What is a chargeback? Meaning, process, and how to avoid them

Published Friday 16 January 2026

Table of contents

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

Key takeaways

• Implement clear communication strategies by using recognisable business names on card statements, providing detailed transaction descriptions, and displaying return policies prominently during checkout to prevent customer confusion that leads to chargebacks.
• Respond immediately to chargeback notifications within 10-30 days by gathering comprehensive evidence including proof of delivery, customer communications, transaction receipts, and signed contracts to maximise your chances of successfully disputing illegitimate claims.
• Monitor your chargeback ratio closely and keep it below 1% of total transactions to avoid payment processor penalties, additional fees, and potential termination of your merchant account.
• Record chargeback fees as operating expenses under "bank fees" and write off disputed amounts as "bad debt expenses" in your accounting system to maintain accurate financial records and proper audit trails.

What is a chargeback in accounting?

A chargeback is a payment reversal initiated by a customer's bank when they dispute a credit or debit card transaction. This process protects cardholders from unauthorised or problematic charges.

Chargebacks affect small businesses through:

• Financial loss: You lose both the sale amount and pay processing fees
• Merchandise loss: Customers keep products while receiving refunds
• Administrative burden: Time spent responding to disputes and gathering evidence
• Relationship risk: High chargeback rates can damage payment processor relationships

Chargeback managers have reported a rise of 76% in chargebacks year on year.

Chargebacks vs refunds: key differences

Refunds are direct transactions between you and your customer where you voluntarily return payment, typically receiving goods back in exchange. Chargebacks are bank-initiated payment reversals that bypass your business entirely.

Key differences:

• Control: Refunds give you control over the process, chargebacks don't
• Timing: Refunds happen immediately, chargebacks take weeks to resolve
• Costs: Refunds typically have no fees, chargebacks include processing charges
• Relationship: Refunds preserve customer relationships, chargebacks can damage them

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. This is a valuable approach, as government data shows that seven in ten UK consumers resolve their problem directly with the business, avoiding the need for a formal dispute.

If a chargeback or refund is approved, you'll need to account for it so your figures are correct.

Understanding the chargeback process

Chargeback timeframes typically range from 60-120 days after the transaction. According to the Financial Conduct Authority (FCA), consumers normally have 120 days to raise a chargeback claim from the expected delivery date, though this can vary by card network and dispute type.

Standard timeframes:

• 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

Check your payment processor's specific policies as some situations may have shorter deadlines.

The chargeback process involves four key parties working through a structured dispute resolution system.

Key participants:

• Customer (cardholder): Initiates the dispute with their bank
• Your business (merchant): Responds with evidence to defend the transaction
• Your payment processor (acquirer): Manages communication and fee collection
• Customer's bank (issuer): Reviews evidence and makes final decisions

Here’s the basic chargeback process in six steps.

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 admin costs.

5. The merchant responds

You then decide whether to accept or dispute the chargeback. They must reply within the allocated time, usually 10–30 days depending on the payment processor, or they could be charged a non-response fee. For instance, if you accept Visa, you have 20 days to respond, while if you accept Mastercard, you 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.

You provide the evidence to your payment processor, who passes it to the bank for review. The bank ultimately decides whether to uphold or reverse the chargeback.

However, merchants should know that the system can be frustrating for customers; independent research found 46% of consumers had problems with dispute resolution, including a perception that the process favoured the business.

If a bank upholds the chargeback, the customer gets to keep the amount and the payment processor may charge the merchant a chargeback fee. But if the dispute is resolved in favour of the merchant, the bank returns the amount and any fees incurred during the process.

Common reasons for chargebacks

Chargebacks happen when customers, businesses, or banks dispute card transactions for specific reasons. Understanding these causes helps you prevent future disputes.

Fraud

• 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
• Business fraud: The business intentionally fails to deliver goods or services after receiving payment

Business errors

• Incorrect charges: If there is 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. For credit card purchases over £100, consumers have additional protection under section 75 of the Consumer Credit Act, which holds the card provider jointly liable. This makes a chargeback more likely if a business has an unhelpful return policy.
• Failure to address customer complaints: If there is a missed complaint, a customer may request a chargeback if there is 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 to 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 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

The effect of chargebacks on your business and finances

Chargebacks cost small businesses far more than just the disputed transaction amount. They create cascading financial and operational impacts that can threaten your ability to accept card payments.

