Define chargeback: what it means for your business

Published Thursday 12 March 2026

Table of contents

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

Key takeaways

• Prioritise offering refunds over allowing chargebacks since refunds help you avoid processing fees, maintain customer relationships, and keep control of the resolution process.
• Implement clear billing descriptors and transparent policies to prevent customer confusion, as unrecognised charges are a common trigger for unnecessary chargebacks.
• Respond to chargeback disputes within the strict deadlines (typically 10-30 days depending on the card network) and gather compelling evidence like delivery confirmations and customer communications to win back disputed funds.
• Record chargeback fees as operating expenses and lost sale amounts as bad debt in your accounting system to maintain accurate financial records and track the true cost of disputes.

What is a chargeback?

A chargeback's a forced reversal of a credit or debit card payment, initiated when a transaction is disputed as incorrect, unauthorised, or fraudulent.

Chargebacks protect cardholders from paying for purchases they didn't make or didn't receive. They also encourage businesses to maintain quality standards and clear billing practices.

Common triggers include:

• Fraudulent activity: Unauthorised use of card details
• Billing errors: Incorrect charges or duplicate payments
• Customer dissatisfaction: Goods not delivered or not as described

For small businesses, chargebacks can be costly. You lose the sale, pay a chargeback fee, and may not recover your goods.

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

Chargebacks vs refunds: key differences

Refunds are voluntary returns of payment from a business to a customer. Chargebacks are forced reversals initiated by the customer's bank, bypassing the business entirely.

With a refund, you work directly with your customer to resolve the issue and typically receive your goods back. With a chargeback, the bank reverses the transaction first and asks questions later, leaving you to dispute it after the fact.

Some customers use chargebacks to avoid dealing with a business directly, even when a refund would be the appropriate route. Research shows that 84% of customers prefer filing chargebacks to requesting refunds.

Refunds and chargebacks differ in four key ways:

• Financial impact: Refunds rarely incur extra fees; chargebacks include processing costs and potential penalties.
• Resolution time: Refunds settle quickly, while chargebacks take weeks or months due to bank involvement.
• Governing rules: Refunds follow your return policy, while chargebacks follow card network regulations with strict deadlines.
• Business reputation: High chargeback rates can damage your standing with payment processors, while refunds carry no such risk.

When either occurs, record it in your accounts to keep your figures accurate.

Are chargebacks or refunds better for merchants?

Refunds are better for merchants in almost every scenario. You avoid chargeback fees, maintain control of the resolution, and preserve your relationship with the customer.

Chargebacks should be a last resort for genuine disputes, not the first option for unhappy customers.

Common reasons for chargebacks

Chargebacks are typically initiated by customers who believe a charge is invalid. However, banks may also trigger chargebacks when their fraud detection systems flag suspicious activity, and businesses can request them to correct processing errors.

The most common reasons fall into four categories: fraud, business errors, customer errors, and subscription-related issues. Here's what each category includes.

Fraud

• Unauthorised transactions: Someone uses the customer's card details without their knowledge, prompting a dispute.
• Friendly fraud: A customer falsely claims a legitimate purchase was fraudulent to avoid paying. This type of fraud is significant, accounting for between 40% and 80% of all eCommerce fraud losses.
• Business fraud: A business takes payment but intentionally fails to deliver goods or services.

Business errors

• Incorrect charges: A processing mistake results in the wrong amount being charged, triggering a dispute.
• Damaged or incorrect goods: The customer receives defective or wrong items and files a chargeback when a refund isn't available.
• Unresolved complaints: The business fails to respond to customer issues, leaving a chargeback as the customer's only recourse.

Customer errors

• Unrecognised transactions: The charge description or business name doesn't match what the customer expects, leading them to dispute it.
• Accidental double purchases: The customer makes duplicate payments for the same item, requiring a chargeback to reverse the extra charge.

Errors relating to subscriptions and recurring payments

• Unwanted subscriptions: The customer signed up unintentionally or forgot about a recurring charge, then disputes it as unauthorised.
• Failed cancellation requests: The business doesn't process a cancellation request, and ongoing charges prompt the customer to file a dispute.

The effect of chargebacks on your business and finances

Chargebacks cost your business money, time, and reputation. Each disputed transaction means lost revenue, forfeited goods, and processing fees that typically range from $20–$100 per chargeback. In 2023, the average chargeback was valued at $76, compounding the financial loss for merchants.

The consequences extend beyond individual disputes:

• Financial loss: You lose the sale amount, the product, and pay a chargeback fee.
• Payment processor penalties: Exceeding a 1% chargeback rate can trigger additional fees or account termination.
• Administrative burden: Each dispute requires time to investigate, gather evidence, and respond.
• Reputation damage: High chargeback rates signal risk to payment processors and can limit your ability to accept card payments.

