What is a chargeback? A guide for small businesses

Published Wednesday 1 April 2026

Table of contents

• What is a chargeback in accounting?
• Common chargeback misconceptions
• Chargebacks vs refunds: key differences
• Common reasons for chargebacks
• Who is involved in the chargeback process?
• Understanding the chargeback process
• The effect of chargebacks on your business and finances
• FAQs on chargebacks

Key takeaways

• Prioritise offering refunds over allowing chargebacks because refunds let you maintain control, avoid processing fees, and preserve your relationship with payment processors.
• Respond to chargeback disputes within the strict deadlines (20 days for Visa, 45 days for Mastercard) and submit strong evidence like proof of delivery, customer communications, and transaction records to improve your chances of winning.
• Keep your chargeback rate below 1% of total transactions to avoid increased processing fees, account holds, or termination of your merchant account.
• Implement clear billing descriptors, prompt customer service, and fraud detection tools to prevent most chargebacks before they occur, as prevention is more cost-effective than disputing them later.

What is a chargeback in accounting?

A chargeback is a reversal of a credit or debit card payment when the charge may be incorrect or fraudulent. The bank returns the funds to the cardholder and debits the merchant's account (see Xero's account info services terms).

Chargebacks protect cardholders from liability for charges they didn't authorise, a crucial safeguard as remote card fraud increased to $4.57 billion in a single year. They also encourage businesses to maintain quality service and clear billing practices.

Common triggers include:

• fraudulent activity on the card, which research shows accounts for about 50 percent of total chargebacks
• billing errors or duplicate charges (use a billing statement template to track these)
• customer dissatisfaction with products or services

Chargebacks hit small businesses hard. You pay a fee whether you win or lose the dispute, and you may also lose the goods you shipped. Chargeback managers have reported a 76% year-on-year rise in chargebacks (source), making prevention essential.

Common chargeback misconceptions

Many small business owners make costly mistakes based on false assumptions about how chargebacks work. Here are the facts:

• Card authorisation guarantees payment: Authorisation only confirms the card is valid and has available funds at that moment. It doesn't protect you from chargebacks filed later.
• You can win every chargeback dispute: Merchants win roughly one-third of the disputes they contest, as studies show about 70 to 80 percent of chargebacks are resolved as merchant liability. Some chargebacks, particularly those involving true fraud, are nearly impossible to overturn.
• Chargebacks and refunds are the same thing: Refunds are processed on your terms. Chargebacks bypass you entirely, involve fees, and can damage your standing with payment processors.
• Chargebacks only happen to bad businesses: Even well-run businesses face chargebacks from friendly fraud, customer confusion, or stolen card details. Prevention and monitoring matter for everyone.

Chargebacks vs refunds: key differences

Refunds are processed directly between you and the customer. Chargebacks bypass you entirely and go through the customer's bank.

Refunds and chargebacks differ in four key ways:

• Refund process: You handle the return directly, receive goods back, and issue the refund on your terms. The customer requests a refund from you, and you control the timeline and approval.
• Chargeback process: The bank reverses the transaction first and only lets you dispute it afterwards. The customer contacts their bank, which immediately debits your account.
• Financial impact: Refunds typically cost nothing extra, while chargebacks include processing fees and potential penalties.
• Resolution time: Refunds settle quickly, while chargebacks take weeks or months due to bank involvement.
• Rules and control: Refunds follow your return policy, while chargebacks follow strict card network rules you can't change.
• Reputation risk: High chargeback rates can damage your standing with payment processors, while refunds carry no such risk.

Are chargebacks or refunds better for merchants?

Refunds are better for merchants in almost every case. You avoid chargeback fees, keep your chargeback ratio low, and maintain the customer relationship.

If either a refund or chargeback is approved, record it in your accounts so your figures stay accurate.

Common reasons for chargebacks

Customers initiate most chargebacks, though banks may also start a chargeback automatically if their fraud systems flag suspicious activity.

Chargebacks typically fall into three categories: fraud, business errors, and customer errors.

Fraud

Fraud-related chargebacks include:

• Unauthorised transactions on a card: The customer's card details are used without their knowledge, leading to a dispute.
• Friendly fraud: A customer intentionally claims a legitimate purchase as fraudulent to avoid payment.
• Non-receipt of goods or services: The customer doesn't receive what they paid for, or the merchandise or services aren't as described, which can lead to a chargeback or card dispute.

