Chargeback Guide: What It Means For Your Small Business

Published Wednesday 5 November 2025

Table of contents

• What is a chargeback?
• 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
• Managing chargebacks with the right tools
• Frequently asked questions about chargebacks

Key takeaways

• Implement clear communication practices by displaying recognisable business names on customer statements, sending order confirmations, and prominently showing billing and refund policies to prevent customers from disputing legitimate charges.

• Respond to chargeback notifications within 10-30 days with compelling evidence including delivery proof, transaction records, and customer communication logs to maximise your chances of recovering disputed funds.

• Monitor your chargeback rate closely as exceeding 1% triggers monitoring from payment processors and consistently high rates can lead to account closure and additional fees.

• Choose payment processors with advanced fraud detection tools and implement address verification and CVV checks to reduce fraudulent transactions that commonly trigger chargebacks.

What is a chargeback?

A chargeback is when a customer's bank reverses a payment after the customer disputes a card transaction. This protects cardholders from unauthorised or problematic charges. It also gives you a chance to respond. In New Zealand, this is part of a wider consumer protection framework, including several approved dispute resolution schemes.

Common chargeback triggers:

• Fraudulent activity: Unauthorised use of card details
• Billing errors: Incorrect charges or processing mistakes
• Customer dissatisfaction: Undelivered goods or poor service quality

Chargebacks can affect your cash flow and create extra costs, even if the chargeback is later reversed. Staying on top of chargebacks helps you protect your revenue and goods. Recent data shows chargeback rates have increased 76% year-on-year.

Chargebacks vs refunds: key differences

The key difference: Refunds are handled directly between you and your customer, while chargebacks go through the customer's bank and do not involve you at first.

Refund process:

• Customer contacts your business directly
• You resolve the issue and process the refund
• Customer returns goods (if applicable)
• No additional fees for your business

Chargeback process:

• Customer contacts their bank to dispute the charge
• Bank reverses the payment immediately
• You're notified after the fact and must dispute to recover funds
• You pay fees regardless of the outcome

Refunds and chargebacks are different in four main ways:

• Financial: Refunds typically don't come with extra fees, while chargebacks involve processing costs and potential penalties.
• Time: Refunds are much quicker than chargebacks, which take longer to resolve as banks and a dispute process are involved.
• Regulation: Refunds depend on a business's return policy, while chargebacks are governed by strict rules and timelines separate from the merchant's business.
• Reputation: High chargeback rates can affect a business's standing with payment processors, while refunds don't carry this risk.

Are chargebacks or refunds better for merchants?

Ideally, your customer is happy with their purchase. If not, offering a refund can help maintain a good relationship.

If a chargeback or refund is approved, you'll need to account for it to keep your records accurate.

The effect of chargebacks on your business and finances

Chargebacks create three major business risks: losing money, damaging your relationship with payment processors, and risking account closure.

Financial impact:

• Direct costs: Lost revenue plus chargeback fees, which can range anywhere from NZ$20 to NZ$100 per dispute
• Indirect costs: Staff time, administrative burden, and potential inventory loss

Account risk thresholds:

• Monitoring: A 1% chargeback rate triggers monitoring
• Penalty zone: Above 1% may result in additional fees
• Termination risk: Consistently high rates can lead to account closure

Common reasons for chargebacks

Chargeback initiators fall into three categories: customers disputing charges, businesses correcting errors, or banks detecting fraudulent activity through automated systems.

Primary chargeback reasons:

• Fraud-related: Unauthorised transactions or identity theft
• Error-based: Processing mistakes or billing issues

Fraud

• Unauthorised transactions on a card: The customer's card details are used without their knowledge, leading to a dispute
• Friendly fraud: A customer claims a legitimate purchase is fraudulent to avoid payment
• 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 you miss a complaint, a customer may request a chargeback if there is no resolution, for example, a refund or clear communication

Customer errors

• Unrecognised transactions: If a charge does not 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
• 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 sign up for a subscription service by mistake or forget about one, then dispute the charge as fraudulent
• Failure to cancel: If you do not cancel a subscription or recurring charge after a customer asks, they might request a chargeback

Who is involved in the chargeback process?

