What Is a Chargeback? Explained, How to Dispute & Best Practices

As someone who ran e-commerce stores, I ran into chargebacks.

I wrote this guide to help you understand what they are, how they work, and how to mitigate/combat them.

Let’s dive in.

Key Takeaways

• Chargebacks help customers fight fraud and unfair business practices.
• Chargebacks come in different types, impacting how they're resolved.
• Merchants lose money from fees, even if they win a dispute.
• Fraud prevention, clear descriptions, and good service minimize chargebacks.
• Businesses with high chargeback rates can lose payment processing abilities.

What Is a Chargeback & How Does It Work?

A chargeback is a forced refund issued by a customer's bank (the issuing bank) back to the customer's account. It happens when a customer disputes a charge on their credit or debit card statement.

Chargebacks protect customers from fraud, billing errors, or dissatisfaction with goods or services.

Fees will vary for chargebacks (I’ll cover these later). However, the overall costs of chargebacks increased to more than $1 billion in 2023 from $690 million in 2020 [1]. And these costs are likely to rise.

Here's a step-by-step breakdown of how a chargeback works:

1. Customer disputes a charge: The customer notices a charge they don't recognize or a problem with a purchase (e.g., item not received, wrong item shipped, service not as described).
2. Bank investigates: The issuing bank reviews the customer's claim and contacts the merchant's bank to get more information about the charge.
3. Chargeback issued: The issuing bank may issue a temporary credit to the customer's account while they investigate further. If they determine the dispute is valid, the chargeback becomes permanent, and the merchant's account is debited.
4. Merchant response: The merchant receives notification of the chargeback and has the chance to fight it by providing evidence supporting the legitimacy of the transaction.
5. Resolution: If the issuing bank rules in the customer's favor, the chargeback stands, and the merchant loses the revenue and may incur additional fees. If the bank sides with the merchant, the temporary credit is reversed from the customer's account.

This process will typically take 30–90 days to resolve.

Here’s an example:

A customer orders a new laptop online. When it arrives, it's the wrong model. The customer tries contacting the merchant but gets no response. The customer files a chargeback for "item not as described" with their bank, ultimately getting their money back.

Summary: A chargeback is a way for customers to get their money back when there's a problem with a credit/debit card purchase. The customer's bank works to resolve the dispute between the customer and the merchant.

1. The Purpose of Chargebacks: Why Would Someone Do a Chargeback?

The main purpose of chargebacks is to protect customers from problems with purchases they make with credit or debit cards.

Chargebacks give customers a way to get their money back when things go wrong and the merchant isn't helpful. This helps build trust between customers and businesses that accept cards.

Here are some common reasons why a customer might do a chargeback:

• Fraud: The customer didn't make the purchase, and their card was used without their permission.
• Billing errors: The customer was charged twice or for the wrong amount.
• Item not received: The customer paid for an item, but it never arrived.
• Not as described: The item arrived, but is different than what the customer ordered or doesn't work properly.
• Dissatisfaction: The customer is unhappy with the quality of the product or service.

For instance, a customer buys a new phone online but discovers it's counterfeit. After the merchant refuses a refund, the customer files a chargeback for "fraudulent activity."

Summary: Chargebacks help customers get their money back in bad situations. Customers use chargebacks for problems merchants can't or won't fix.

2. Chargebacks vs. Refunds

Chargebacks and refunds result in the customer getting their money back, but they are different processes.

Here's a breakdown of the key differences:

A chargeback is started by the customer through their bank, taking control away from the merchant. Chargebacks can cost the merchant extra fees, take a long time to resolve, and hurt their reputation. 

The merchant controls refunds.They're much faster, and less harmful.

Let’s check out a couple scenarios: a customer is unhappy with a dress they bought:

• Refund Scenario: The customer returns the dress to the store and gets their money back.
• Chargeback Scenario: The customer calls their bank instead and files a chargeback for "item not as described."

Summary: Refunds are merchant-controlled and faster. Chargebacks involve the bank and hurt the merchant more.

