9 Chargeback Reasons & How to Prevent Them

When I sold stuff online, I had to prepare myself for many different chargeback types. I want to share some of what I’ve learned.

I’ll talk about the most common chargeback reasons, provide examples, and ways to prevent them. Then, I’ll cover general (and useful) chargeback information.

Let’s see what we’ll run into with chargebacks.

Key Takeaways

• Chargebacks usually fall under friendly fraud, criminal fraud, and merchant error.
• Most preventative measures involve being honest and using clear language with policies.
• Debit card chargeback reasons are for unauthorized purchases.
• Credit card reasons are for merchant error, authorization issues, and more.
• Chargeback reasons are similar to refunds, but they’re different processes.

Dispute & Chargeback Reasons (Plus How to Prevent Them)

Here are some of the most common chargeback reasons:

1. Goods delivered were damaged.
2. Cardholder denies authorizing the transaction.
3. Buyer seeks to keep the goods without payment.
4. Family member of the cardholder made the purchase.
5. Merchant overcharged the shopper.
6. Affiliate fraud.
7. Seller failed to provide the agreed-upon goods or services.
8. Product description did not reflect the item.
9. Consumer failed to cancel or dispute the subscription terms.

Each section will explain the chargeback type, provide an example, and how to prevent it.

I’ve written enough here.

Let’s move onto the first reason.

1. Goods Arrived Damaged or Defective

This occurs when the buyer claims that the product they received was damaged or defective. The customer argues that the product did not match what was expected.

You probably want an example:

A consumer orders a coffee maker.

Let’s say that it arrives and “looks” fine. The customer tries to brew coffee, but the machine leaks. The shopper then wants their money back due to the defective product.

Here’s how to prevent this from happening:

• Quality control: Check products before shipping.
• Packaging: Use strong materials to protect items during transit.
• Documentation: Keep records of all inspections and shipping processes.
• Tracking: Use tracking to monitor shipments and address issues.
• Feedback: Encourage customers to provide feedback on product conditions upon arrival.
• Supplier relations: Work with suppliers to ensure consistent quality.

These transactions were made with the cardholder’s knowledge. The next ones aren’t.

Summary: Purchased goods arrived damaged.

2. Transactions Happened Without the Cardholder’s Knowledge

An unauthorized transaction occurs when the cardholder claims they disapproved of the transaction.

The cardholder might argue that their card information was used without their knowledge.

This usually comes from fraud, where someone steals card details.

Another scenario is when someone uses a cardholder's physical card without consent.

Here’s an example scenario:

A cardholder notices a charge on their statement that they don't recognize.

They contact the merchant, who cannot provide proof of authorization. Like a signed receipt or other evidence. The customer then disputes the transaction. Stating they did not authorize the charge.

Here’s how you’d prevent these chargebacks;

• Use verification: Always require cardholder authentication, like PINs or signatures.
• Monitor transactions: Look for unusual patterns, such as high-value purchases.
• Use fraud scoring tools: Automatically gauge whether a transaction is suspicious.
• Verify customer information: Contact the “shopper” and confirm they made the purchase.

In some cases, the buyer could have approved the transaction. But they just want free stuff.

Summary: Transaction wasn’t authorized by the cardholder.

3. Buyer Seeks to Get Items for Free

In this situation, a buyer disputes a charge to get free items. They would claim to have never received the goods or items that were not as described.

Their goal is to keep the products while getting a refund.

This is known as friendly fraud. I’ll discuss it more in-depth toward the end of the guide.

Prevent this chargeback type by following these tips:

• Require signature on delivery: This ensures that someone received the package.‍
• Communicate with customers: Be clear about delivery times and product descriptions.

There’s not much you can do to prevent these types of chargebacks. Buyers who want free stuff will find a way to do it.

There’s another reason that also falls under friendly fraud.

Summary: Customers try to get free items by falsely claiming items didn’t arrive.

4. Family Member of the Cardholder Made the Purchase

This chargeback occurs when a family member uses the cardholder's card without permission.

I was on the disputing end of a “family fraud” situation.

I had a mobile game where you could buy packs of cards for real money. I let my 5-year-old nephew play the game without adding fingerprint verification to my payment method.

He spent around $13 – $20 on card packs without knowing what he was doing. I didn’t find out about his purchase until it was too late.

I contacted the app’s customer service about the situation, and they refunded me.

That situation didn’t lead to a chargeback. But it could have if they hadn’t refunded me.