Who is involved in the chargeback process?

Understanding who's involved helps you navigate disputes more effectively. Four parties play a role in every chargeback:

• 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 makes the final decision.

The chargeback process

Customers typically have 60–120 days to file a chargeback after a transaction. Card network rules generally state a cardholder has a maximum of 120 calendar days from the transaction date to dispute it. Visa, Mastercard, Amex, and Discover generally allow up to 120 days, though this varies by dispute type.

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

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

The merchant then decides whether to accept or dispute the chargeback. They must reply within the allocated time, which varies by card scheme (for example, 40 days for Mastercard, 14 for American Express), or they could be charged a non-response fee. For instance, Visa gives merchants 20 days to respond, while Mastercard users have 40 days.

6. The dispute resolution process

If the merchant disputes a chargeback, they must give evidence to support their position. This includes proof of delivery, communications with the customer, photographs, and sales receipts. Merchants who provide compelling evidence win an average of 45% of the chargebacks they fight, though it takes effort. The merchant provides the evidence to the merchant's acquirer, who passes it to the bank for review. The bank ultimately decides whether to uphold or reverse the chargeback.

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.

Preventing chargebacks from occurring

Preventing chargebacks saves you money and protects your payment processing relationship. Here's how to reduce your risk:

• Communicate clearly: Set transparent billing, return, and refund policies so customers know what to expect.
• Use recognisable billing descriptors: Ensure your business name appears clearly on card statements to prevent confusion.
• Implement fraud detection: Use secure payment processors with address verification and Card Verification Value (CVV) checks.
• Respond to complaints promptly: Resolve issues before customers escalate to their bank.
• Document everything: Keep records of transactions, delivery confirmations, and customer communications.
• Follow Payment Card Industry (PCI) standards: Comply with PCI security requirements to protect customer data.

The key to avoiding chargebacks is to follow payment card guidelines, maintain PCI compliance, and track your chargeback rate closely.

How to dispute and resolve chargebacks

When your payment processor notifies you of a chargeback, you can dispute it by following these steps:

1. Respond within the deadline: Contact your acquirer within 10–30 days, depending on the card network. Missing this window typically means forfeiting the funds.
2. Gather supporting evidence: Collect documentation that proves the transaction was valid. This includes proof of delivery or shipment tracking, signed contracts or order confirmations, communication logs with the customer, and transaction receipts and invoices.
3. Submit your response: Send your evidence to your acquirer, who forwards it to the issuing bank for review.
4. Await the decision: The issuing bank evaluates the evidence and decides whether to reverse or uphold the chargeback. Complex disputes may be escalated to the card network for a final ruling.

Record and manage chargeback fees in accounting

Record chargeback fees as operating expenses under bank fees or payment processing costs. If you lose the dispute, write off the transaction amount as bad debt expense.

Your accounting entries should include:

• Chargeback fee: Debit to bank fees or operating expenses.
• Lost sale amount: Debit to bad debt expense, credit to accounts receivable.
• Reversed revenue: Adjust your sales records to reflect the returned transaction.

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

Manage chargebacks and your finances with Xero

Chargebacks are easier to manage when you have clear visibility into your finances. Xero helps you track chargeback fees, record disputed transactions, and monitor your cash flow in real time.

With Xero, you can:

• Categorise chargeback fees: Record fees accurately as operating expenses.
• Track disputed transactions: Keep clear records for potential disputes.
• Monitor cash flow: See how chargebacks affect your bottom line.
• Generate reports: Identify patterns and take action to reduce future disputes.

Track chargebacks and manage your business finances with confidence. Get one month free of Xero today.

Need help navigating complex chargeback situations? Find a Xero advisor near you.

FAQs on chargebacks

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

Is a chargeback the same as a refund?

No. A refund is a voluntary payment return initiated by the merchant. A chargeback is a forced reversal initiated by the customer's bank, bypassing the merchant entirely.

Who loses money on a chargeback?

The merchant bears the full cost. You lose the sale amount, the product or service provided, and pay a chargeback fee typically ranging from $20–$100.

What is an example of a chargeback?

A customer buys a product online but doesn't recognise the charge on their statement because the billing descriptor shows a different business name. They contact their bank to dispute the unfamiliar charge, triggering a chargeback.

How much does a chargeback cost?

Each chargeback typically costs $20–$100 in fees, plus the full transaction amount and the value of any goods already delivered. Frequent chargebacks can also lead to higher processing rates or account termination.

Can I get my money back after a chargeback?

Yes, if you successfully dispute the chargeback. Provide evidence such as proof of delivery, signed contracts, or customer communications to your payment processor. If the issuing bank rules in your favour, the funds and fees are returned.