What are Chargebacks & How to Prevent Them?
Chargebacks are transaction reversals initiated by cardholders through their bank. When a customer disputes a charge, the bank forcibly reverses the payment, returning funds to the customer. Merchants lose the transaction amount, the product or service, and pay chargeback fees typically ranging from $20-100 per incident.
Why Chargebacks Happen
Chargebacks were originally designed to protect consumers from credit card fraud and merchant errors. Fraudlogix IP Risk Score helps prevent fraudulent transactions that lead to chargebacks by identifying suspicious orders before they process. The system lets cardholders dispute unauthorized transactions or problems with purchases. However, the process now gets abused and creates significant costs for merchants.
Legitimate Fraud
Someone steals a credit card or card number and makes unauthorized purchases. The real cardholder notices the charges and disputes them with their bank. This is the intended use of chargebacks—protecting victims of theft.
The merchant loses both the payment and merchandise because they shipped to the fraudster. Even if the merchant followed all verification procedures, they still lose when cardholders claim fraud.
Friendly Fraud
Legitimate customers claim they didn't authorize purchases they actually made. Sometimes this is accidental—forgetting about a subscription or a family member's purchase. More often it's deliberate abuse to get free merchandise.
The customer receives the product, uses it, then disputes the charge. They keep the item and get their money back. Merchants have limited recourse since banks typically favor cardholders.
Merchant Errors
Real operational problems trigger legitimate chargebacks. Charging the wrong amount, processing duplicate transactions, failing to deliver products, or providing items that don't match descriptions all justify disputes.
These are preventable through better processes, but they still cost merchants when they happen.
Technical Issues
Payment processing glitches sometimes cause duplicate charges or authorization holds that don't reverse properly. Customers see unexpected charges and file disputes. These weren't fraud or merchant error, just technical problems.
Payment processors track your chargeback rate—the percentage of transactions that result in chargebacks. Rates above 1% trigger warnings. Sustained rates above 1.5-2% can result in higher processing fees, reserves held from your account, or complete loss of payment processing capabilities. High chargeback rates make you a risky merchant.
The Chargeback Process
Understanding the process helps you respond effectively and minimize losses.
Customer Dispute
The cardholder contacts their bank claiming an unauthorized or problematic charge. They don't need to contact the merchant first. Many customers go straight to their bank because it's easier.
Provisional Credit
The bank immediately credits the customer's account while investigating. The customer gets their money back right away. This creates incentive to dispute charges rather than request refunds from merchants.
Merchant Notification
You receive a chargeback notification, typically 30-90 days after the original transaction. The payment gets reversed. You lose the funds and the chargeback fee gets deducted.
Representment
You can fight the chargeback by providing evidence the transaction was legitimate. This includes delivery confirmation, correspondence with the customer, proof of authorization, and transaction details.
The bank reviews your evidence and makes a decision. This process takes 60-90 days. Most decisions favor the cardholder.
Final Decision
If you win, you recover the transaction amount but rarely the chargeback fee. If you lose, the decision is final. Either way, the chargeback counts against your ratio.
Preventing Chargebacks
Fraud Detection
Most chargebacks stem from fraudulent transactions. Preventing fraud before processing payments dramatically reduces chargebacks.
IP Risk Score screens transactions in real-time to identify suspicious patterns. Flagging high-risk IP addresses, detecting VPNs and proxies, identifying geographic mismatches between billing address and IP location, and recognizing card testing patterns stops fraud before it generates chargebacks.
Catching one fraudulent transaction before it processes prevents both the immediate loss and the future chargeback. This is far more effective than fighting chargebacks after they occur.
Clear Communication
Many chargebacks happen because customers don't recognize charges on their statements. Use a recognizable business name for billing descriptors. Include your customer service number. Send order confirmations immediately with clear details about what was purchased.
Accurate Descriptions
Products must match descriptions. Misleading photos, exaggerated claims, or missing information lead to dissatisfied customers who file disputes. Clear, honest product information prevents misunderstandings.
Delivery Confirmation
Require signatures for high-value orders. Use tracking for all shipments. Save delivery confirmation as evidence. Customers who claim non-delivery can't win disputes when you have proof the carrier delivered successfully.
Responsive Customer Service
Solve problems before customers file chargebacks. Make it easy to contact you. Respond quickly to complaints. Offer refunds when appropriate. Many customers file chargebacks because they couldn't reach you or weren't satisfied with your response.
Clear Refund Policies
Display refund and return policies prominently. Make the process straightforward. Customers who understand how to get refunds are less likely to file chargebacks.
🛡️ Reduce Chargebacks with Fraud Prevention
Fraudlogix IP Risk Score stops fraudulent transactions before they process, preventing the chargebacks that follow. Detect high-risk IP addresses, identify proxy and VPN usage, flag geographic anomalies, recognize card testing patterns, and stop fraud in real-time. Reduce your chargeback rate and protect your merchant account.
Fighting Chargebacks
When you receive a chargeback, fighting it requires evidence that the transaction was legitimate.
Essential Documentation
Delivery confirmation with signature proves the customer received the product. Customer correspondence shows you communicated with them. IP address and device information demonstrates the person who made the purchase matched the cardholder's typical patterns. Transaction authorization details prove the payment was approved.
Build Your Case
Respond quickly to chargeback notifications. Submit all relevant evidence clearly organized. Include a cover letter explaining why the chargeback is invalid. Reference specific evidence that contradicts the customer's claim.
Know When to Fight
Fighting chargebacks takes time and rarely succeeds. Focus on cases where you have strong evidence: clear delivery confirmation, customer correspondence admitting receipt, or obvious friendly fraud patterns.
Don't waste resources on weak cases. Sometimes accepting the loss is more efficient than fighting an unwinnable dispute.
Set up systems that automatically collect and store evidence. Save all customer communications, track IP addresses, log delivery confirmations, and store authorization details. When chargebacks occur, you'll have everything needed to fight them without scrambling to find information.
Frequently Asked Questions
Typically 7-21 days from notification, depending on your payment processor and the reason code. Missing the deadline means automatic loss. Set up systems to monitor chargeback notifications and respond quickly. The clock starts when you receive notification, not when the customer filed the dispute.
Yes, though they shouldn't. Some customers file chargebacks without checking if they received refunds. Others deliberately double-dip to get both the refund and chargeback reversal. Always document refunds and include this evidence when fighting chargebacks. The bank should reverse the chargeback if the customer already received a refund.
Payment processors implement penalties for high chargeback rates. First, you'll receive warnings. Then you might face higher processing fees, additional monitoring, or reserves held from your payments. Sustained high rates can result in termination from payment processors. Getting labeled a high-risk merchant makes it difficult to find new processors and increases costs significantly.