That’s the best way to prevent this type of chargeback. Refund customers if they don’t have multiple instances of family fraud.

If this isn’t a one-off scenario and you told them to monitor their account, then they are to blame.

Let’s step away from family fraud.

What happens when a chargeback is the result of a seller error?

Summary: Family fraud happens when a family member makes an unauthorized purchase.

5. Cardholder Was Charged the Wrong Amount

This happens when a customer claims you billed them for an amount different from what they agreed to pay.

This issue can happen during a transaction when the merchant accidentally does the following:

• Inputs the wrong total
• Applies incorrect taxes; or
• Makes a similar error

This shouldn’t need an example.

Here’s one just in case:

A customer purchases an item for $50 at a store. The cashier mistakenly enters $500 instead of $50.

Easy to understand. Right?

Use these tips to prevent such an issue:

• Double-check transaction amounts: Confirm the amount entered matches the agreed price.
• Use reliable point-of-sale systems: Set up your POS to minimize human errors.
• Provide clear receipts: Give customers a receipt showing the exact amount charged.
• Train staff: Train employees to verify transaction amounts.

The following reason isn’t your fault. But more so an affiliate marketer’s.

Summary: You charged the customer more than what they agreed to.

6. Affiliate Fraud

Affiliate fraud occurs when a merchant faces disputes due to deceptive activities by an affiliate marketer. 

Affiliates sometimes use fraudulent means to inflate their performance metrics. They do this to get more money (obviously).

This can involve creating fake purchases with stolen credit card information. These purchases are processed, and the affiliate receives their commission.

Here’s an example:

A merchant partners with an affiliate marketer. The affiliate drives a large number of sales within a short period.

The seller then pays the affiliate for their performance. Weeks later, the merchant receives multiple chargebacks from cardholders claiming unauthorized charges.

It turns out the affiliate used stolen credit card information for fake sales.

That doesn’t mean you should get rid of your affiliate program.

Instead, follow these tips:

• Vet affiliate marketers before partnering with them.
• Use monitoring tools to track the quality of traffic affiliates generate.
• Limit commissions until you can confirm the validity of sales.
• Analyze spikes in sales before paying affiliates.
• Review affiliate terms and update them to cover new fraud tactics.

And what if the customers never got the goods you were supposed to send?

Summary: Affiliate marketers use stolen card information to pump affiliate referrals.

7. Merchant Did Not Provide the Goods or Services

This happens when a customer claims they did not receive what they paid for.

Here’s an example…

A shopper buys a concert ticket online. The ticket is for a show 3 months later.

The merchant promises to email the ticket within 2 days.

After a week, the consumer still hasn't received the ticket or any communication from the seller. The customer tries to contact the merchant but gets no response.

As the concert date approaches, the customer still doesn't have the ticket. They then file a chargeback.

The easiest way to prevent this is by giving the customer the product.

Here are additional safeguards, though:

• Provide clear delivery timelines: Notify customers if delays occur.
• Send order confirmations: Do this immediately.
• Offer tracking information: Shipping insurance provider typically offer this.
• Have them sign for the order: When receiving the product, require a signature.

You could have followed all the above preventative measures, but the customer still claims they didn’t receive the product. In this case, they may want to defraud you.

What I mentioned in the preventative steps should help you evidence-wise.

Here’s another way they may try to claim you “scammed” them.

Summary: The buyer never received the product.

8. Product Description Was Misleading

This occurs when a shopper receives a product that doesn't match the description given at purchase.

This may include differences in color, size, functionality, or features.

The easiest way to prevent this is by writing accurate product descriptions.

Here are some details on how to do this:

• Use clear and concise language in product listings.
• Include multiple photos of the product from various angles.
• List any variations in color, size, or materials.
• Verify that product specifications match what you’re selling.
• Provide detailed sizing charts (if applicable).
• Update product descriptions if any changes happen.
• Monitor customer feedback for common complaints.

It boils down to ensuring you’re honest about your product. If you are and a customer claims you’re not, you’ll have the evidence to prove otherwise.

The product could have been described, but the user didn’t read the terms.

That’s where this next reason comes in.

Summary: The product wasn’t as described.

9. Customer Forgets to Cancel a Subscription or Disagrees With Terms

This happens when a customer signs up for a subscription but forgets to cancel it before renewal. It also happens if the user disputes the terms of the subscription.