True chargeback costs include:

• Direct losses: Transaction amount plus £15–30 processing fees
• Administrative time: two to four hours per dispute gathering evidence and responding
• Inventory loss: Products shipped but not paid for
• Relationship damage: Payment processor penalties and potential account termination
• Threshold risk: Exceeding 1% chargeback rate triggers additional fees and monitoring

Preventing chargebacks from occurring

Preventing chargebacks requires proactive strategies across customer service, payment security, and business operations.

Essential prevention strategies:

• Clear communication: Use recognisable business names on statements and provide detailed transaction descriptions
• Transparent policies: Display return, refund, and shipping policies prominently during checkout. For online sales, consumers have a legal right to cancel for 14 days after the goods have been delivered, so your policies should reflect this to avoid disputes.
• Secure processing: Choose payment processors with fraud detection and verification tools
• Quick customer service: Respond to complaints immediately before customers contact their banks
• Accurate billing: Ensure charges match what customers expect and authorised

How to dispute and resolve chargebacks

Disputing chargebacks requires quick action and comprehensive evidence. Success depends on following the process correctly and providing compelling proof.

Chargeback dispute process:

1. Respond immediately: Contact your payment processor within 10-30 days of notification
2. Gather evidence: Collect proof of delivery, signed contracts, customer communications, and transaction receipts
3. Submit documentation: Provide clear, organised evidence that proves the transaction was legitimate
4. Await decision: The issuing bank reviews evidence and decides whether to reverse or uphold the chargeback
5. Accept outcome: Complex cases may escalate to card networks for final resolution

Critical evidence includes:

• Proof of delivery with customer signature
• Email communications showing customer satisfaction
• Transaction receipts and authorisation codes
• Terms of service agreements

Record and manage chargeback fees in accounting

Recording chargebacks in your accounting system requires proper categorisation to maintain accurate financial records.

Accounting treatment:

• Chargeback fees: Record as operating expenses under "bank fees" or "payment processing costs"
• Lost revenue: Write off disputed amounts as "bad debt expenses" or "chargeback losses"
• Documentation: Keep dispute correspondence and evidence for audit trails
• Professional help: Consult your bookkeeper or accountant for complex situations or tax implications

Managing chargebacks in your business

Managing chargebacks effectively protects your revenue, maintains payment processing relationships, and improves customer satisfaction. Success requires ongoing monitoring, quick responses, and proper record-keeping:

• Monitor your chargeback ratio: Keep it below 1% to avoid payment processor penalties
• Implement prevention strategies: Focus on clear communication and secure payment processing
• Respond quickly to disputes: Gather evidence immediately and submit within deadlines
• Track patterns: Identify recurring issues and address root causes
• Get professional help: Work with bookkeepers and accountants to manage financial impacts properly

Managing chargebacks alongside your other financial processes becomes much easier with Xero online accounting software. Try Xero for free so you can focus on running your business, not your books.

FAQs on chargebacks

Chargebacks are a normal part of taking card payments. Here are answers to some common questions.

How long do I have to dispute a chargeback?

You usually have a limited window, set by the card network, to respond to a chargeback. Check your payment processor’s rules and act quickly so you do not miss the deadline.

What happens if I get too many chargebacks?

A high chargeback rate, typically over 1% of your transactions, can lead to penalties from your payment processor. This may include higher fees or even the termination of your merchant account, which would prevent you from accepting card payments.

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

In most cases, yes. The chargeback fee is an administrative cost charged by the bank for processing the dispute. Even if you win the case and the transaction amount is returned to you, this fee is often non-refundable.

Can chargebacks be prevented completely?

While it's not possible to prevent all chargebacks, especially those resulting from genuine fraud, you can significantly reduce them. Providing excellent customer service, writing clear billing descriptors, and having a transparent return policy are great ways to minimise disputes.