Chargebacks can happen when a customer goes to their bank, as opposed to the merchant, to dispute a charge. When the customer requests their money back, the bank contacts the business's payment processor. From there, the bank verifies whether the chargeback request is legitimate. If it is, the bank reverses the charge.
The Fair Credit Billing Act of 1974 created chargebacks to protect consumers against credit card fraud. However, customers also dispute charges due to billing errors or unresolved complaints. They may dispute unrecognized (or forgotten) charges too.
Chargebacks are a problem for businesses, because they often involve extra fees. Here's more information on chargebacks and how to avoid them.
How do chargebacks work?
The chargeback process can vary depending on your payment processor. However, here is what you can generally expect:
- A debit/credit card charge occurs. A customer buys something from your business. Your payment processor helps process the transaction. Then you receive the funds in your business account.
- The cardholder disputes the charge. The cardholder sees the transaction on their statement. They file a dispute with the bank that issued their card, also called the issuing bank.
- The chargeback process begins. The issuing bank may give the cardholder a temporary credit for the disputed transaction. Then it contacts your payment processor.
- Your processor deducts funds from your business account. After your payment processor learns about the chargeback, it'll notify you. It'll typically remove the disputed funds from your business account until the dispute gets resolved.
- Your business can dispute the chargeback. You have the opportunity to provide documents to dispute the chargeback. If you don’t respond, the issuing bank will usually grant the chargeback to the customer.
- The issuing bank makes a decision. If you provide documents to dispute the chargeback, the issuing bank will evaluate the evidence. Then it'll make a decision. If the bank rules in your favor, the customer has to pay. You'll get the disputed funds back.
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Reasons for chargebacks
Generally, chargebacks fall into two groups:
Valid use of the chargeback process
Customers may have valid reasons for filing a chargeback. Here are the most common ones:
- Unauthorized transactions: These are fraudulent charges. They can happen when a cardholder's physical card or card info gets lost or stolen.
- Billing errors: A customer may flag incorrect purchase dates or amounts. Or maybe they returned their items and never received a refund.
- Unresolved customer complaints: Customers might communicate their concerns to a business. But they aren't satisfied with the business's response.
Misuse of the chargeback process
Sometimes customers file chargebacks and don't have legitimate reasons to do so. Examples include:
- Avoiding the return process: A customer might file a chargeback instead of starting a return for various reasons. For example, they might feel that the return process is too difficult. Or they don’t understand it. In some cases, they'll file a chargeback because the time limit for the return has expired.
- Not recognizing the transaction: A customer may forget they made the purchase. Or, they may not recognize the business name on their statement and file a dispute as an honest mistake.
- Claiming a legitimate purchase is fraud: A customer might make a legitimate purchase and dispute it to avoid paying for it.
Chargeback fees
If a business loses a chargeback dispute, it'll lose the funds from the sale. And on top of that, it'll also typically owe a chargeback fee. This covers the administrative costs of resolving the dispute. These fees usually range from $0 to $50 per transaction. But they can reach up to $100 or more, depending on the payment processor.
Some processors, like Square, don't have chargeback fees. And others will reimburse the chargeback fees if the business wins the dispute.
High-risk payment processors may impose more expensive chargeback fees. These can vary based on the business’s industry (e.g., tobacco, CBD, pawnshops) or chargeback history. Sometimes, for example, a business gets classified as high risk because it frequently has chargebacks. In this case, the business may need to pay higher processing fees. Or they may have to keep a reserve of funds to cover potential chargebacks.
Basic fees aside, businesses can get in trouble if they exceed their monthly chargeback threshold. This can result in separate fines.
How to prevent chargebacks
Here are a few ways to reduce how many chargebacks your business faces:
Vet your payment processor
Before choosing a payment processor, read its terms and conditions. And make sure to look into its chargeback process, credit card processing fees and fraud prevention tools. You’ll work closely with your payment processor to dispute illegitimate chargebacks. So it's important to understand what you're working with.
Follow credit card acceptance guidelines and best practices
You can minimize chargebacks by following credit card guidelines and remaining PCI-compliant. Some best practices include the following:
- Use a reliable point-of-sale system and payment gateway.
- Use POS hardware that is EMV compliant.
- Don’t swipe a chip card.
- Require a cardholder’s ID and signature for magnetic-strip-only cards.
- Have the customer enter their PIN or sign a receipt for debit card transactions.
- Require customers to provide the expiration date, type of card and CVV code for online or phone transactions.
- Train your employees on how to securely process credit cards.
- Provide receipts to customers.
- Use the fraud prevention tools and technology offered by your payment processor.
Develop clear, visible business policies and focus on customer service
Developing clear and visible business policies applies especially to shipping and returns. Make it as easy as possible for customers to return merchandise and raise issues by doing the following:
- Provide tracking information for all orders. Also use a reliable shipping service that shows proof of delivery.
- List your shipping timeline and policies on your website. Include them with order confirmations and receipts.
- Display your return and refund policies clearly at your store and on your website.
- Make your pricing clear and itemize everything on receipts so there’s no confusion.
- If you have recurring payments set up for a subscription service, remind customers before processing the payment.
- Ensure that your business name is recognizable on credit card statements.
- Encourage customers to reach out to you by phone, email or live chat with issues. And respond to customer complaints promptly.
How to dispute chargebacks
No matter how proactive you are, it’s likely that your business will face chargebacks at some point. When it happens, you’ll want to determine whether the claim is legitimate. If you think it is, relay that to your payment processor. It will work with the issuing bank to return the funds to the cardholder. Hopefully, your payment processor will suggest how to avoid similar incidents of credit card fraud.
If you think a chargeback is not legitimate, you’ll want to dispute it as soon as possible. You may have only a few days to respond. Work with your payment processor to offer evidence (e.g., invoices, receipts, shipping details and other records) to the issuing bank. If you resolve the issue with your customer during the dispute process, they can contact their bank to cancel the chargeback.
Here are a few important tips:
- Stay organized. Ensure that you keep thorough and organized transaction records. These can be essential to providing evidence to fight chargebacks.
- Communicate with your payment provider. Understand how your processor handles chargebacks. Respond to them promptly when you receive notification of a disputed transaction.
- Dispute cases of friendly fraud. Don’t be afraid to fight against chargebacks that you believe are illegitimate. Not refuting them could hurt your bottom line. Merchants have reported that friendly fraud made up an estimated 45% of their chargebacks. Data estimates an even higher percentage.
Chargeback vs. refund
Chargebacks and refunds can both involve returning funds to a customer. But there are important differences between the two:
- Who initiates the transaction: A business initiates a refund when a customer returns a product or is dissatisfied. A customer initiates a chargeback through the bank that issued their card.
- Whom the customer deals with: The issuing bank facilitates the chargeback process on the customer’s behalf. With refunds, the customer works with the business to resolve the problem and collect their payment.
- What happens to the funds: When a chargeback occurs, the processor withdraws funds from your account. With refunds, you ask your payment processor to return the appropriate funds to the customer.
- How long the process takes: Chargebacks typically take longer to resolve than refunds. In general, from the time they receive their bill, customers have 60-120 days to dispute a credit card charge and notify their credit card company.
A version of this article was first published on Fundera, a subsidiary of NerdWallet.
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- 1.Chargebacks911. 2026 Chargeback Field Report. Accessed Jul 17, 2026.