3. Why Chargebacks Are Bad for Businesses

Here are the reasons why chargebacks are bad for businesses:

• Lost revenue: The most immediate impact is the loss of revenue from the original transaction.
• Lost goods: In cases where a product was shipped, the business loses the revenue and the cost of the shipped goods.
• Chargeback fees: Banks often charge merchants a fee for each chargeback, adding to the financial loss. These fees can range from $20 to $100 per incident.
• Operational costs: There are administrative costs for documenting the transaction, communicating with the bank, and potentially fighting the dispute.
• Reputation damage: High chargeback rates can damage a business's reputation with banks and card networks. This could lead to higher card processing fees, restrictions on the merchant's account, or the inability to accept cards altogether.

Chargebacks represent a financial and operational burden for businesses. They can hinder a business's long-term growth and stability due to increased fees and potential loss of payment processing capabilities.

Here’s an example:

A customer files a fraudulent chargeback claiming they never bought a product. The business loses the value of the product, pays a chargeback fee, and their reputation is harmed though they did nothing wrong.

Summary: Chargebacks cost businesses money and cause extra problems. Too many chargebacks can put a business in trouble.

4. Types of Chargebacks

Chargebacks fall into 3 main types:

1. Chargeback Fraud (often referred to as "friendly fraud")
2. Merchant Error Chargebacks
3. Customer Disputes (including billing errors)

Here's a closer look at each type:

1. Chargeback Fraud (Friendly Fraud)

This type of chargeback occurs when a cardholder disputes a legitimate purchase they made. It's essentially a fraudulent claim. Although the cardholder isn't using stolen card information.

Here are some common examples:

• Buyer's remorse: The customer regrets a purchase and claims they never received the item or it wasn't authorized.
• Not as described: The customer claims the item isn't as described, though it might be.
• Product dissatisfaction: The customer is unhappy with the product's quality or performance and tries to get a refund through a chargeback.

Friendly fraud is a challenge for businesses because it's difficult to disprove a customer's claim.

2. Merchant Error Chargebacks

These chargebacks happen due to mistakes made by the merchant during the transaction or fulfillment process.

Here are some common reasons:

• Duplicate charges: The customer is accidentally charged twice for the same item.
• Incorrect charges: The customer is charged an incorrect amount due to pricing errors or typos.
• Order fulfillment errors: The wrong item is shipped, the item is damaged in transit, or the order is not shipped at all.
• Subscription billing errors: The customer is charged after canceling a subscription service.

These errors can damage customer trust and lead to chargebacks. Implementing clear billing practices and a reliable subscription management system can help prevent merchant error chargebacks.

3. Customer Disputes (Including Billing Errors)

This category encompasses situations where a customer has a legitimate dispute with a merchant regarding the billing or service.

Here are some common reasons:

• Billing errors: These are unintentional mistakes made during the billing process, such as duplicate charges, incorrect charges, or math errors.
• Item not received: The customer paid for an item but it never arrives. This could be due to genuine shipping issues, not necessarily merchant error.
• Item not as described: The product or service the customer receives is significantly different from what was advertised or is defective.

These disputes can sometimes be resolved through direct communication with the customer. However, if a resolution isn't reached, the customer may file a chargeback to get their money back.

Debit Card Chargebacks vs. Credit Card Chargebacks

The following sections will highlight the following differences between each chargeback type:

• Legal
• Financial
• Liability
• Dispute process

Let’s dive in.

1. Debit Card Chargebacks

Here are the differences with debit card chargebacks:

• Legal: Governed by Regulation E of the Electronic Funds Transfer Act (EFTA), this focuses on customer protection in electronic transactions, including debit card disputes.
• Financial: Disputed funds might be frozen in the customer's account pending resolution, impacting their immediate access.
• Liability: The cardholder's bank bears primary liability, but the merchant may be responsible for certain fraud types if insufficient proof of legitimacy is presented.
• Dispute resolution process: The customer usually initiates the dispute with their bank, which then contacts the merchant for resolution.

With debit card chargebacks, merchants face immediate cash-flow impacts, and the focus is on swift resolution due to the direct nature of the funds withdrawal.

2. Credit Card Chargebacks

Here are the differences with credit card chargebacks:

• Legal: Governed by Regulation Z of the Truth in Lending Act (TILA), which centers on fair credit practices and consumer protection, encompassing credit card chargeback processes.
• Financial: Funds are not instantly deducted from the merchant's account, leading to a delayed financial impact.
• Liability: Merchants may be held liable for fraudulent transactions if they cannot provide evidence supporting the purchase's validity.
• Dispute resolution process: Customers initiate the dispute with their credit card issuer, who acts as an intermediary between the merchant and customer.

