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What Is a Chargeback and How Do I Dispute Them? (2023)



A chargeback happens when a customer asks their credit card issuer to reverse a transaction, returning funds used in a purchase.

Customers request chargebacks when items they purchase never arrive, they’re double-charged, or they’ve been fraudulently charged. When a buyer disputes a purchase, their credit card company reverses the charge, reimbursing the buyer, and debiting the business’s account.

Chargebacks cost merchants 0.47% of their total revenue each year, so it helps to understand the chargeback process, what causes them, and how you can dispute erroneous credit card reversals.

What is a chargeback?

A chargeback occurs when a customer questions a credit card transaction and asks their bank to reverse it.

Chargebacks differ from standard return requests in several ways. With a chargeback, funds are held from businesses until payment card issuers decide what to do. If they rule against the retailer, funds are returned to the cardholder.

Retailers are also charged a fee by merchant services providers to investigate and resolve chargebacks. These fees cost about $15 per incident and can quickly add up.

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Shopify Protect covers the total order cost and chargeback fee, and handles the dispute process on protected fraud-based chargebacks.

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The chargeback process explained

There’s a specific process customers, merchants, and credit card companies go through when dealing with chargebacks. 

Customer issues chargeback

After a retailer collects money from a customer, transaction details should appear on the customer’s credit card statement.

If the customer doesn’t recognize the transaction or receive the purchase, they can dispute the charge with their card issuer (usually via a banking app or over the phone).

US law requires card issuers to offer chargebacks within 60 days of the date of billing.

Credit card providers may need to see evidence, such as a purchase receipt or communications with the merchant, to authorize the chargeback.

Chargeback debited from merchant

The customer’s card issuer sends the chargeback to the merchant, debiting the disputed amount, plus a processing fee.

Credit card issuer reviews response

If necessary, a merchant can submit evidence (e.g., proof of delivery) to the customer’s card issuer to contest the chargeback and confirm the validity of the charges.

The credit card company can take up to 75 days to review the merchant’s chargeback response. Some cards, like Visa, require merchant banks to respond with evidence within 30 days of a chargeback.

Chargeback resolution

Chargeback disputes end with the merchant accepting the chargeback, the customer canceling the chargeback, or further arbitration by the credit card company.

Arbitration

If neither party is willing to accept the outcome, the credit card provider is called on to make a final decision over the chargeback dispute.

If the dispute is found in the merchant’s favor, the customer’s bank returns the amount to the merchant (plus any fees, depending on region).

However, merchants may have to pay additional fees if the chargeback is deemed valid.

Why do chargebacks happen?

When a credit card company issues a chargeback, they use a code to indicate the reason for the reversal. There are four general chargeback code categories:

  1. Fraud
  2. Quality
  3. Clerical
  4. Technical

Fraud

Chargebacks exist to make it safer for customers to shop. They protect against card cloning and other fraudulent purchases made without the buyer’s knowledge or consent. Fraud is the most common reason for a chargeback.

Chargebacks with the following reason codes have been requested due to fraudulent activity:

Chargeback reason American Express reason code Discover reason code Visa reason code Mastercard reason code
Card wasn’t present at the time of transaction F29 UA01 10.4
Counterfeit Europay, Mastercard, or Visa (EMV) card F30 UA05 or UA06 10.5 4870
Card not present at the time of transaction F29 UA06 10.4 4863
EMV card was lost, stolen, or not received at the time of transaction F31 4871

💡Note: A point-of-sale (POS) system that accepts secure payment technologies like EMV chip cards can help protect your business and customers from fraud.

Quality

Chargebacks also keep retailers accountable. If a buyer receives a defective product, or never receives the item they paid for, they can initiate a chargeback.

In many cases, no proof of delivery or an illegal returns policy will mean a customer is entitled to a chargeback.

An increasing number of merchants are offering product or service subscriptions. While free trials are great for encouraging customer sign-ups, you can be hit with chargebacks if subscriptions aren’t canceled promptly when requested.

Chargeback reason American Express reason code Discover reason code Mastercard reason code Visa reason code
Cancelled subscription C28 NF 4841 13.7
Defective goods and services C32 RM 13.3
Goods or services were not as described C31 RM 13.3
Goods or services were not received C08 RG 4855 13.1

Clerical

If a buyer is billed twice for an item, or a return is made without a refund, a clerical chargeback can be raised.

Chargeback reason American Express reason code Discover reason code Mastercard reason code Visa reason code
Invalid card number P01 IN 4834 12.1
Incorrect transaction amount P05 AW 4846 12.4
Duplicate charge P08 DP 4999 12.6

Technical

If there’s an issue with the buyer’s bank, credit card, or they don’t have funds in their account, a technical chargeback may be issued.

Website errors and confusing checkout processes can also cause technical chargebacks. To combat this problem, use a reliable ecommerce solution with a hassle-free checkout process.

Shop Pay limits distractions at the checkout so customers know exactly what they’re buying.

Chargeback reason American Express reason code Discover reason code Mastercard reason code Visa reason code
Invalid card number F10 UA01 4837 10.1
Missing signature F14 UA02 4840 10.2

Illegitimate chargebacks (friendly fraud)

Sometimes, customers will initiate chargebacks despite receiving their purchases.

Termed “friendly fraud,” illegitimate chargebacks can occur because consumers are unhappy with their products, are confused about payments, or are simply trying to gain a free product. In fact, it’s estimated that 61% of all chargebacks happen as a result of friendly fraud. 

