What is a chargeback? Process, costs and prevention

Published Thursday 2 April 2026

Table of contents

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

Key takeaways

• Prioritise preventing chargebacks over disputing them by using clear billing descriptors, fraud detection tools, and responding quickly to customer complaints, as prevention costs far less than the $3.75–$4.61 total cost per dollar lost in chargeback disputes.
• Respond to chargeback notifications within 10–30 days with strong evidence like proof of delivery, signed contracts, and customer communications, as failing to respond results in automatic loss of the disputed amount plus additional fees.
• Maintain a chargeback rate below 1% to avoid penalties from payment processors, which can include higher processing fees, account monitoring, reserve requirements, or even account termination.
• Process refunds directly with customers whenever possible instead of allowing chargebacks, as refunds avoid the additional fees, lengthy dispute processes, and negative impact on your payment processor standing that chargebacks create.

What is a chargeback?

A chargeback is a reversal of a credit or debit card payment, typically initiated when a transaction is disputed as incorrect or fraudulent. This process protects your customers from unauthorised charges and encourages you to maintain service quality.

Chargebacks commonly occur due to:

• fraudulent activity on a card
• billing errors or duplicate charges
• customer dissatisfaction with products or services

Who is involved in the chargeback process?

Four parties play a role in every chargeback. Understanding who does what helps you navigate disputes more effectively:

• Cardholder: The customer who made the purchase and initiated the dispute
• Merchant: Your business, which received the original payment
• Acquirer: Your payment processor, which handles transactions on your behalf
• Issuer: The customer's bank or card company, which evaluates the dispute and makes the initial decision

Understanding the chargeback process

The chargeback process follows a structured sequence from dispute to resolution. Each step involves specific parties and deadlines you need to understand.

Key timeframes to know:

• Customers typically have 60–120 days to file a chargeback
• Major card networks like Visa and Mastercard often allow 120 days depending on the dispute type
• Check your payment processor's policy for specific deadlines

Here's how the process works:

1. The customer disputes the charge

The customer contacts their bank to dispute a charge they believe is invalid. This must happen within the allowed timeframe, typically 60–120 days.

2. The issuing bank evaluates the dispute

The customer's bank reviews the dispute to determine whether it meets the criteria for a chargeback. If the bank finds the claim valid, they approve the chargeback and proceed to the next step.

3. The issuing bank gives provisional credit

The bank issues a temporary credit to the customer's account and notifies your payment processor. This credit is provisional, and the bank will reverse it if you successfully dispute the chargeback.

4. The acquirer notifies the merchant

Your payment processor debits the disputed amount from your account and charges a chargeback fee. This fee covers administrative costs, with research showing it can range from $20 per instance to $100 per chargeback.

5. The merchant responds

You must decide whether to accept or dispute the chargeback within the required timeframe:

• General deadline: 10–30 days depending on your processor
• Visa: 20 days to respond
• Mastercard: 45 days to respond

Failing to respond may result in automatic loss and additional non-response fees.

6. The dispute resolution process

If you dispute the chargeback, you must submit evidence supporting your position. Your payment processor forwards this to the bank for review.

Common evidence to include:

• proof of delivery or shipping confirmation
• signed contracts or terms of service
• customer communications showing receipt of goods
• photographs of items shipped
• sales receipts and transaction records

Possible outcomes:

• Chargeback upheld: The customer keeps the funds and you may face additional fees
• Chargeback reversed: The bank returns the disputed amount and any fees to your account

Chargebacks vs refunds: key differences

Chargebacks and refunds are not the same. You process a refund directly with your customer, while the customer's bank initiates a chargeback without your involvement.

With a refund, you resolve the issue directly and typically receive your goods back. With a chargeback, the bank reverses the transaction first and gives you a chance to dispute it afterwards. Some customers use chargebacks to bypass a business's returns process entirely, as data shows that 84% of customers find filing chargebacks simpler than requesting refunds through a merchant's formal process.

Chargebacks and refunds differ in four main ways:

• Financial impact: Refunds rarely incur extra fees, while chargebacks involve processing costs and potential penalties
• Resolution time: Refunds process quickly, while chargebacks take longer due to bank involvement and formal dispute procedures
• Governing rules: Refunds follow your return policy, while chargebacks are governed by card network rules and strict timelines
• Business reputation: Refunds don't affect your processor standing, while high chargeback rates can trigger penalties or account termination

Are chargebacks or refunds better for merchants?

Refunds are better for merchants in almost every case. A refund keeps your customer relationship intact, avoids chargeback fees, and protects your standing with payment processors.

When you process either a chargeback or refund, record it in your accounting so your figures stay accurate.

Common reasons for chargebacks

Chargebacks typically fall into four categories: fraud, business errors, customer errors, and subscription-related issues. While customers initiate most chargebacks, banks may also trigger them when their systems detect fraudulent activity.

