What's a Chargeback? How Can It Affect Your Business? [2026]

Chargebacks are an unfortunate but necessary reality of doing business online. On one hand, chargebacks hold merchants to a higher standard and protect consumers from fraudulent charges. However, chargebacks also carry a severe cost—lost merchandise, revenue impact, and the risk of account termination. Understanding chargebacks is vital for every business owner who accepts card payments.

At Pay.com, we recognize that chargebacks can be complex. This guide covers everything you need to know about chargebacks: what they are, why they occur, how they work, and how to prevent and dispute them.

What is a chargeback?

A chargeback is a forced reimbursement initiated by a cardholder to dispute a debit or credit card payment they believe to be illegitimate. When a chargeback occurs, the card issuer forces the transaction amount back to the customer. Chargebacks can happen any time after a sale, but are most common within the first 120 days.

How does a chargeback work?

The chargeback process is set and managed by card networks and must be followed by financial institutions and merchants. The parties involved are:

• The cardholder
• Issuing bank
• Acquiring bank
• Card network
• Merchant

The general chargeback process follows these steps:

1. The cardholder notifies their bank of a transaction they want to dispute.
2. The cardholder's bank reviews the claim.
3. If valid, the issuing bank sends the claim to the merchant's bank.
4. The acquiring bank notifies the merchant and debits their account for the transaction amount plus fees.
5. If the merchant wants to fight the chargeback, they have 7-10 days to submit forms explaining their side.
6. The merchant sends completed forms to the acquiring bank, which forwards them to the cardholder's bank. The merchant receives a provisional credit.
7. The issuing bank reviews the evidence. If the merchant proves the transaction was valid, they keep the credit. If the bank rules for the cardholder, the merchant's credit is withdrawn.

What causes chargebacks?

Chargebacks occur for numerous reasons—some legitimate, others fraudulent. Common causes include:

• A cardholder was the victim of fraudulent transactions
• Overcharging or billing errors
• Merchant failed to deliver goods or services
• Product or service was misrepresented
• Cardholder dissatisfaction
• Charges after subscription cancellation or failure to cancel
• Accidental duplicate charges
• Friendly fraud—disputing to keep goods without paying

Difference between a chargeback and a payment dispute

Chargebacks and payment disputes are related but distinct. A payment dispute occurs when a cardholder challenges a transaction on their credit card statement. Disputes stem from various causes: believing a purchase wasn't made, incorrect amounts, or failure to deliver.

A chargeback is the forced reimbursement that results from a dispute. Not all disputes become chargebacks—many are resolved directly between merchant and customer.

Chargeback Fees

Acquiring banks charge chargeback fees to cover processing costs. These fees typically range from $10 to $50, though high-risk merchants may pay more. Beyond the fee itself, merchants lose:

• Payment processor fees (not refunded)
• Operational costs (warehouse, logistics, transportation)
• Lost products or services

Chargeback costs can be substantial. With global chargeback losses estimated at $12.87 billion by 2026, and studies showing that for every $1 lost to chargebacks, businesses incur $3.75–$4.61 in total costs, prevention is critical.

Minimize impact by confirming cardholder identity, clarifying billing terms, and displaying shipping and return policies prominently.

How to handle chargebacks (step by step)

Chargebacks are bound to happen regularly—be ready to respond. The keys are:

• Maintain organized, thorough record-keeping
• Respond quickly when notified
• Understand the reason code (attached by the issuing bank)
• Never simply accept invalid chargebacks—defend valid transactions using the chargeback representment process

To successfully fight a chargeback:

• Collect relevant evidence based on the reason code and card scheme requirements (sales receipts, customer communications, delivery confirmation)
• Write a chargeback rebuttal letter summarizing evidence and proving transaction validity
• Submit within the required timeline

Handle this in-house if you have resources and expertise, or hire a third-party specialist. Use a payment processor that provides chargeback protections.

According to 2021 data, 50% of merchants manage chargebacks in-house, 31% use external teams, and 18% use a hybrid approach.

How does a chargeback work on a credit card?

Credit card chargebacks are effective consumer protections—so effective that many customers now use them instead of requesting refunds. Chargebacks have become faster than ever; strict deadlines now govern all phases. Timelines vary by card network:

Visa card chargeback

• Cardholders have 120 days from the day after the transaction date to file a chargeback
• Merchants have 30 days to respond
• Merchants have 10 days to file for arbitration

Mastercard chargeback

• Cardholders have 120 days from the day of the transaction to file a chargeback
• Merchants have 45 days to respond
• Merchants have 45 days to file for arbitration

American Express chargeback

• Cardholders have 120 days from the day of the transaction to file a chargeback
• Merchants have 20 days to respond

Merchant rights

Merchants are not defenseless. You have rights within the chargeback process:

• The total for all chargebacks cannot exceed the original purchase amount
• If a customer files for late delivery, they must try returns first—chargebacks only apply if both return and refund are denied
• Returned items cannot be charged back for 15 days after receipt, giving merchants time to issue refunds

Debit card chargebacks

Debit card chargebacks differ significantly from credit card chargebacks. Debit transactions pull cash directly from bank accounts, while credit transactions record debt. Refunds typically take 10 days for debit vs. 1-2 days for credit.

