Dispute vs. Chargeback - A Concise Explanation

As someone who owns e-commerce storefronts, I’ve dealt with disputes and chargebacks. You may hear people use the terms interchangeably (incorrectly). I wrote this guide to clarify the differences between the two.

I’ll explain whether they’re the same (they’re not). Areas they’re different in. How to prevent both. And other relevant information to help your business navigate both areas.

Are you ready? Let’s go.

Key Takeaways

• Disputes are a customer's initial complaint to their bank, whereas chargebacks are forced refunds.
• Merchants can prevent chargebacks by resolving disputes quickly and effectively.
• Common reasons for disputes include fraud, incorrect charges, and undelivered products.
• Providing clear descriptions, accurate billing, and excellent customer service can minimize disputes.
• Strong evidence and a swift response are crucial for merchants to win chargeback disputes.

Are Disputes & Chargebacks the Same?

They're related but NOT the same:

• Dispute: The initial stage where a customer questions a charge on their card statement. They contact their bank to report an issue.
• Chargeback: This occurs if the bank sides with the customer and forcibly reverses the payment. The merchant loses revenue and may incur fees.

Many people use the terms "dispute" and "chargeback" interchangeably. However, they shouldn’t.

A dispute is the initial stage where the customer contacts their bank to report a problem with a transaction. This could be anything from fraud to an incorrect billing amount. Following the dispute, the bank will conduct an investigation and make a determination..

If they find in favor of the customer, a chargeback occurs. This means the bank forcibly reverses the payment, taking the money back from the merchant and returning it to the customer. The way they’ll return the money depends on the type of card used.

It's important to try to resolve disputes with customers quickly and fairly whenever possible.

Summary: Disputes are the first step, potentially escalating into chargebacks. Merchants should focus on resolving disputes to prevent chargebacks.

What Is a Chargeback?

• Timing: After transaction.
• Initiator: Customer.
• Reasons: Items not arriving, products differing from descriptions, unauthorized charges, or billing errors.

A chargeback is a process where the customer’s bank returns the payment amount to a card or bank account after a customer disputes a transaction.

Here’s how they work:

• Customer contacts their bank to challenge a charge.
• Bank investigates, potentially asks the merchant for evidence.
• Bank decides, forcing a refund if they side with the customer.

At least 30% of chargebacks stem from fraud and stolen cards [1]. Customers may also initiate chargebacks if they don't receive the product they paid for. Or if the items they receive differ significantly from the description.

Resolution can take up to 90 days. The process involves timelines set by card networks.

Not only do merchants lose the revenue from the sale, but they are face fees by their banks for each chargeback they incur ($20–$100 per instance).

A high number of chargebacks can damage a merchant's relationship with payment processors, who may increase their fees or terminate their accounts.

Summary: Chargebacks protect customers but can be costly and time-consuming for merchants. Merchants should work to prevent chargebacks whenever possible.

Chargebacks vs. Refunds

Here’s the TL;DR of chargebacks versus refunds:

Chargebacks are initiated by the customer through their bank, often due to fraud or problems. The merchants have limited control over chargebacks and end up wasting time and money dealing with them.

Merchants initiate refunds and have control over the entire process.

While both options result in the customer getting their money back, refunds are preferable for merchants. They consume less time and maintain a positive customer relationship.

They also don’t incur extra fees or put the merchant’s relationship with their payment provider at risk.

Summary: Chargebacks are customer-driven, costly, and time-consuming for merchants. Refunds are merchant-controlled, simpler, and maintain a better customer relationship.

What Is a Dispute?

• Timing: Dispute happens before a potential chargeback.
• Initiator: Customer.
• Reasons: Disputes and chargebacks share the same reasons.

Disputes are customer complaints about transactions, reported directly to the bank. The customer may question the charge amount, product quality, or non-delivery.

They begin when customers contact their banks to question a charge to their card. From there, the bank may contact their merchant for clarification. This situation could escalate into a chargeback if a refund or reversal isn’t granted.

The reasons for disputes are the same as chargebacks. But here they are, anyway:

• Fraud: Someone uses the card without the owner's permission.
• Incorrect Billing Amounts: Customer is charged more than the agreed-upon price.
• Product Not Received: Customer paid, but the item never arrived.
• Damaged Goods: The received product is broken or unusable.
• Service Not As Described: The service provided didn't match the advertisement.