Here's a breakdown of the most common causes:

Fraud

Fraud-related chargebacks occur when customers dispute transactions as illegitimate:

• Unauthorised transactions: Someone uses the customer's card details without their knowledge
• Friendly fraud: A customer falsely claims a legitimate purchase was fraudulent to avoid paying. This practice accounts for 70–79% of all chargebacks.
• Business fraud: A business accepts payment but intentionally fails to deliver goods or services

Business errors

Operational mistakes can trigger chargebacks even without fraud:

• Incorrect charges: Processing errors or billing mistakes prompt disputes from customers or businesses
• Damaged or incorrect goods: Customers file chargebacks when they receive defective items and can't secure a refund
• Unresolved complaints: Customers escalate to chargebacks when complaints go unanswered or unresolved

Customer errors

Sometimes chargebacks result from honest mistakes rather than fraud or poor service:

• Unrecognised transactions: Customers dispute charges when they don't recognise the billing descriptor or business name
• Accidental double purchases: Duplicate payments trigger chargebacks from either the customer or the business

Errors relating to subscriptions and recurring payments

Recurring billing creates specific chargeback risks:

• Unwanted subscriptions: Customers dispute charges for subscriptions they signed up for unintentionally or forgot about
• Failed cancellations: Continued charges after customers request to cancel prompt them to file chargebacks

The effect of chargebacks on your business and finances

Chargebacks cost you more than the disputed amount. For every dollar lost, businesses incur at least $3.75–$4.61 in total costs from fees, operational expenses, and lost goods. You lose the sale, the product, and face additional fees ranging from $15 to $100 per dispute. The administrative time spent managing chargebacks also takes you away from running your business.

High chargeback rates create serious consequences. Most payment processors consider a 1% chargeback rate the threshold for concern. For example, Mastercard's 'Chargeback Monitored Merchant' program applies to businesses with 100 monthly chargebacks and a ratio of at least 1%. Exceeding this rate can trigger:

• additional monitoring fees
• higher processing rates
• reserve requirements on your account
• account termination in severe cases

Preventing chargebacks from occurring

Prevention is more cost-effective than disputing chargebacks. A proactive approach protects your revenue and keeps your payment processor relationship healthy.

Follow these strategies to reduce chargebacks:

• Communicate clearly: Set expectations throughout the buying process with visible billing descriptors, return policies, and refund terms
• Use fraud detection: Choose payment processors with address verification, CVV checks, and real-time fraud monitoring
• Respond quickly to complaints: Resolve issues before customers escalate to their bank
• Provide detailed descriptions: Accurate product information reduces "item not as described" disputes
• Send delivery confirmation: Proof of delivery protects against "item not received" claims
• Make cancellation easy: Clear subscription cancellation processes prevent recurring billing disputes

How to dispute and resolve chargebacks

Not every chargeback is worth disputing, but when you have evidence supporting your case, fighting back can recover lost revenue. Here's how to respond:

1. Respond within the deadline: Contact your payment processor within 10–30 days of notification. Missing this window typically means automatic loss of the dispute.
2. Gather your evidence: Compile documentation proving the transaction was legitimate, such as proof of delivery or shipping confirmation, signed contracts or agreements, customer communication logs, and transaction receipts and invoices.
3. Submit through your processor: Your payment processor forwards your evidence package to the issuing bank for review.
4. Await the decision: The bank evaluates your evidence and decides whether to uphold or reverse the chargeback. Complex cases may escalate to the card network for final resolution.

Record and manage chargeback fees in accounting

When the bank finalises a chargeback against you, record it properly in your books:

• Chargeback fees: Record as operating expenses under bank fees or payment processing fees
• Lost transaction amount: Write off as bad debt expense if the goods or services were already delivered

A bookkeeper or accountant can help you set up the correct accounts and ensure your records stay accurate.

Track chargebacks with Xero

Managing chargebacks effectively requires accurate record-keeping and clear visibility into your payment activity. Xero helps you stay on top of your finances with:

• Automated bank reconciliation: Match transactions quickly and spot discrepancies before they become disputes
• Expense tracking: Record chargeback fees accurately as operating expenses
• Real-time reporting: Monitor your cash flow and identify patterns in disputed transactions

When you need expert guidance, Xero connects you with accountants and bookkeepers who can advise on chargeback management and financial processes. Get one month free and see how Xero simplifies your business finances.

FAQs on chargebacks

Here are answers to common questions about chargebacks and how they affect small businesses.

Who usually wins chargebacks?

Customers win the majority of chargebacks, as merchants only win chargeback disputes 20%–30% of the time, particularly when they fail to respond or lack documentation. However, merchants with strong evidence such as proof of delivery and signed agreements can successfully dispute many claims.

How long does a chargeback take to resolve?

Chargebacks typically take 30–90 days to resolve, though complex cases can extend beyond six months. The timeline depends on evidence quality, card network rules, and whether the dispute escalates to arbitration.

Can I refuse a chargeback?

You cannot refuse a chargeback outright, but you can dispute it by submitting evidence to your payment processor. If you choose not to dispute, the bank automatically finalises the chargeback against you.

Do I still pay chargeback fees if I win the dispute?

Fee policies vary by payment processor. Some refund the chargeback fee when you win, while others retain it regardless of outcome. Check your processor's terms to understand your specific situation.

What happens if I ignore a chargeback notification?

Ignoring a chargeback means you automatically lose. You forfeit the disputed amount, pay the chargeback fee, and the dispute counts against your chargeback ratio, potentially triggering penalties from your payment processor.