What is a chargeback? A guide for NZ small businesses

Published Tuesday 14 April 2026

Table of contents

• What is a chargeback?
• 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
• Preventing chargebacks from occurring
• FAQs on chargebacks

Key takeaways

• Implement clear transaction descriptors and maintain visible refund policies to help customers recognise charges and resolve issues directly with you rather than disputing through their bank.
• Respond quickly to customer complaints and keep detailed records of all transactions, communications, and delivery confirmations to prevent chargebacks and provide strong evidence if disputes arise.
• Monitor your chargeback rate closely since rates above 1% can trigger additional fees, monitoring programmes, and potential account termination with payment processors.
• Dispute chargebacks only when you have strong supporting evidence, as you typically have just 20-45 days to respond depending on the card network involved.

What is a chargeback?

A chargeback occurs when a bank reverses a card payment after a customer disputes a transaction. This mechanism protects cardholders from unauthorised or problematic charges while giving you a chance to respond.

In New Zealand, chargebacks form part of a wider consumer protection framework. This includes four approved dispute resolution schemes for financial services: the Banking Ombudsman Scheme, the Insurance and Financial Services Ombudsman Scheme, Financial Services Complaints, and the Financial Dispute Resolution Service.

Chargebacks typically stem from three main 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 when the dispute is later resolved in your favour. Recent data shows chargeback rates have increased 76% year-on-year.

Staying on top of chargebacks helps you protect both your revenue and your goods.

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 without involving you at first.

Here's how the refund process works:

• customer contacts your business directly
• you resolve the issue and process the refund
• customer returns goods if applicable
• you pay no additional fees

Here's how the chargeback process works:

• customer contacts their bank to dispute the charge
• bank reverses the payment immediately
• you receive notification after the fact and must dispute to recover funds
• you pay fees regardless of the outcome

Refunds and chargebacks differ in four main ways:

• Financial impact: refunds typically incur no extra fees, while chargebacks involve processing costs and potential penalties.
• Time to resolve: refunds process quickly, while chargebacks take longer due to bank involvement and formal dispute procedures.
• Regulatory framework: refunds follow your business's 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 carry no such risk.

Are chargebacks or refunds better for merchants?

Refunds are better for merchants because they avoid fees and protect your payment processor relationship. Offering a refund when a customer is unhappy helps maintain goodwill and prevents the dispute from escalating.

If the bank approves a chargeback or refund, you'll need to record it to keep your accounts accurate.

Common reasons for chargebacks

Chargebacks happen when customers dispute charges, businesses correct errors, or banks detect fraudulent activity through automated systems.

The primary reasons fall into two categories:

• Fraud-related: unauthorised transactions or identity theft
• Error-based: processing mistakes or billing issues

Fraud

Fraud-related chargebacks occur when transactions happen without the cardholder's authorisation.

• Unauthorised transactions on a card: someone uses the customer's card details without their knowledge, leading to a dispute.
• Friendly fraud: a customer claims a legitimate purchase is fraudulent to avoid payment.

Business errors

Business errors that lead to chargebacks include the following:

• Incorrect charges: if someone processes a charge incorrectly, the customer may dispute the transaction through their issuer. You can correct the error by refunding, reversing, or adjusting the charge.
• 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 and don't resolve it, a customer may request a chargeback.

Customer errors

Customer errors that lead to chargebacks include the following:

• Unrecognised transactions: if a charge doesn't have a clear description, the customer might not recognise it. The same applies if the business name differs from what they expect. They may then ask for a chargeback.
• Accidental double purchases: for duplicate or accidental double charges, you should normally void or refund the extra transaction. A chargeback may occur only if the cardholder disputes the duplicate with their issuer.

Errors relating to subscriptions and recurring payments

Subscription and recurring payment issues that lead to chargebacks include the following:

• 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 don't cancel a subscription or recurring charge after a customer asks, they might request a chargeback.

Who is involved in the chargeback process?