Credit card chargebacks offer a buffer for merchants as funds aren’t removed immediately, but the risk of financial loss lingers.

Players in the Chargeback Process

Here’s how each individual and entity plays a role in the chargeback process:

• Cardholder: The individual who initiates the chargeback process by reporting a disputed transaction to their issuing bank.
• Issuing Bank: The financial institution that investigates the dispute, determines the chargeback's validity, and retrieves funds from the merchant's account if necessary.
• Merchant: The business that must provide evidence to potentially overturn the chargeback and faces financial loss if the chargeback is successful.
• Acquiring Bank: The financial institution that represents and defends the merchant in the chargeback process.
• Card Network: The entity that sets the framework for chargeback rules, facilitates communication between banks, and may provide dispute resolution services.

I’ll explain each of their responsibilities and roles further throughout the following sections.

1. Cardholder

Cardholder's role:

• Communication: The cardholder should respond promptly to any requests for additional information from their bank.
• Resolution: If the bank rules in the cardholder's favor, the chargeback becomes permanent. If not, the temporary credit is reversed.

The cardholder is the individual who owns the credit or debit card used in the disputed transaction. They are a crucial player in the chargeback process, as they initiate the dispute when a problem arises.

2. Issuing Bank or Credit Card Issuer

Issuing financial institution responsibilities:

• Customer dispute intake: Receives the initial chargeback request from the cardholder and assesses its validity.
• Evidence evaluation: Collects evidence from the cardholder (reasons for the dispute) and the merchant (proof of the transaction's legitimacy).
• Chargeback initiation: If the bank deems the dispute valid, they initiate the chargeback process and temporarily credit the cardholder's account.
• Communication with merchant: Informs the merchant of the chargeback and requests documentation to defend the transaction.
• Final decision: Determines whether to uphold or reverse the chargeback.

The issuing bank is the financial institution that issues the credit or debit card to the cardholder. In the chargeback process, they play a role as the intermediary and decision-maker.

3. Merchant

Responsibilities of the merchant:

• Notification: Notified of the chargeback by their acquiring bank.‍
• Evidence gathering: Has a limited timeframe to gather evidence supporting the legitimacy of the transaction (e.g., proof of delivery).‍
• Representment: The merchant submits the evidence to their acquiring bank as a "representment" package.

The merchant is the business that sold the product or service that resulted in a chargeback. They bear the financial brunt of a successful chargeback claim.

4. Acquiring Bank

Acquiring bank responsibilities:

• Receiving transaction data: Receives transaction data from the merchant's point-of-sale system or payment gateway.
• Verifying transactions: They perform initial verification checks to ensure the transaction appears legitimate.
• Funding merchant accounts: Settles the transaction and deposits the funds into the merchant's account (minus any processing fees).
• Representing the merchant: Acts on the merchant's behalf by receiving notification from the issuing bank and presenting the merchant's defense (evidence of the transaction's validity).
• Facilitating communication: May communicate with the issuing bank and the merchant to gather information and resolve the dispute.
• Collecting chargeback fees: Collect any associated chargeback fees from the merchant.

The acquiring bank serves as a link between businesses and the payment card networks (Visa, Mastercard, etc.). 

5. Card Networks

Card networks responsibilities:

• Setting chargeback rules and standards: Establish the guidelines and timeframes for how chargebacks are initiated, investigated, and resolved.
• Facilitating communication: They provide a network for transmitting chargeback information between issuing banks, acquiring banks, and merchants.
• Dispute resolution support: Some networks offer additional services like arbitration or mediation to help resolve complex chargeback disputes.
• Chargeback fees: May impose fees on merchants for lost or fraudulent chargebacks.

Card networks, like Visa, Mastercard, Discover, and American Express, are the facilitators of electronic payments. They act as a communication hub between issuing banks and acquiring banks.

The Chargeback Lifecycle

Here’s the typical lifecycle of a chargeback:

1. Initiation: Cardholder initiates the dispute.
2. Pre-chargeback/first chargeback: Financial institution reviews claim and potentially initiates first chargeback.
3. Second chargeback: Merchant provides evidence on chargeback and bank decides whether to intensify the issue.
4. Arbitration: A decision arises on who’s at fault.