Four key parties handle every chargeback dispute:

• Customer (cardholder): Initiates the dispute with their bank
• Business (merchant): Receives notification and can provide evidence
• Acquirer (your payment processor): Manages your merchant account and facilitates disputes
• Issuer (customer's bank): Reviews evidence and makes final decisions

Understanding the chargeback process

Chargeback timeframes typically range from 60-120 days after the original transaction, depending on your payment processor and dispute type.

Common timeframes by processor:

• Visa: 120 days for most disputes
• Mastercard: 120 days for most disputes
• American Express: 120 days for most disputes
• Discover: 120 days for most disputes

Always check your specific payment processor's terms, as timeframes can vary based on dispute reasons and transaction types.

Here's the basic chargeback process:

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 costs for handling the chargeback.

5. The merchant responds

You then decide whether to accept or dispute the chargeback. You must reply within the allocated time – usually between 7 and 45 days, depending on the card network – or you could be charged a non-response fee. For example, Visa gives you 20 days to respond, while Mastercard gives you 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. You provide the evidence to your payment processor, who passes it to the bank for review. The bank then 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 a chargeback fee. If the dispute is resolved in your favour, the bank returns the amount and any fees you paid during the process.

Preventing chargebacks from occurring

Three core prevention strategies can significantly reduce your chargeback risk:

1. Clear communication:

• Display billing, return, and refund policies prominently
• Use recognisable business names on customer statements
• Send order confirmations and shipping notifications

2. Fraud protection:

• Choose payment processors with advanced fraud detection
• Implement address verification and CVV checks
• Monitor for suspicious transaction patterns

3. Strong credit control:

• Set clear payment terms and follow up promptly
• Document all customer interactions
• Address complaints quickly before they escalate to chargebacks

How to dispute and resolve chargebacks

Disputing a chargeback requires quick action and strong evidence. Here's the three-step process:

1. Respond quickly

• Timeframe: 10-30 days (varies by processor)
• Action: Contact your payment processor immediately
• Consequence: Miss the deadline and you forfeit the funds automatically

2. Gather compelling evidence

• Delivery proof: Shipping confirmations, delivery receipts, tracking numbers
• Transaction proof: Signed contracts, receipts, payment confirmations
• Communication records: Email exchanges, customer service logs, refund attempts

3. Bank review process

• Initial review: Issuing bank evaluates your evidence
• Escalation: Complex cases go to the card network (Visa, Mastercard, etc.)
• Final decision: Bank either reverses the chargeback or upholds the customer's claim

Record and manage chargeback fees in accounting

If you do not win the dispute or choose not to challenge the chargeback, record chargeback fees as bank fees. You may need to record the chargeback amount as an expense if you cannot recover it.

A bookkeeper or accountant can advise you on how to record the transactions and fees.

Managing chargebacks with the right tools

Chargebacks are a part of doing business, but you can manage them with the right approach. Keeping clear records and organised finances helps you quickly find proof of delivery, customer communications, or transaction receipts, so you are in a strong position to dispute unfair chargebacks.

Xero accounting software helps you keep everything in one place, so you spend less time on paperwork and more time running your business. Start your free trial of Xero accounting software to see how it can help you run your business, not your books.

FAQs on chargebacks

Below are answers to common questions about chargebacks for small business owners.

What is an example of a chargeback?

Imagine a customer buys a product from your online store. A few days later, they see the charge on their credit card statement but don't recognise your business name. Instead of contacting you, they call their bank and report the transaction as unauthorised. The bank then initiates a chargeback, reversing the payment from your account while they investigate.

Can a business refuse a chargeback?

You can't refuse a chargeback outright, as it's initiated by the customer's bank. However, you do have the right to dispute it. If you believe the chargeback is invalid – for example, if you have proof the customer received the goods – you can submit evidence to the bank to challenge the claim. If your dispute is successful, the funds will be returned to you.

How long do chargebacks take to resolve?

The chargeback process can take a few weeks to several months to resolve. The timeline depends on the card network's rules, the complexity of the case, and how quickly both sides provide the necessary information.

What happens if I lose a chargeback dispute?

If you do not win a chargeback dispute, the provisional credit given to the customer becomes permanent. You will not receive the revenue from the sale, the product itself (if it was shipped), and you will need to pay any chargeback fees charged by your payment processor. Winning more disputes helps you maintain a good relationship with payment providers.