What is a chargeback and how does it work?
Fatima Puri
Fintech & Payments Writer - AMER
Key takeaways
Merchants pay an average of US$128 in internal costs and third-party fees for each chargeback before counting the value of disputed goods.1
A chargeback is a payment reversal a cardholder initiates through their issuing bank, which pulls the funds out of the merchant's account and returns them to the customer.
Airwallex Optimize 360 applies 3D Secure where authentication is warranted, shifting fraud liability on qualifying transactions while delivering up to 2.6% higher approval rates.
Chargebacks provide consumers with a secure mechanism to dispute unauthorized card transactions. However, these reversals jeopardize merchant revenue by depleting inventory and creating substantial processing fees. Effective dispute management remains critical for businesses to safeguard the bottom line.
What is a chargeback?
A chargeback occurs when a cardholder contacts an issuing bank to dispute a credit or debit card transaction. The bank then forces a fund reversal from the merchant's account back to the consumer. US federal law establishes chargebacks as a consumer protection standard, safeguarding buyers against identity theft, rogue vendors, and fraudulent activity.
Chargeback vs. refund
While both processes return money to the customer, mechanics and business impact differ significantly:
Feature | Merchant refund | Chargeback |
|---|---|---|
Initiator | Customer requests directly from the merchant | Customer requests through the issuing bank |
Process | Direct agreement between customer and seller | Formal dispute involving banks and payment networks |
Fees | Standard payment processing fees (often non-refundable) | Dispute fees levied on the merchant |
Merchant health | Has no negative impact on processing standing | Directly increases the business' chargeback ratio |
How does a chargeback work?
The chargeback ecosystem relies on four main parties: the cardholder, the issuing bank (buyer's bank), the payment network (Visa, Mastercard, etc.), and the acquiring bank (merchant's bank).
The chargeback process step-by-step
The cardholder notices an unrecognized or unsatisfactory charge and files a claim with the issuing bank.
The issuing bank assesses the initial claim. If valid, the bank issues a provisional credit to the customer and initiates the dispute through the payment network.
The acquiring bank receives the chargeback notification and alerts the merchant. The bank then debits the disputed amount plus a chargeback fee from the merchant account.
To contest an invalid dispute, the merchant gathers evidence and submits a rebuttal package.
The issuing bank reviews the evidence and renders a final decision. The bank either upholds the chargeback or returns funds to the merchant.
What is a chargeback dispute?
A chargeback dispute, also known as representment, is the official process where a merchant contests an unjust chargeback. By presenting evidence such as delivery confirmations, signed receipts, and IP logs, the merchant proves to the issuing bank that the transaction was legitimate and fulfilled according to contract terms.
Common reasons for chargebacks
Chargeback reason codes generally fall into three primary categories.
True fraud
True fraud occurs when identity thieves or unauthorized individuals gain access to payment card details and make illicit purchases without the cardholder's knowledge or consent. When the cardholder discovers the charge, they file a legitimate fraud claim.
Friendly fraud
Friendly fraud occurs when a legitimate cardholder makes a purchase but later disputes the charge with an issuing bank. Cardholders can do this accidentally by forgetting a purchase or not recognizing the statement billing descriptor. Cardholders can also do this intentionally by claiming non-delivery to receive goods for free.
Merchant error or item not received
Operational oversights can trigger legitimate customer disputes. Common scenarios include:
Shipping damaged, defective, or incorrect items.
Failing to deliver goods within promised timeframes.
Double-charging a customer due to technical glitches.
Charging recurring subscription fees after a customer cancels.
How chargebacks impact businesses
Chargebacks do more than reverse a single transaction. They compound operational and financial strain on a growing business.
Chargeback fees and lost revenue
When a chargeback occurs, a merchant forfeits:
The original sale revenue.
Physical inventory or delivered services, alongside shipping costs.
Non-refundable administrative chargeback fees, which banks charge regardless of the dispute outcome.
Tools such as Airwallex Billing streamline billing processes, reduce payment friction, and prevent billing-related disputes before escalation into chargebacks.
On every chargeback, US merchants absorb an average of US$82 in internal costs and US$46 in third-party fees. These combined expenses frequently exceed the value of the disputed item.
The danger of a high chargeback ratio
Payment networks evaluate merchant risk based on a chargeback ratio, calculated as total monthly chargebacks divided by total monthly transactions.
Exceeding industry thresholds prompts card networks to place the business into high-risk monitoring programs, such as the Visa Acquirer Monitoring Program. This monitoring triggers elevated processing fees and fines. It may also lead to merchant account termination, leaving the business unable to accept credit cards.
How to dispute a chargeback as a merchant
Winning a chargeback representment requires quick action and meticulous documentation.
Gathering compelling evidence
Overturning an invalid dispute requires concrete proof specific to the dispute reason code:
Order confirmation emails, line-item receipts, and timestamped purchase logs.
Courier tracking numbers, proof-of-delivery signatures, and GPS drop-off confirmation.
Support chat transcripts, email exchanges, and previous undisputed transaction history.