I’ll provide more details on these steps throughout the following sections.

Read on to learn more.

1. Dispute Initiation

The chargeback process begins when a cardholder decides to dispute a credit or debit card transaction. 

Here's how it typically works:

1. Identifying the Issue

The cardholder notices a problem with a charge on their statement. This could be due to several reasons:

• Fraud: Unauthorized use of their card or account information.
• Billing errors: Incorrect charges, duplicate charges, or math mistakes.
• Product/service issues: Item not received, item not as described, dissatisfaction with the service.
• Recurring billing disputes: Difficulty canceling a subscription, continued charges after cancellation.

2. Contacting the Issuing Bank

The cardholder reaches out to their financial institution (via phone, online form, or in person) to initiate the dispute. They provide details about the transaction and the reason for their dissatisfaction.

Summary: Dispute initiation starts when the cardholder contacts their bank to challenge a transaction. Disputes can stem from fraud, errors, or dissatisfaction.

2. Pre-Chargeback/First Chargeback

This is the stage where the financial institution reviews the customer's claim and the chargeback process officially begins.

Here's what happens:

1. Bank Evaluates Claim

The issuing bank examines the cardholder's dispute submission and relevant transaction information. They determine if there's sufficient evidence and if the dispute reason falls under valid chargeback conditions.

2. Potential Pre-Chargeback Resolution

If the issue is straightforward (e.g., a billing error), the bank might contact the merchant directly to resolve it. This can prevent a formal chargeback.

3. First Chargeback Issued

If the bank deems the dispute valid, they initiate a chargeback. This means funds are withdrawn from the merchant's account, potentially incurring fees. The acquiring bank is notified.

Summary: The bank reviews the dispute and either tries to resolve it with the merchant directly or initiates a formal chargeback.

3. Second Chargeback (If Applicable)

A second chargeback, also known as pre-arbitration, occurs in circumstances when the initial dispute process isn't resolved to the satisfaction of either party.

Here's how it unfolds:

1. Merchant Disputes First Chargeback

The merchant disagrees with the initial chargeback decision and provides compelling evidence or new information to the acquiring bank to fight it.

2. Issuing Bank Reviews New Evidence

The issuing bank carefully reviews the merchant's response and the original case information.

3. Intensified Resolution

If the bank still finds in favor of the cardholder, it issues a second chargeback, likely with new reason codes, reaffirming their decision. Or if the bank sides with the merchant, the funds are returned, and the cardholder may have to pursue other avenues.

Summary: A second chargeback occurs when the merchant fights the initial decision. The bank reevaluates the case and may overturn or reaffirm the chargeback.

4. Arbitration (If Applicable)

Arbitration is often a last resort when other efforts to resolve a chargeback dispute have failed. It's a more formal and costly process.

Here's what typically happens:

1. Initiating Arbitration

The merchant or the cardholder's issuing bank may choose to escalate the dispute to arbitration, usually for high-value transactions or complex disagreements.

2. Card Network Steps In

The card network oversees the arbitration process. They then appoint an independent arbiter to review all evidence and arguments from both sides.

3. Binding Decision

The arbiter makes a final and legally binding decision on the chargeback, which both parties must adhere to. Arbitration fees are high (minimum $650). Making this a risky move.

Summary: Arbitration is a final decision phase handled by the card network. The decision is binding, and it can be expensive for merchants.

How to Dispute a Chargeback

Here's a step-by-step guide to disputing a chargeback:

1. Gather Evidence: Collect all relevant documentation, including:

• Proof of delivery or service: Shipping receipts, tracking numbers, customer usage records
• Customer communication: Emails, order confirmations, contracts
• Clear terms and conditions: Highlighting refund policies, product descriptions

2. Write a Rebuttal: Craft a clear and detailed letter explaining why you believe the chargeback is invalid. Reference specific evidence and address the chargeback reason code.

3. Submit Within the Deadline: Banks and card networks have strict timeframes for disputing chargebacks. Respond promptly, missing deadlines can make overturning the chargeback nearly impossible.

Deadlines will vary by card network, but are typically 30 days.

