Chargebacks are one of the most costly and frustrating challenges facing merchants today. According to the Nilson Report, payment card fraud losses worldwide reached $33.83 billion in 2023 — and chargebacks are a significant driver of that figure. The true cost of a chargeback goes well beyond the disputed transaction amount: when you factor in the chargeback fee, lost merchandise, staff time spent on disputes, and the risk of account penalties if your chargeback rate climbs too high, a single dispute can cost several times the original sale. Understanding how chargebacks work — and how to prevent them — is essential for protecting your business.
What Is a Chargeback?
A chargeback occurs when a cardholder contacts their bank to dispute a transaction and request a reversal of the charge. Unlike a refund (which you initiate), a chargeback is initiated by the customer's bank and results in the funds being pulled from your merchant account — often before you even have a chance to respond.
Chargebacks were originally designed to protect consumers from fraud and merchant misconduct. However, the system is frequently abused. According to Chargeflow's 2024 State of Chargebacks Report, friendly fraud — where a customer makes a legitimate purchase and then disputes the charge to get their money back while keeping the goods or services — accounts for 40–80% of all fraud losses for eCommerce merchants. It has become one of the most common chargeback categories, and it continues to grow year over year.
The Three Types of Chargebacks
True fraud occurs when a criminal uses stolen card information to make unauthorized purchases. This is the original use case for the chargeback system and is generally the most defensible type for merchants — if you followed proper card acceptance procedures, you have a reasonable chance of winning the dispute.
Friendly fraud (also called first-party fraud) occurs when a legitimate cardholder disputes a valid transaction. Common scenarios include a customer who forgot they made a purchase, a family member who made a purchase without the cardholder's knowledge, or a customer who wants to avoid the hassle of a return.
Merchant error occurs when a chargeback results from a legitimate problem with the transaction — a duplicate charge, an incorrect amount, a product that was not delivered, or a subscription that was not properly cancelled. These chargebacks are preventable with good operational practices.
7 Proven Chargeback Prevention Strategies
Use clear billing descriptors. Your billing descriptor is the name that appears on your customer's bank statement. If it is unclear or unfamiliar, customers may not recognize the charge and dispute it. Use your business name as it is commonly known to customers, not a parent company name or abbreviated version.
Provide detailed receipts and order confirmations. Send email confirmations immediately after purchase with a clear description of what was purchased, the amount charged, and your return/refund policy. For online orders, include tracking information as soon as it is available.
Make your return and refund policy easy to find and follow. Many chargebacks happen because customers cannot figure out how to return a product or get a refund. A clear, accessible return policy — and a responsive customer service team — can convert a potential chargeback into a simple refund.
Use Address Verification Service (AVS) and CVV verification for card-not-present transactions. These tools verify that the billing address and card security code match the card issuer's records, significantly reducing the risk of true fraud on online transactions.
Require signatures for high-value in-person transactions. While signature requirements have been relaxed for most transactions, requiring a signature for large purchases creates a paper trail that can be invaluable in a chargeback dispute.
Respond to all chargebacks promptly. You typically have 7–30 days to respond to a chargeback, depending on the card network and reason code. Missing the response deadline means an automatic loss. When you do respond, provide compelling evidence: transaction records, delivery confirmation, customer communications, and any signed agreements.
Monitor your chargeback ratio. Visa and Mastercard have thresholds for acceptable chargeback rates — typically 1% of transactions. Merchants who exceed these thresholds are placed in monitoring programs that can result in higher fees, additional requirements, or termination of your merchant account. Keeping your chargeback ratio below 0.5% is a good target.
What to Do When You Receive a Chargeback
When you receive a chargeback notification, act quickly. Gather all relevant documentation: the original transaction record, any signed authorization forms, delivery confirmation, customer communications, and your refund policy. Submit a clear, organized rebuttal that directly addresses the reason code on the chargeback.
For "item not received" chargebacks, provide delivery confirmation and tracking information. For "not as described" chargebacks, provide product descriptions, photos, and any customer communications. For "unauthorized transaction" chargebacks, provide AVS and CVV match data, IP address information for online transactions, and any other evidence that the legitimate cardholder made the purchase.
Winning chargeback disputes requires documentation and persistence. Merchants who respond with well-organized evidence win a meaningful percentage of their disputes — but only if they respond at all.
Contact our team if you have questions about chargeback prevention or need help understanding your options.
Sources
1. Nilson Report — Card Fraud Losses Worldwide in 2023