high chargeback rates can damage your relationship with payment processors and may affect your ability to secure favourable processing terms.