4. Follow Up: Stay in communication with your acquiring bank for updates and additional information requests.

Here’s an example of what you’d do:

A customer files a chargeback claiming they never received a new laptop ordered from your online store. You provide tracking information showing the package delivered and signed for at the correct address. This evidence can increase your chance of winning the dispute.

Summary: Disputing a chargeback involves providing compelling evidence within tight deadlines. A clear rebuttal letter can make a substantial difference.

Common Chargeback Reason Codes

Banks use specific codes to categorize chargeback disputes, although these codes can vary between card networks like Visa and Mastercard. 

Understanding these categories can help you anticipate and address potential issues:

• Fraud: This encompasses situations where a card is used without the owner's permission.
• Authorization: Issues related to cardholder authorization, such as transactions denied due to insufficient funds or exceeding spending limits.
• Processing Errors: These involve mistakes during transaction processing, such as incorrect billing amounts or duplicate charges.
• Consumer Disputes: This covers cases where a customer is unhappy with the product or service, such as "item not received," "item not as described," or cancellation disputes.
• Point-of-Interaction (POI) Errors: Errors related to physical card swipes or chip insertions at a physical store.
• Services: Chargebacks related to specific services, like chargebacks on recurring subscriptions.
• Other: This category captures less common reasons for disputes.

While specific codes vary by network, for instance, Discover Card might use code "NA" for "no authorization," the underlying categories provide a general framework.

Summary: Chargeback reason codes categorize disputes by category (fraud, authorization, etc.). Understanding these categories helps merchants anticipate potential issues.

1. Visa Chargeback Reason Codes

Here’s a list, but I’ll explain how to combat each of these codes in a separate post:

1. Fraud:

2. Authorization:

3. Processing Errors:

4. Consumer Disputes:

2. Mastercard Chargeback Reason Codes

A separate post will explain what actions merchants should take for each of these codes and will provide a full list:

1. Fraud

2. Cardholder Dispute

3. Authorization

4. Point-of-Interaction Error

3. American Express (AE) Chargeback Reason Codes

We’ll explain actions you should take in a separate post for each code (and a full list):

1. Cardmember Disputes

2. Processing Error

3. Authorization

4. Fraud

5. Other

4. Discover Card Chargeback Reason Codes

A different guide will provide necessary actions to take when responding to each code and a full list:

1. Service Dispute

2. Fraud

3. Processing Error

The Financial Impact of Chargebacks: Chargeback fees

Chargebacks don't just mean lost revenue. They also directly cost merchants money in fees.

Here's how these fees add up:

• Chargeback Fee: Banks typically charge a fee for every chargeback filed against a merchant, regardless of whether the chargeback is successful. These fees can range from $20 to $100 or more per incident.
• Representment Fees: Similar to the initial chargeback fee and potentially higher in some cases.
• Retrieval Fees: Usually less substantial, potentially ranging from $5–$25 per document request.
• Arbitration Fees: Reaching several hundred dollars.
• Transaction Fee: 1.5–4% of your transaction; these fees aren’t returned in the event of a chargeback.
• Operational Costs: You still paid for the packaging, shipping, picking, and employee costs.
• Marketing Costs: You likely paid marketing expenses to sell the disputed product.

For instance, a merchant receives a $500 chargeback and their bank charges a $35 chargeback fee. Even if the merchant wins the dispute, they're still out $35 due to the bank's fee.

Summary: Chargeback fees directly impact a business's bottom line. Merchants lose money if they win the dispute.

Best Practices for Chargeback Management

Here’s a summary on quick ways you can potentially mitigate chargebacks:

• Fraud Prevention Tools: Use tools to mitigate and prevent chargebacks.
• Clear Descriptions: Accurately describe products and services.
• Great Customer Service: Respond to customers quickly and provide plenty of ways they can reach you.
• Prompt Order Fulfillment: Don’t make orders take forever to reach your customer.

I’ll provide more details about each of these methods throughout the following sections. You’ll also find examples of tools or services (when applicable).

Let’s dive in.