As Nicolas Tranchant, founder of jewelry store Vivalatina, says, “The biggest reason for our chargebacks has been the client’s dishonesty. Sixty percent of them are claimed without even an email to explain there is a problem with the jewelry we had shipped to them, with no explanation and no intent to give us the opportunity to solve the issue.”

In these cases, merchants can dispute customer chargebacks to regain funds.

The biggest reason for our chargebacks has been the client’s dishonesty.

Nicolas Tranchant, founder of Vivalatina.

How to dispute a chargeback

When disputing a chargeback, respond as quickly as possible, since delayed action may result in a chargeback loss.

1. Gather information

When you’re notified of a chargeback, identify the customer and transaction in question. Source as much information about the transaction as possible, including warehouse data and delivery status. 

You can also contact the customer directly to see if their issue can be resolved.

2. Submit your chargeback response

If you feel that a chargeback has been made unfairly, you can submit your evidence in a dispute response.

This document is returned to the bank or card issuer that sent you the chargeback letter (alternatively, you may need to initiate your own chargeback dispute). Follow any formatting instructions and deadlines, and ensure you directly respond to the chargeback’s reason code. 

For disputed fraud or “no authorization” chargebacks, provide evidence that the cardholder was aware of and authorized the transaction. AVS (address verification system) matches, CVV confirmations, signed receipts, or contracts may help to prove this.

3. Await the decision

After you submit a rebuttal, the situation is out of your hands while the processor’s acquiring bank reviews the information. The cardholder’s bank makes the final decision about whether it will process the chargeback, and it will inform the customer of its decision.

💡 TipShopify Payments comes with Automatic Dispute Resolution, which can nearly double your win rate from unnecessary chargebacks.

How to protect your store from chargebacks

Take these steps to reduce the chance of a chargeback occurring in the first place:

Avoid manual processing

To reduce the possibility of charging errors, don’t type in information manually.

Keep automated records of customers’ credit card transaction dates, amounts, and authorization information. Don’t forget to retain proof of shipments and deliveries in case you need them to fight a chargeback.

Use fraud protection software

Implementing fraud prevention strategies such as investing in software will help you avoid transactions that can lead to chargebacks.

To prevent chargeback claims, customer care representative Ashley Shook explains that hair care merchant Calista uses a fraud detection app called NoFraud. “It screens and analyzes customer orders shortly after they’re placed,” Ashley says. “If it detects any suspicion of fraud, the order will be passed on to an analyst on their team.”

Make yourself easy to reach

Fraudulent transactions do occur, but sometimes buyers forget they purchased from you, or don’t recognize your business name. Ensure the name on credit card transactions matches how your customers know you.

If that’s not possible, try adding your phone number to your credit card transactions. When customers see “Luxury Lighting 800-123-4567” next to the charge, they may be more likely to call you for more information.

Clearly describe store policies

If you clearly describe your products and service policies, your customers are more likely to assume liability for unsatisfactory purchases. 

Write a precise return policy. That way, if a consumer is unhappy with their purchase, you can avoid a chargeback by processing it as a return instead. 

You should also display your contact information on credit card receipts and online, and encourage customers to call you with questions before automatically filing a chargeback. It saves everyone fees and dramatically reduces the time you spend evaluating whether to give the refund.

While it might seem like chargebacks are an easy way for customers with bad intentions to steal products, there are several consequences of friendly fraud.

If a customer’s card issuer discovers they’ve engaged in friendly fraud, it may close their credit account. This will affect the customer’s credit score and make it more difficult to make larger purchases.

Customers are also asked to cover chargeback fees if they lose a payment dispute.

As an extra disincentive, the chargeback process takes much longer than the average refund. So it’s faster for a customer to contact a retailer directly and iron out the issue.

Disputing chargebacks

Consumers benefit from the protection chargebacks provide against fraud and poor customer service.

Chargeback rules promote fair return policies and discourage retailers from selling subpar products. But, when consumers abuse the chargeback system, merchants can face unexpected losses and fees.

Merchants can recover disputed funds by submitting evidence to a consumer’s credit card company, showing that the customer authorized the transaction and received their purchase.

Handle retail chargebacks with Shopify POS

Merchants who choose Shopify to run their business get fully integrated payment processing and automatic dispute resolution, which consolidates transactions made in-store and online, receipts, shipping, and package tracking, helping you win more disputes and spend less on chargeback fees.

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What is a chargeback FAQ

How does a chargeback work?

A chargeback is a process where a customer contacts their credit card company to dispute a charge on their account. The credit card company then debits the merchant’s account for the disrupted amount. The merchant may be required to provide evidence the charge was legitimate in order to receive a reversal of the chargeback. The process usually takes 30 to 90 days to complete.

Is a chargeback a refund?

A chargeback is not the same as a refund. A chargeback is a process that allows a cardholder to dispute a transaction with their card issuer. A refund is when a merchant voluntarily agrees to return a customer’s money for a purchase.

What happens when a customer does a chargeback?

When a customer does a chargeback, the merchant will receive a notification a chargeback has been initiated and will be asked to provide evidence to support the disputed charge. If the merchant is unable to provide evidence, the chargeback will be upheld. If the merchant can show the charge is legitimate, the chargeback will be reversed.

What is a chargeback in simple terms?

A chargeback is a process that allows a customer to dispute a credit card transaction and have the money returned to them.

What is an example of a chargeback?

A customer might initiate a chargeback because they don’t recognize a transaction on their credit card statement. Another example of a chargeback is when customers never receive items they purchased online, and can’t contact the merchant for a refund. The bank will investigate the claim and, if necessary, reverse the charge and return the funds to the cardholder.



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