When a debit card dispute enters the chargeback process, merchants follow the same steps as with credit cards. Prevent debit chargebacks by being proactive: deliver excellent customer service, communicate clearly, and share your return, exchange, and authorization policies.

Visa card chargeback

When a Visa cardholder files a dispute, a Visa dispute (chargeback) occurs under Visa rules:

• The issuing bank credits the cardholder and notifies the acquiring bank
• The acquirer notifies the merchant and debits their account for the transaction amount plus fees
• To fight, merchants provide evidence to the issuing bank. If accepted, the chargeback reverses

Visa chargeback reason codes

Each chargeback claim gets a reason code explaining the dispute:

(10) Fraud:No EMV chip used, stolen credentials, or Visa Fraud Program flagged transactions.

(11) Authorisation:Missing appropriate authorization or ignored Card Recovery Bulletin.

(12) Processing Errors:Incorrect transaction codes, account numbers, duplicate payments, and similar issues.

(13) Customer Disputes:Services not received, product/service not as advertised, defective or counterfeit items, etc.

Mastercard chargeback

When a Mastercard holder files a dispute, Mastercard's process applies—different from Visa:

First Presentment:Transaction amount is taken from cardholder and credited to merchant. Issuing bank may request merchant information.

Chargeback:If the merchant fails to respond with evidence, the issuer initiates a chargeback. If uncontested, the full amount goes to cardholder.

Second Presentment:Merchant provides evidence proving the chargeback is invalid and submits to the acquirer for processing.

Pre-arbitration:If the issuer isn't convinced, the case moves to pre-arbitration. Merchants can accept or fight with new evidence.

Arbitration Case Filing:If unresolved between issuer and acquirer, Mastercard determines final responsibility.

Mastercard chargeback reason codes

CodeDescription4837No Cardholder Authorization4840Fraudulent Processing of Transactions4849Questionable Merchant Activity4863Cardholders Does Not Recognize—Potential Fraud4870Chip Liability Shift4871Chip/PIN Liability Shift4807Warning Bulletin Files4808Authorization-Related Chargeback4812Account Number Not On File4834Point-of-Interaction Error4831Transaction Amount Differs4842Late Presentments4846Correct Transaction Currency Code Not Provided4850Installment Billing Dispute4999Domestic Chargeback Dispute (Europe Region Only)4853Cardholder Dispute4841Canceled Recurring or Digital Goods Transactions4854Cardholder Dispute—Not Elsewhere Classified (U.S. Region Only)4855Goods or Services Not Provided4859Addendum, No-show, or ATM Dispute4860Credit Not Processed

How can Pay help reduce chargeback disputes?

Pay.com enables merchants to increase conversions with a secure, fraud-resistant checkout that prevents fraud-based chargebacks and meets the latest PSD2 legislation. Our 3D-Secure 2.0 authentication uses AI-driven decision-making to assess transaction risk based on spending patterns and cardholder familiarity.

Regular, familiar customers spending expected amounts bypass extra checks. Unfamiliar customers, large sums, and suspicious behavior face enhanced verification. With 98% of fraud leaders now using AI in their daily workflows, AI-powered fraud detection is the industry standard for preventing chargebacks.

To learn how Pay.com protects you from fraud-based chargebacks, sign up now!

Learn more about our revenue optimization and payment methods for your eCommerce business. You can also begin to accept online payments today!

FAQs

How does a chargeback work?

The chargeback process is set and managed by card networks and must be followed by financial institutions and merchants. In general, the process starts with the issuing bank crediting the cardholder's account and notifying the merchant's acquiring bank. The acquirer notifies the merchant and debits their account for the transaction amount plus fees. If a merchant wants to fight a claim, they must provide evidence to the issuing bank to prove the chargeback is illegitimate. If accepted, the chargeback is reversed.

Is a chargeback a refund?

No. A chargeback involves a customer contacting their bank to take money back by force, whether a merchant agrees or not. A refund occurs directly between merchant and customer and is agreed upon by the merchant.

Can you go to jail for chargebacks?

Merchants can criminally prosecute customers who engage in fraudulent transactions, which can result in jail time.

Is a chargeback bad?

Yes. Chargebacks harm any merchant through lost revenue, lost products, and dispute charges. Too many chargebacks can lead to merchant account termination.

What qualifies for a chargeback?

Chargebacks qualify for fraudulent charges, goods or services not delivered, defective or misrepresented items, unreceived credit from cancelled orders, and billing errors.

Is a chargeback illegal?

It depends on the reason. Merchants can criminally prosecute customers who engage in fraudulent transactions.

Is disputing a transaction bad?

No. Legitimate disputes filed for valid reasons have no negative impacts.

Does doing a chargeback hurt your credit?

No. Disputing a charge on a credit card does not negatively affect credit scores. Card companies may temporarily note a dispute on statements or reports, but this is temporary.