1. Fraud Prevention Tools

Here's how to strengthen your defenses:

• Address Verification Service (AVS): Check for discrepancies between the billing address provided by the customer and the address on file with the card issuer.
• 3D Secure: Implement this technology which adds an extra authentication step during online transactions.
• Fraud Detection Software: These solutions use algorithms to identify suspicious patterns and flag potentially fraudulent orders.
• Chargeback Insurance: Consider this coverage to offset some financial losses incurred from chargebacks.

These precautions help reduce fraud, and having evidence of them can also assist you in winning a chargeback dispute if one does occur.

Summary: Fraud prevention tools minimize true and friendly fraud. These tools can also help a merchant win chargeback disputes.

2. Clear Product/Service Descriptions

Accurate and detailed product/service descriptions are crucial to prevent chargebacks arising from misunderstandings.

Here's how to get it right:

• Be Specific: Provide dimensions, materials, functionality, condition (if used), and other relevant details.
• Use High-Quality Images: Show the product/service from multiple angles, highlight key features, and set realistic expectations.
• Clear Return/Refund Policy: Publish a return/refund policy, outlining timeframes, limitations, and the condition in which items must be returned.

This isn’t a product description. However, JBL lists most questions/concerns customers could have with their products. Thus, educating them more on the product before buying. And potentially reducing the chance of a chargeback.

Summary: Detailed descriptions and clear policies prevent "item not as described" claims. Customers with accurate expectations are less likely to file chargebacks.

3. Robust Customer Support

Providing excellent customer service can prevent many chargebacks from occurring in the first place. 

Here's how:

• Multiple Contact Methods: Offer email, phone, and live chat options to reach your support team. Make these contact options visible on your website or storefront.
• Timely Responses: Set a goal for responding to initial inquiries within 24 hours or less. Communicate that response time clearly to customers.
• Proactive Updates: Provide order confirmations, shipping updates, and clear notifications if there are any delays or changes to the order.
• Fair and Clear Resolution Policies: Be willing to offer refunds, replacements, or other remedies when justified by the circumstances.

Zappos, the online shoe retailer, is famous for going above and beyond with customer service. Some examples include:

• They offer a 365-day return policy with free shipping.
• Their support team is available 24/7 with a commitment to friendly service.

Summary: Responsive and accessible customer service resolves problems quickly. This prevents frustrated customers from filing chargeback disputes.

4. Prompt Order Fulfillment & Shipping

Here's how to optimize this aspect:

• Clear Shipping Timeframes: Be transparent about processing times and expected delivery dates. Communicate these on your website and in order confirmations.
• Reliable Shipping Carriers: Choose carriers with good track records for on-time delivery. Consider offering expedited shipping options for customers needing items quickly.
• Tracking Information: Provide customers with tracking numbers to monitor their order status. Update them promptly if there are any delays.

B&H presents a timeline of the customer’s delivery and provides an ESTIMATED delivery date.

Summary: Efficient shipping reduces "item not received" chargeback claims. Customers who receive items quickly are less likely to dispute the charge.

Working with Chargeback Management Services

Who Should Use It: Businesses that lack the internal resources or expertise to manage chargebacks effectively.

Additionally, businesses in industries with a higher risk of chargebacks, such as travel or electronics, may find this service valuable.

Chargeback management services act as an extra layer of defense for merchants against costly chargebacks. These companies specialize in helping businesses fight and prevent these disputes.

They offer a range of services, including:

• Monitoring: They keep an eye on your accounts, identifying potential chargebacks in real-time.
• Dispute Assistance: When a chargeback occurs, they take the reins, gathering evidence, crafting well-structured rebuttal letters, and communicating with banks on your behalf.‍
• Prevention Tools: This might include fraud detection software, data analysis to identify suspicious transactions, and risk assessment tools.

Need a visualization on why they’re effective?

Imagine a small clothing boutique experiences a sudden increase in chargebacks for "item not received." They're overwhelmed by the dispute process and unsure how to respond.

A chargeback management service can step in, gather evidence like shipping confirmations and track-and-trace information, and craft compelling rebuttals to fight these disputes.

They may also analyze the situation and suggest improvements to the boutique's shipping process or communication with customers to minimize future occurrences.

Summary: Chargeback management services provide expertise and streamline the dispute process, potentially saving businesses significant money. Consider one if you lack internal resources, or operate in a high-risk industry.

History of Chargebacks

Chargebacks emerged in the United States during the 1970s as a response to growing concerns about credit card fraud.