The resolution timeline is often faster than chargebacks. Merchants may resolve disputes during the same day if resolved with the customer. When involving banks, it could take days or weeks.

Summary: Disputes are the first step, potentially leading to chargebacks. Merchants can stop chargebacks by resolving disputes in good time.

What is Dispute Management?

Dispute management is the process merchants use to reduce chargebacks. This involves tactics for preventing and responding to customer disputes.

These tactics include:

• Working directly with customers: Resolving issues quickly to prevent escalation.
• Providing evidence to banks: Documentation like receipts, shipping records, and communication logs.
• Using chargeback representment services: Specialists who fight chargebacks on the merchant's behalf.

To prevent disputes, merchants must provide accurate charges with detailed descriptions on bills and invoices. They should also craft product descriptions to accurately reflect the condition, features, and functionality of what the customer is receiving.

And implementing fraud detection tools can help identify suspicious activity before it becomes a problem, preventing fraudulent transactions from becoming disputes later.

Summary: Dispute management is vital to minimizing chargeback losses. Proactive prevention and swift resolution save merchants money and reputation.

Types of Disputes

Different types of disputes are as follows:

• Fraudulent Transactions: Someone makes an unauthorized purchase using a customer's card—the customer doesn't recognize the charge.
• Billing Errors: The customer is charged an incorrect amount, or there might be a duplicate charge.
• Item Not Received (INR): The customer paid for a product, but it never arrived.
• Significantly Not as Described (SNAD): The product the customer received is broken, faulty, or different from the seller's description.
• Service Not as Described: Paid services didn't match what was advertised. For instance, a shoddy or incomplete home repair.
• Subscription Cancellations: Disputes might arise if a subscription is difficult to cancel or continues billing past the agreed period.
• Return Policy Issues: Customers might dispute if a merchant has an unfair return policy or refuses to honor a valid return.

Summary: Disputes cover various scenarios like fraud, incorrect charges, or unsatisfactory goods. Merchants should understand different dispute types to effectively prevent and respond to them.

Dispute-To-Chargeback Process

Here’s how disputes can lead to chargebacks:

1. Customer Initiates Dispute: The customer contacts their bank, providing a reason for disputing the charge (e.g., fraud, unrecognized charge, product not received). The bank assigns a reason code based on this information.

2. Bank Investigates: The bank contacts the merchant, informing them of the dispute. The merchant has a limited time (usually a few weeks) to respond and can accept the dispute or challenge it.

3. Challenge Option: If the merchant challenges the dispute, they must provide evidence that’ll combat the reason code to the bank, such as:

• Proof of purchase (receipt, signed contract)
• Delivery confirmation
• Communication with the customer
• Proof that the product or service matched the description

4. Bank Decision: The bank reviews the evidence and makes a decision. If they side with the customer, they issue a chargeback:

• The bank removes funds from the merchant's account.
• The merchant may incur additional chargeback fees ($20–$100 per chargeback).

5. Possible Arbitration: If the merchant disagrees with the bank's decision, they can go through arbitration with the card network (Visa, Mastercard, etc.) for an additional cost. In the formal process known as arbitration, a neutral, third-party resolves disputes by making a final, binding decision.

Summary: Disputes can turn into chargebacks if the bank supports the customer. Merchants can prevent chargebacks by resolving disputes quickly and effectively.

How to Win Chargeback Disputes

The following sections will explain the steps you’ll need to take to win a dispute (and a chargeback) as a customer and a business.

1. As a Merchant

You won’t win every chargeback. If there's a genuine error on your part (merchant error), refunding the customer may be the better course of action to preserve reputation.

Otherwise, here are the steps you’ll want to take to win a chargeback as a merchant:

1. Understand the Reason Code: Each chargeback has a code indicating the customer's reason for the dispute (e.g., fraud, merchandise not received). Knowing this helps tailor your response.

2. Gather Compelling Evidence: Gather these documents:

• Transaction records: Sales receipts, signed contracts, invoices
• Delivery proof: Tracking numbers, signed delivery confirmations
• Communication logs: Customer emails, support tickets, call recordings
• Proof of product/service matching description: Photos, marketing materials

If you haven’t collected these documents already, you better start now. Without these documents, you have no proof to present to the bank. And without them, you’ve lost your case.

3. Respond Quickly: Card networks set tight deadlines for merchant responses. Missing deadlines can automatically result in a lost chargeback.