They may argue that the terms were unclear, that they never agreed to them, or that they were misled.

Let’s see a scenario:

A customer subscribes to an online service.

The service offers a free trial period, after which the customer will be billed automatically unless they cancel. The customer forgets to cancel before the trial ends.

The next month, they see a charge on their credit card statement. They contact the merchant, claiming they didn’t authorize the charge.

The ways to prevent this reason are straightforward:

• Send reminders: Do this before subscription renewals.‍
• Make cancellation easy: Don’t create a complex process.‍
• Provide clear terms during the signup process: Use simple language.‍
• Ensure the customer agrees to the terms: Do this with a checkbox or other method.

Will all these chargeback reasons differ whether a customer uses a credit or debit card?

Summary: A customer forgets to cancel a subscription then fights the charges.

Are the Chargeback Reasons Different for Credit Cards?

Credit card chargebacks cover accounting errors, credits not issued, accounting errors, and more. Chargebacks done with other payment methods only cover fraudulent transactions.

These “other payment methods” fall under the Electronic Fund Transfer Act (EFTA) and refer to these methods [1]:

• Point-of-sale (POS) terminals
• Transfers through ATMs
• ACH systems
• Telephone bill-payment
• Remote banking programs
• Remittance transfers
• Debit cards
• Prepaid cards

Credit cards offer much more protection through the Truth in Lending Act.

I compare chargebacks from these payment methods in a separate piece. I don’t want to dive too deep here.

After reading everything about chargebacks, you might think they’re refunds. They’re not.

Summary: Credit card chargebacks offer coverage for more reasons. Debit cards only cover fraud transactions.

Chargebacks vs. Refunds: The Reasons Sound Similar, But

Refunds are when merchants give money back to customers. This happens if a product is returned or a customer is unhappy. Merchants start refunds themselves.

They only lose the sale and payment fees.

Chargebacks happen when banks return money without merchant approval. Customers start these through their banks.

Chargebacks cost merchants more than refunds. As they come with extra fees.

And they can lead to additional problems.

For instance, if sellers have a 0.65% chargeback rate, brands like Visa will place them in the Visa Dispute Monitoring Program.

These can lead to paying $50 for chargeback fees instead of $25. Then there are $25,000 review fees.

If the seller’s in the program for more than 12 months, they could lose their ability to process Visa cards.

We have a separate guide that provides more details on chargebacks versus refunds. Check it out.

Otherwise, let’s move onto discussing the chargeback process.

Summary: Chargebacks take more time and effort for merchants. Refunds are simpler and have fewer consequences.

What Is the Chargeback Process When One Happens?

• How Long They Last: 75 – 120 days
• Typical Fees: $25 – $100 per instance

Here are the general steps for the chargeback process:

1. Dispute: Customer challenges a transaction with their bank.
2. Provisional refund: Bank may credit customer's account during investigation.
3. Reason code: Bank assigns a code to categorize the dispute.
4. Merchant decision: Seller chooses to accept or fight the chargeback.
5. Evidence gathering: Merchant collects proof to support their case.
6. Submission: Merchant sends evidence to their bank for review.
7. Bank review: Issuing bank examines evidence and makes a decision.
8. Arbitration: Card network makes final judgment if dispute remains unresolved.

The chargeback process differs based on the payment processor, bank, and card network.

Here are some guides to help you understand various payment gateways’ and card brands’ processes:

• PayPal
• Stripe
• Shopify Payments
• Amazon Payments
• Apple Pay
• Visa
• Mastercard
• American Express
• Discover

Weigh the cost of fighting against potential losses. Also consider their chargeback rate to avoid exceeding thresholds.

Though the process usually ends with the bank’s decision, customers or sellers could “restart” it.

This is usually done through an appeals process. Either party could submit additional evidence for a chance at a new decision.

Not all issuers will allow this, though.

That’s why I keep telling you to refer to different card networks and their rules.

We know the process. And we know the different types of chargebacks. But we don’t know the types they fall under.

These Fall under 3 Kinds of Chargebacks

All the above chargeback types fall under these categories:

• Friendly fraud: Customer disputes legitimate charge.
• True fraud: Unauthorized use of payment card.
• Merchant error: Seller makes a mistake on a transaction.

I’ll explain in more depth what each category is.

Let’s begin.

1. Friendly Fraud

Friendly fraud occurs when a customer requests a chargeback for a legitimate purchase. These may account for 40 - 80% (or higher) of all chargebacks [2].