Here’s an overview of key points throughout the history of chargebacks.

Summary: Chargebacks originated in 1974 as a consumer protection measure. Technological advancements and the rise of e-commerce have introduced new complexities for businesses, including friendly fraud and data breaches.

1. 1974: Fair Credit Billing Act (FCBA)

The birth of chargebacks through this act granted protections for credit cardholders:

• Limited liability: Customers were no longer solely responsible for unauthorized charges.
• Dispute rights: Cardholders gained the right to dispute billing errors and fraudulent charges.
• Formalized process: The FCBA established a framework for handling disputes, laying the foundation for the modern chargeback process.

2. 1978: Electronic Fund Transfer Act (EFTA)

The EFTA extended similar protections to debit card transactions, providing a dispute resolution mechanism for unauthorized charges and billing errors.

3. The Rise of E-commerce & New Challenges

The late 1990s and early 2000s witnessed the boom of e-commerce. Leading to an increase in card-not-present transactions. These transactions occur when the physical card is not present at the time of purchase.

This period also saw the rise of "friendly fraud" around the year 2000, where customers started abusing the chargeback system for illegitimate refunds.

4. Data Breaches and Security Measures

Large-scale data breaches became a growing concern in the mid-2000s, highlighting the need for stronger security measures.

5. EMV Chip Technology and Liability Shift (2000s)

To combat fraud in the face of e-commerce growth, Europay, MasterCard, and Visa (EMV) introduced the EMV chip standard. These cards contain a microchip that generates a unique code for each transaction. 

Unlike magnetic stripe cards, which store static data, this code makes it more difficult for criminals to counterfeit cards or use stolen card information to make fraudulent purchases.

Around the same time, the EMV liability shift placed responsibility for certain fraudulent transactions on the party that hadn't implemented chip-and-pin technology. This move further incentivized the adoption of EMV chips

6. Dispute Resolution Standardization (2000s)

Standardization efforts in the late 2000s led to the implementation of Visa Claims Resolution (VCR) and Mastercard's identical program. These programs aimed to streamline the dispute resolution process for merchants and cardholders.

FAQs for Chargebacks

Read on to find frequently asked questions about chargebacks.

How Long Does a Chargeback Take?

The chargeback process could take up to 120 days [2]. The process length depends on the card network, the reason for the chargeback, and how quickly the merchant responds.

What Is Friendly Fraud Chargeback?

Friendly fraud happens when a customer files a chargeback for a purchase they made, claiming it was unauthorized. This is different from true fraud where someone steals a card to make a purchase.

What is a Chargeback Analyst?

A chargeback analyst is a specialist who helps businesses manage and prevent chargebacks. They analyze chargeback data, fight unfair chargebacks, and find ways to improve processes.

Can Cardholders Receive Partial Chargebacks?

Yes. Customers can file chargebacks for a partial amount of a transaction. This means they can dispute specific charges or items within a larger purchase.

When Are Customers Not Entitled to Chargebacks?

Customers can't file chargebacks if they change their mind about a product.

Who Is Liable for Chargebacks?

Merchants are usually liable for chargebacks unless they can prove the chargeback is invalid. Banks are liable for chargebacks when the fraud is proven and the merchant followed proper procedures.

What is the EMV Liability Shift?

The EMV (Europay, MasterCard, and Visa) liability shift places responsibility for certain fraudulent transactions on the party that did not implement chip-and-pin technology. This shift aimed to reduce fraud by encouraging the use of more secure chip cards.

How Many Chargebacks Occur Annually?

The number of chargebacks occurring annually is in the billions worldwide. However, it's difficult to pinpoint an exact figure due to underreporting.

How Do Cardholders File a Chargeback?

Cardholders file a chargeback by contacting their bank and disputing a charge on their statement. The bank then starts an investigation into the disputed transaction.

Does a Chargeback Hurt Your Credit?

A chargeback does not hurt a consumer’s personal credit score or merchant’s business credit score [3].

Wrapping Up

While they can be a major hassle, understanding the process and focusing on prevention is key. By implementing the strategies outlined in this article, you can reduce the impact of chargebacks and safeguard your business from unnecessary losses.

We have a tool that’ll help prevent chargebacks from happening. Learn about how it can help your business.

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