Business errors

Business-related chargebacks include:

• Incorrect charges: Processing mistakes by merchants are normally corrected by reversal, void, or refund. Cardholders may also dispute them through the issuer.
• Damaged or incorrect goods: Damaged, defective, or not-as-described goods can be grounds for a card dispute, subject to issuer review and applicable network rules.
• 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

Customer-related chargebacks include:

• 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: For accidental duplicate transactions, the customer may dispute the duplicate charge with the issuer, or the merchant may correct it by voiding, reversing, or refunding the duplicate payment.

Errors relating to subscriptions and recurring payments

Subscription-related chargebacks include:

• Unwanted subscriptions: A customer might have signed up to a subscription service unintentionally or forgotten about one. The customer might 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?

Every chargeback involves four parties:

• The customer (cardholder): initiates the dispute with their bank
• The business (merchant): receives notification and can accept or dispute the chargeback
• The payment processor (acquirer): handles the merchant's card transactions and communicates with the bank
• The customer's bank (issuer): evaluates the dispute and decides whether to grant the chargeback

Understanding the chargeback process

Customers typically have 60 to 120 days to file a chargeback, depending on the card network. Visa, Mastercard, American Express (Amex), and Discover generally allow 120 days for most dispute types.

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

Issuers often provide provisional credit during a dispute investigation, but practices vary by issuer, dispute type, network rules, and applicable law. This credit will be reversed if the chargeback is denied at a later stage.

4. The acquirer notifies the merchant

In many cases, the merchant's acquirer or payment provider debits the disputed amount and may assess a chargeback fee under the merchant agreement. The rationale and amount vary by provider.

5. The merchant responds

You must decide whether to accept or dispute the chargeback within the response window.

Response deadlines vary by card network:

• Visa: 20 days to respond
• Mastercard: 45 days to respond
• General range: 10 to 30 days depending on the processor

If you miss the deadline, you may face a non-response fee and automatically lose the dispute.

6. The dispute resolution process

To dispute a chargeback, you need to submit evidence that supports your position. Your payment processor forwards this to the bank for review.

Useful evidence includes:

• proof of delivery or signed receipts
• customer communications confirming receipt
• photographs of the product
• transaction records and invoices

The issuer often determines the initial outcome. Unresolved disputes may proceed through additional network dispute stages. The card network may have the final decision in arbitration, depending on the case.

Two outcomes can occur:

• Chargeback upheld: The customer keeps the refund, and you may pay a chargeback fee.
• Chargeback reversed: The bank returns the funds to you, along with any fees charged during the process.

The effect of chargebacks on your business and finances

Chargebacks cost you money, time, and reputation. According to the Kansas City Fed, chargebacks can average 6.5 basis points of sales value, and each dispute requires administrative effort that can damage your relationship with payment processors.

The 1% threshold matters: Most payment processors flag accounts with a chargeback rate of 1% or higher. Exceeding this threshold can trigger:

• increased processing fees
• account holds or reserves
• termination of your merchant account
• difficulty obtaining payment processing services in the future

FAQs on chargebacks

Here are answers to common questions about chargebacks.

How long do I have to respond to a chargeback?

Response times vary by card network. Visa gives you 20 days, while Mastercard allows 45 days. Most processors give you 10 to 30 days to respond. Missing the deadline means you automatically lose the dispute and may face additional fees.

Can I prevent chargebacks completely?

You can't prevent all chargebacks, but you can reduce them significantly. Use clear billing descriptors, communicate with customers promptly, provide detailed product descriptions, confirm orders, and use fraud detection tools. Good customer service that resolves issues quickly often prevents customers from filing chargebacks.

What happens if my chargeback rate is too high?

If your chargeback rate exceeds 1%, payment processors may increase your fees, place holds on your funds, or terminate your merchant account. High chargeback rates also make it harder to find new payment processors and can damage your business reputation.

Is a chargeback the same as a refund?

No. A refund is processed directly between you and the customer under your terms. A chargeback bypasses you entirely, goes through the customer's bank, includes processing fees, and can harm your standing with payment processors.

How do I win a chargeback dispute?

Submit strong evidence that proves the transaction was valid. This includes proof of delivery, signed receipts, customer communications confirming receipt, photographs of products, and transaction records. Respond within the deadline and provide clear documentation that addresses the customer's specific complaint.