Every chargeback involves four key parties working through a formal dispute process:

• 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 to 120 days after the original transaction, depending on your payment processor and dispute type.

Most major card networks, including Visa, Mastercard, American Express, and Discover, allow 120 days for most disputes. Always check your specific payment processor's terms, as timeframes can vary based on dispute reasons and transaction types.

The chargeback process follows six steps from initial dispute to final resolution. Here's how it works:

1. The customer disputes the charge

The customer contacts their bank to dispute a charge they believe is invalid. They must do this within the valid timeframe set by the card network.

Find out more about disputed charges.

2. The issuing bank evaluates the dispute

The issuing bank reviews the cardholder's claim under applicable card-network rules. If the claim meets those criteria, the bank may initiate a chargeback. You have the right to respond through the acquirer.

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 acquirer or payment processor typically debits the disputed amount from your settlement funds or linked account. They may also charge a chargeback fee according to your merchant agreement.

5. The merchant responds

You decide whether to accept or dispute the chargeback. You must reply within the allocated time or you could be charged a non-response fee.

Response windows vary by card network:

• Visa: 20 days to respond
• Mastercard: 45 days to respond

6. The dispute resolution process

If you dispute a chargeback, you must provide evidence to support your position. This includes proof of delivery, customer communications, photographs, and sales receipts.

You submit 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 fee.

If you win the dispute: the acquirer generally restores the disputed transaction amount. Whether they refund any chargeback or dispute fees depends on their policy.

The effect of chargebacks on your business and finances

Chargebacks create three major business risks: you could lose money, damage your relationship with payment processors, or risk account closure.

The financial impact includes both direct costs and indirect costs:

• Direct costs: lost revenue plus chargeback fees ranging from NZ$20 to NZ$100 per dispute
• Indirect costs: staff time, administrative burden, and potential inventory loss

Payment processors set account risk thresholds based on your chargeback rate:

• Monitoring threshold: a 1% chargeback rate triggers monitoring.
• Penalty zone: rates above 1% may result in additional fees.
• Termination risk: consistently high rates can lead to account closure.

Preventing chargebacks from occurring

You can take several steps to reduce chargebacks and protect your business.

Improve your transaction descriptors. Make sure the business name on customers' statements matches what they expect to see. Clear descriptors help customers recognise charges and reduce confusion.

Communicate clearly with customers. Send order confirmations, shipping notifications, and delivery updates. Keep customers informed throughout the purchase process.

Make your refund policy visible. Display your return and refund policy clearly on your website and in communications. Make it easy for customers to request refunds directly from you.

Respond quickly to customer complaints. Address issues promptly before customers contact their bank. Quick resolution often prevents chargebacks.

Use fraud detection tools. Implement address verification, card security codes, and fraud screening. These tools help identify suspicious transactions before processing.

Keep detailed records. Document all transactions, customer communications, and delivery confirmations. This evidence proves valuable if you need to dispute a chargeback.

Train your staff. Ensure your team understands how to process transactions correctly and handle customer concerns. Proper training reduces errors that lead to chargebacks.

FAQs on chargebacks

Here are answers to common questions about chargebacks.

How long do I have to respond to a chargeback?

Response windows vary by card network. Visa gives you 20 days to respond, while Mastercard allows 45 days. Check with your payment processor for specific deadlines.

Can I prevent all chargebacks?

You can't prevent all chargebacks, but you can significantly reduce them. Focus on clear communication, accurate transaction processing, and excellent customer service.

What happens if I get too many chargebacks?

High chargeback rates can trigger monitoring programmes, additional fees, and potentially account termination. Most processors consider a rate above 1% problematic.

Should I always dispute chargebacks?

Dispute chargebacks when you have strong evidence to support your case. If the chargeback is valid, accept it and focus on preventing similar issues in the future.

How do chargebacks affect my credit rating?

Chargebacks don't directly affect your personal credit rating. However, they can impact your merchant account status and your ability to accept card payments.