Chargebacks: What They Are and How to Prevent Them
A chargeback is a forced transaction reversal initiated by a cardholder's bank, allowing customers to dispute charges and recover funds directly through their card issuer rather than the merchant. Chargebacks cost merchants the transaction amount, merchandise (if shipped), and fees of $15-$100 per dispute. Excessive chargebacks can result in higher processing rates, reserve requirements, or account termination. Prevention through clear policies, fraud tools, and excellent customer service is far more cost-effective than fighting disputes.
How Chargebacks Work
The chargeback process involves multiple parties and can take 60-90 days to resolve:
The Chargeback Timeline
Day 1-120: Cardholder contacts their bank to dispute a charge (most networks allow disputes up to 120 days after the transaction)
Day 1-5: Issuing bank reviews the dispute and assigns a reason code. If valid on its face, the bank initiates a chargeback.
Day 5-10: The chargeback flows through the card network to the merchant's acquiring bank, which debits the merchant's account.
Day 10-20: Merchant receives chargeback notification with reason code and deadline to respond.
Day 20-45: Merchant gathers evidence and submits representment (if fighting the dispute).
Day 45-75: Issuing bank reviews evidence and makes a decision.
Day 75-90: If merchant loses, they can pursue arbitration (rarely cost-effective).
Who's Involved
| Party | Role |
|---|---|
| Cardholder | Initiates dispute with their bank |
| Issuing Bank | Cardholder's bank; reviews dispute, makes initial decision |
| Card Network | Visa, Mastercard; sets rules, handles arbitration |
| Acquiring Bank | Merchant's bank; receives chargeback, debits merchant |
| Merchant | Receives notification, can accept or fight dispute |
Common Chargeback Reason Codes
Chargebacks are categorized by reason codes. Understanding these helps with prevention:
Fraud (Reason Code 10.x for Visa, 4837/4863 for Mastercard)
- Card used without cardholder authorization
- Stolen card number used online
- Account takeover
Prevention: Use fraud detection tools, require CVV, implement 3D Secure
Not as Described (Reason Code 13.x)
- Product significantly different from description
- Defective merchandise
- Counterfeit goods
Prevention: Accurate product descriptions, quality photos, clear policies
Not Received (Reason Code 13.x)
- Customer claims item never arrived
- Delivery confirmation missing or unclear
Prevention: Tracking numbers, signature confirmation, delivery photos
Credit Not Processed (Reason Code 13.6)
- Customer returned item but didn't receive refund
- Canceled service but was still charged
Prevention: Process refunds promptly, communicate refund timelines
Duplicate Processing (Reason Code 12.6)
- Customer charged multiple times for same purchase
Prevention: Review transactions before batching, train staff on error correction
Unrecognized Transaction
- Customer doesn't recognize charge on statement
- Billing descriptor unclear
Prevention: Use clear billing descriptors that match your business name
The True Cost of Chargebacks
Chargebacks are expensive beyond the obvious:
Direct Costs
| Cost Component | Typical Amount |
|---|---|
| Transaction Amount | 100% lost |
| Merchandise Value | 100% lost (if shipped) |
| Chargeback Fee | $15-$100 per dispute |
| Representment Costs | $15-$50 in time/resources |
Indirect Costs
- Higher processing rates: Excessive chargebacks trigger rate increases
- Reserve requirements: Processor may hold percentage of sales
- Account termination: Rates above 1% risk account closure
- MATCH listing: Terminated merchants are placed on industry blacklist
- Lost future sales: Customer unlikely to return
Example Impact
A $100 transaction disputed:
- Transaction amount: -$100
- Product cost (40% margin): -$40
- Shipping cost: -$8
- Chargeback fee: -$25
- Staff time (30 min @ $25/hr): -$12.50
- Total loss: $185.50
The merchant loses nearly twice the transaction value.