This can happen by mistake or on purpose. 

For instance, they might forget about the purchase and not recognize the charge on their statement. They request a chargeback, thinking the charge is fraud.

Unintentional fraud can result from confusion or forgetfulness.

Shoppers might not recognize a business name on their statement. They might also forget about a subscription renewal or a purchase.

Intentional fraud is a form of theft.

Customers knowingly request chargebacks for valid purchases. They might claim they never received an item they actually got. Or they might say a product was defective when it wasn't.

It’s a bit difficult to distinguish between honest mistakes and deliberate fraud.

Education and clear communication can help prevent unintentional friendly fraud. Strong evidence and dispute processes are key to fighting intentional friendly fraud.

You shouldn’t worry about either too much, though.

Merchants win 43.82% of these chargebacks [3]. Much higher than the industry average of 30%.

Why such a high win rate?

Shoppers may not have the best evidence. If you have solid fraud detection SOPs and tools, you shouldn’t have trouble proving you’re in the right.

Anyway.

Friendly fraud is not chargeback fraud.

Here’s why:

• Chargeback fraud: Customers intentionally abuse the chargeback system for personal gain.
  • They plan to keep both the product and their money.
• Friendly fraud: A type of chargeback fraud that can sometimes be unintentional.

Then, you might be familiar with another version of friendly fraud.

Family fraud.

It happens when a family member makes unauthorized purchases with the cardholder’s information. I wrote a story about it in this guide.

What if the fraud wasn’t so friendly?

Summary: Friendly fraud is when customers dispute legitimate transactions.

2. Third-Party Fraud (AKA Criminal Fraud)

True fraud chargebacks occur when unauthorized parties use stolen card details to make purchases. 

These transactions happen without the cardholder's knowledge or consent. This isn’t like friendly fraud. Where the cardholder did authorize the transaction.

A common example is when a hacker finds a customer’s card on the dark web and uses it to buy something.

And unlike friendly fraud, your chances of winning this dispute aren’t so high. It’s only 9.27%.

There are also instances of criminal fraud that you won’t notice.

Many fraudsters will “crack cards.” This involves making small purchases to see whether they have funds.

If a customer notices this, they’ll tell their bank. Then the bank will just refund that amount. You (the seller) would never know this happened.

Unless:

You request TC40 data. Banks must create these whenever any instance of fraud occurs. Thus, they could help you find any weak spots in your fraud prevention.

We talk about getting and using this data in a separate guide.

In short, you need to ask your payment processor for it.

There are some scenarios where it’s just the merchant’s fault.

Summary: Third-party fraud is an unauthorized transaction.

3. Merchant Error

A merchant error chargeback happens when a business makes a mistake in processing a transaction. 

This type of chargeback is the seller's responsibility. It happens due to errors in billing or product delivery.

Common causes include:

• Charging a customer twice
• Billing for the wrong amount
• Failing to process a refund
• Shipping the wrong item
• Not delivering the product or service

And here’s a specific example:

A customer orders a blue shirt from an online store. The store ships a red shirt instead.

It’s a straightforward chargeback type and doesn’t require further explanation.

Are we done yet? Nope. We have one more area to cover.

Summary: Merchant error chargebacks happen when sellers make mistakes.

Then, There Are Chargeback Reason Codes

When dealing with most payment gateways or card brands, you’ll see reason codes for chargebacks. These describe the specific reason for a chargeback.

Many of the reasons I covered will show up as reason codes. And some won’t.

I recommend looking through our guides for different chargeback reason codes to dive further into this subject.

However:

These will vary by the following card networks:

• Visa
• Mastercard
• Discover/JCB
• American Express

That’s about it. I hope some of this information helped.

Wrapping Up

Most reasons for chargebacks fall under merchant errors, criminal fraud, and friendly fraud. Though they're hard to prevent, you’ll have the best chances of winning friendly fraud chargebacks. And you likely won’t win merchant error disputes, but they’re easy to prevent.

Speaking of prevention.

Using chargeback alerts will help you address issues before they escalate to disputes and chargebacks. We make integrating these alerts with your payment ecosystems simple. Learn how we can help.

Sources

• [1] Federal Consumer Financial Protection Guide. National Credit Union Administration
• [2] How E-Commerce's Growth Is Attracting Fraud. Forbes. 5/18/2020
• [3] Chargeback Report. ChargeFlow. 1/23/2024