4. Write a Rebuttal Letter: Explain why the chargeback is invalid. Structure your argument using the evidence you've gathered.

Consider these factors when writing your letter:

• Format: Follow any guidelines provided by the bank or card network.
• Introduction: State your merchant details, the transaction in question, and assert that the chargeback is invalid.
• Body: Address every point of the customer's dispute, refer to your evidence by name or document number ("See attached invoice...").
• Conclusion: Summarize your argument and request the chargeback to be reversed.

5. Consider Representment Services: Chargeback specialists can handle the complex process on your behalf. Potentially increasing your chances of success. Most chargeback scenarios won’t warrant hiring them.

More complex situations, businesses with a high chargeback volume, and teams with limited resources should consider hiring them. Because without them, you put your business at risk of losing access to payment processors.

Summary: Merchants can win chargebacks with strong evidence and swift action. Prioritizing prevention saves you the most time and money.

2. As a Customer

Only file legitimate disputes, fraudulent claims can backfire. Say you file a chargeback claiming fraud, but upon investigation, the bank discovers you made the purchase yourself. This could damage your relationship with your bank and potentially lead to account restrictions.

Anyway. Here’s how you win (most) chargebacks as a customer:

1. Understand Your Rights: Card networks (Visa, Mastercard, etc.) have rules protecting consumers. Familiarize yourself with valid reasons for chargebacks:

1. Fraud: Someone used your card without permission.
2. Goods not received: You paid but never received the item.
3. Product not as described: Item is faulty, damaged, or different from the seller's description.
4. Duplicate billing: You were charged twice for the same purchase.

2. Attempt Resolution with the Merchant First: Contact the merchant directly and explain the problem. Reputable businesses often prefer resolving issues to avoid chargebacks.

3. Gather Evidence: Document EVERYTHING, this is crucial for your bank:

• Receipts and transaction records: Proof of what you paid and when.
• Communication with the merchant: Emails, call transcripts, etc.
• Product photos (if applicable): Shows damage, incorrect item, etc.

4. Contact Your Bank: Initiate a dispute, providing a clear reason and your evidence. Most banks have a dedicated process for disputes. This might involve an online form, a phone call, or visiting a branch in person. Check with your bank directly for their preferred method.

5. Follow Up: The bank will investigate. The time to do this can vary depending on the complexity of the case. Simple disputes might resolve within a week or 2, while complex ones could take several weeks.

If you haven't heard back after a reasonable timeframe (around a week), a polite inquiry with your bank is appropriate. If they need additional information, provide it.

Summary: Customers can win chargebacks with valid reasons and strong evidence. First try resolving the issue directly with the merchant.

How to Prevent Chargeback Dispute Claims

Even the best prevention can't stop all chargebacks. However, these prevention methods should do a good job in reducing chargebacks:

• Clear Descriptions: Accurately describe products/services, avoiding misleading claims, and be upfront about any potential extra fees or limitations.
• Easy Billing: Use clear merchant descriptors on statements, match them to your business name. Also include all the ways to reach your customer support. That way, the customers can reach out with questions.
• Excellent Customer Service: Make communication easy and promptly help with returns or order issues. This helps resolve potential disputes directly.
• Shipping Smarts: Use reliable carriers, offer tracking numbers, and insure valuable shipments to prove delivery.
• Fraud Prevention Tools: Systems like Address Verification (AVS) and security codes (CVV) can help catch fraudulent orders before they're processed.
• Chargeback Prevention Tools: Certain tools can prevent disputes from resulting in chargebacks or find solutions to prevent disputes from happening (we offer a tool).

The methods for preventing disputes are the same as those used in mitigating chargebacks. We cover more methods (in-depth) in a separate guide.

Summary: Preventing chargebacks means clear communication and proactive customer service. Strong anti-fraud measures can also reduce the risk of disputes.

FAQs for Chargebacks & Disputes

You’ll find frequently asked questions regarding disputes versus chargebacks. Keep reading to learn more.

How Do Banks Process Disputes?

Banks investigate the transaction and gather evidence from customers and merchants. They then make a decision based on the evidence and card network rules.

Wrapping Up

While disputes and chargebacks signal customer dissatisfaction, understanding the difference is key. Transaction disputes can lead to the latter if the situation escalates. Merchants should focus on resolving disputes quickly to prevent costly and time-consuming chargebacks.

Learn how we can help prevent disputes from escalating into chargebacks.