Chargeback Prevention Strategies
1. Use Clear Billing Descriptors
Customers dispute charges they don't recognize. Your billing descriptor should:
- Match your business name or DBA
- Include phone number or website
- Be consistent across all transactions
Bad descriptor: "PMT*1847362" Good descriptor: "REDROCK PAYMENTS 555-123-4567"
2. Implement Strong Fraud Prevention
For card-not-present transactions:
- Require CVV for all transactions
- Use Address Verification Service (AVS)
- Implement 3D Secure (Verified by Visa, Mastercard SecureCode)
- Deploy fraud scoring tools
- Review high-risk orders manually
Red flags to watch:
- Shipping and billing address mismatch
- Multiple failed payment attempts
- Unusually large orders
- Rush shipping to new customers
- Orders from high-fraud regions
3. Communicate Clearly
Before purchase:
- Display accurate product descriptions and photos
- Show clear pricing including taxes and shipping
- Make terms, return policy, and refund policy visible
After purchase:
- Send order confirmation immediately
- Provide tracking information
- Set delivery expectations
- Follow up after delivery
4. Make Returns and Refunds Easy
Customers dispute charges when they can't get help directly:
- Display contact information prominently
- Respond to customer service inquiries within 24 hours
- Process refunds within 3-5 business days
- Communicate refund status proactively
A $50 refund is better than a $50 chargeback plus $25 fee.
5. Document Everything
Maintain records to fight illegitimate disputes:
- Transaction receipts with signature or PIN verification
- Delivery confirmation with tracking
- Customer communications (emails, chat logs)
- IP addresses and device information for online orders
- Photos of products shipped
6. Use Delivery Confirmation
For shipped goods:
- Always use tracking
- Require signature for orders over $100
- Consider delivery photo confirmation
- Ship to verified billing addresses when possible
7. Monitor Your Chargeback Ratio
Calculate monthly: Chargebacks ÷ Total Transactions
| Ratio | Status |
|---|---|
| Under 0.5% | Healthy |
| 0.5% - 1.0% | Caution |
| Over 1.0% | Danger zone |
Card networks place merchants in monitoring programs when ratios exceed thresholds. Act quickly if your ratio rises.
Fighting Chargebacks (Representment)
When you receive an illegitimate chargeback, you can fight back:
When to Fight
- You have proof of delivery
- Customer authorized the transaction
- Product was as described
- Refund was already processed
- Transaction was duplicate (and you have proof)
When to Accept
- You lack documentation
- Customer has legitimate complaint
- Dispute amount is small (under $25-50)
- Time investment exceeds potential recovery
Representment Process
- Review reason code: Understand what evidence is needed
- Gather documentation: Receipts, tracking, communications, policies
- Write rebuttal letter: Concise, factual, addresses reason code directly
- Submit before deadline: Usually 10-20 days
- Wait for decision: 30-45 days typical
Effective Evidence by Reason Code
| Reason | Key Evidence |
|---|---|
| Fraud | Signed receipt, AVS match, delivery confirmation, customer history |
| Not received | Tracking number, delivery confirmation, signature |
| Not as described | Product photos, description shown at purchase, return policy |
| Credit not processed | Refund receipt, communication about refund |
Win rates vary by reason code and evidence quality. Fraud disputes are hardest to win; documentation-based disputes have higher success rates.
Frequently Asked Questions
How long do customers have to file a chargeback?
Most card networks allow disputes within 120 days of the transaction date. Some dispute types have shorter windows. For recurring billing, the window may start from each charge date.
Can I blacklist customers who file chargebacks?
Yes. Many merchants maintain internal lists of customers with chargeback history and decline future orders. This is legal and common practice for fraud prevention.
What happens if I get too many chargebacks?
Exceeding network thresholds (typically 1% ratio or 100+ monthly chargebacks) triggers monitoring programs with fines, required action plans, and potential account termination. Terminated merchants may be placed on the MATCH list, making it difficult to obtain processing elsewhere.
Is "friendly fraud" really fraud?
"Friendly fraud" occurs when legitimate customers dispute valid charges to get free products or because disputing is easier than requesting a refund. It's estimated to account for 60-80% of all chargebacks. While frustrating, these disputes are harder to prevent than true fraud.
Should I offer refunds to avoid chargebacks?
Often yes. A refund costs you the transaction amount but avoids chargeback fees, processing time, and ratio impact. Proactively contacting unhappy customers before they dispute is usually worthwhile.
Key Takeaways
- Chargebacks cost merchants the transaction amount, merchandise, and $15-$100 in fees per dispute
- Prevention through fraud tools, clear policies, and excellent service is far cheaper than fighting disputes
- Use clear billing descriptors that customers will recognize on their statements
- Document everything: delivery confirmation, customer communication, and transaction details
- Monitor your chargeback ratio and take immediate action if it exceeds 0.5%
Red Rock Payments provides chargeback prevention tools and support to help merchants protect their revenue. Contact us to learn about our fraud prevention solutions.