Matching IP addresses, Address Verification Service (AVS) responses, and CVV match confirmations.
Submitting a rebuttal
The merchant drafts a concise cover letter explaining why the dispute is invalid and referencing the attached evidence. The merchant then submits the completed rebuttal package through the payment gateway or acquiring portal well before the network deadlines.
5 strategies to prevent chargebacks
Preventing chargebacks costs far less than contesting them.
Use clear billing descriptors
Set billing descriptors to display recognizable names, such as the consumer-facing brand, website domain, or support phone number, preventing confusion over obscure legal entity names.
Provide prompt and accessible customer service
Make support phone numbers, live chat, and email addresses visible across customer touchpoints and order confirmations. When customers can reach a business directly, fewer of them go to their bank instead.
Display return and refund policies clearly
Displaying refund, return, and cancellation policies prominently on checkout pages, receipt emails, and terms-of-service pages minimizes misunderstandings. Requiring customer agreement to these policies before purchase strengthens the merchant's position during a dispute.
Implement fraud prevention tools
Building automated fraud detection into the payment flow provides essential safeguards, including:
Address Verification Service (AVS) to verify billing street numbers and zip codes.
Card Verification Value (CVV) checks.
3D Secure 2.0 (3DS2) to add authentication for higher-risk online transactions and shift fraud liability on qualifying transactions.
Communicate shipping delays proactively
Merchants should send automated updates at every fulfillment stage. If backorders or logistical delays occur, merchants should inform buyers immediately and offer simple options to cancel or adjust the order before it becomes an "item not received" chargeback.
How Airwallex helps businesses manage payments securely
Airwallex provides a cross-border financial platform to accept, process, and manage payments worldwide. Instead of connecting separate third-party fraud tools to a payment processor, Airwallex integrates fraud detection, card authentication, and payment processing into a single system. A key part of the platform is Airwallex Optimize 360, an AI engine designed to protect businesses from fraud while maintaining smooth checkout for legitimate sales.
The fraud detection engine reads device, behavioral, transaction, and network signals in real time.
This ensures fewer legitimate orders are falsely declined while still blocking fraudulent ones.Optimize 360 delivers up to 2.6% higher approval rates.Smart 3DS orchestration weighs approval likelihood, regulatory requirements, and liability shift on each transaction rather than challenging every checkout. Applying 3DS to qualifying transactions shifts liability for fraudulent chargebacks away from the merchant.
Action-based rules combine business risk tolerances with machine-learning adjustments as fraud patterns change. Merchants can backtest a rule against historical transactions before deployment.
Automatic Currency Conversion, tied to the Airwallex multi-currency account, presents and accepts payment in the shopper's local currency. This ensures buyers see the exact cost at checkout rather than guessing conversion rates.
Frequently asked questions about chargebacks
What is a chargeback in banking?
In banking, a chargeback is the formal process where an issuing bank pulls funds back from an acquiring bank to settle a consumer dispute over a credit or debit card transaction.
What is a chargeback on a credit card?
A credit card chargeback is a consumer protection mechanism allowing cardholders to challenge billed transactions due to unauthorized account use, incorrect billing amounts, or unfulfilled orders.
Why would someone do a chargeback?
Cardholders initiate chargebacks due to stolen payment details, unrecognized billing descriptions, non-delivery of goods, defective items, merchant failure to honor cancellations, or intentional fraud.
How long does the chargeback process take?
The full cycle typically runs between 30 and 90 days. Complex cases involving pre-arbitration or arbitration between banks can extend beyond that.
Can a chargeback be reversed?
Yes, if a merchant successfully contests a chargeback during representment, or if the customer withdraws the dispute, the issuing bank reverses the chargeback and returns the funds to the merchant.
Who pays for a chargeback?
Merchants ultimately absorb the cost of an unrecovered chargeback, including lost revenue, lost inventory, and non-refundable chargeback processing fees assessed by payment networks.
Can a merchant refuse a chargeback?
No, a merchant cannot block an issuing bank from debiting the funds initially. Merchants can, however, formally challenge invalid claims through the representment process.
Is filing a false chargeback illegal?
Knowingly filing a false chargeback to obtain free goods or services, known as friendly fraud, violates merchant terms of service and can result in account termination. Depending on the circumstances, it may also carry legal consequences.
Sources
https://www.mastercard.com/global/en/news-and-trends/Insights/2025/what-s-the-true-cost-of-a-chargeback-in-2025.html
The material presented here is for informational purposes only and does not constitute legal, regulatory, taxation, or investment advice. Readers should engage their own advisors or counsel for advice unique to their circumstances.
Fatima Puri
Fintech & Payments Writer - AMER
Fatima is a business finance writer at Airwallex, where she covers the products and processes that help US businesses move and manage money across borders. She writes about payments, financial operations, and the practical realities of scaling internationally, drawing on over a decade of experience covering B2B technology. Fatima's goal is to write about complex financial infrastructure in a way that the people responsible for it can actually use.
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