Global chargebacks are expected to cost merchants more than USD 281 million annually by 2026, rising from USD 261 million in 2025, highlighting the continued growth in chargeback volumes as digital payments expand.
A chargeback occurs when the cardholder reclaims the amount they paid to a merchant from their issuing bank.
Undoubtedly, the more transactions companies process, the higher the rewards and the exposure to disputes. In some cases, customers may initiate a chargeback through their issuer for a product or service they purchased from a business.
Let us walk you through what chargebacks are, how they work, why they occur and how to efficiently manage them so you can continue to expand and grow your business.
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What is a chargeback?
A chargeback is the process by which funds from a card transaction are reversed and returned to the cardholder following a dispute raised with their issuing bank. It is initiated by the issuer against the merchant and typically includes the original transaction amount along with any applicable chargeback fees (more on fees below).
Chargeback vs refund – what is the difference?
Although chargebacks and refunds may appear similar, they are fundamentally different processes and should not be treated as interchangeable.
During a refund, the cardholder returns their bought goods and/or services to the merchant for numerous reasons, expecting to be credited for the value of the items. It should be noted that each merchant gets to determine their refund policies.
For a chargeback to take place, the cardholder needs to get in touch with their card issuer directly and instruct them to file a dispute of the transaction. Depending on the cardholder’s card scheme, the issuer will take all the steps necessary to reverse the payment to the cardholder.
One of the main differences between a refund and a chargeback is that the merchant isn’t aware that the cardholder requested their funds back through their issuer in the form of a chargeback until they receive the relevant notification.
Why do merchants need to keep track of their chargebacks?
Chargebacks can have both financial and reputational implications for businesses. Merchants incur several fees when disputes happen, including fees set by the card schemes, the chargeback management fees that acquirers impose and other administrative fees.
Moreover, the business can be fined if chargebacks occur too often and exceed their agreed-upon chargeback threshold per month over a long period. Even more so, the acquiring bank may decide to terminate a merchant account and bar a business from accepting card payments when its chargeback ratio is consistently high.
The above factors necessitate investing time and effort in understanding how chargebacks work and how businesses can manage them effectively.
How do chargebacks work?
When a cardholder disputes a charge made on their bank card, there’s a set of steps involved in handling it, with each major card scheme setting its own rules and procedures for doing so. These procedures protect cardholders from fraudulent charges, preventing them from being financially responsible for any unapproved withdrawal of funds. At the same time, the procedures give merchants the opportunity to overturn the chargeback through their acquirer, so long as they can provide evidence that proves the chargeback was wrongly raised by the cardholder.
When a chargeback is initiated by the issuer, the payment amount in question is automatically moved from the acquirer to the issuer. Then, the acquirer receives the chargeback and provides the chargeback details to the merchant to decide whether they want to dispute it and recoup their lost revenue.
In the meantime, the issuer keeps the received amount on hold until the merchant’s timeframe for dispute expires prior to returning the sales amount to the cardholder.
Common chargeback reasons
Card schemes have their own reason codes to categorise and explain what caused the chargeback. Issuers classify chargebacks according to the cardholder’s payment card network.
Below we explore some of the most typical reasons for filing a chargeback:
- The customer didn’t receive the ordered merchandise
- Merchandise is not as described at the time of sale or is delivered faulty
- Credit card fraud
- Friendly fraud where a customer makes a purchase and later disputes it with their bank without a valid reason.
In addition to the above, chargebacks can also occur due to authorisation issues. This includes transactions processed without a valid authorisation response from the issuing bank, such as when no approval message is received. It can also happen when a card has expired or has been declined, but the transaction is still processed.
Another reason that a cardholder disputes a transaction may involve processing errors. These can come in the form of subscription errors, where the customer cancels their subscription, but the merchant still charges them for it. Other examples can be the merchant applying the incorrect currency or payment amount or the merchant processing the same transaction twice.
In general, while chargebacks are designed to mitigate deliberate attempts of fraud, they can also come from a simple miscommunication or confusion, which can, ultimately, lead to a complaint or escalate into a chargeback. Being aware of the reason behind chargeback claims is paramount for merchants and their acquirer to successfully dispute them if possible.
How long after the transaction should customers wait until they request a chargeback?
For most Visa and Mastercard transactions, the standard timeframe for raising a chargeback is 120 days from the transaction date. In certain cases, depending on the specific reason code, this can extend up to 540 days.
It is important to note that chargeback time limits can vary based on several factors, including the type of transaction, such as eCommerce or point of sale, as well as the reason for the dispute. In some cases, different calculation rules may also apply, which can affect the final timeframe.
Ways to safeguard your business from chargebacks
Card not present transactions
Card not present eCommerce payments inherently hold a bigger chargeback risk than a card present, in-store transaction. This is primarily because the merchant is not always able to identify if their customer is the owner of the card details they entered on the payment page.
Luckily, there are various tools to help merchants reduce the risk of chargebacks. Businesses operating in the online world have the option of applying 3D Secure 2(3DS2) – an authentication protocol used by the card schemes which follows the PSD2 regulation. In principle, 3DS2 authenticated transactions are protected against “fraud reason” chargebacks.
However, there’s no guarantee when it comes to fraud and risk management. For this reason, 3DS2 should go hand in hand with fraud prevention tools, real-time fraud monitoring and expert advisory from an experienced payment service provider.
Card present transactions
While payments processed through a POS terminal are considered lower risk because the cardholder is present during the transaction flow, there may be occasions when cardholders file chargeback requests. Entering the PIN into the terminal keypad is the safest way to accept card present payments. If you process a PIN-enabled card without the cardholder entering the PIN (such as a contactless payment), there is a risk of a chargeback.
Mobile-enabled payments such as digital wallets like Apple Pay and Google Pay™, for example, provide additional layers of security via their tokenisation and biometric authentication, which can, ultimately, mitigate the risk of fraud for merchants and customers alike.
Frequently asked questions about chargebacks
Can a chargeback be reversed? Yes, but only if the merchant successfully challenges the dispute with sufficient supporting evidence and the issuer rules in their favour.
Do chargebacks always mean fraud has taken place? No. Chargebacks can result from fraud, but also from misunderstandings, service issues or processing errors.
How are chargebacks decided? Decisions are made by the issuing bank based on card scheme rules and the evidence provided by both the cardholder and the merchant.
What evidence can merchants provide in a dispute? Common evidence includes proof of delivery, transaction records, customer communications, billing details and authentication logs.
Do all chargebacks follow the same process? The overall framework is consistent, but rules, timelines and evidence requirements can vary depending on the card scheme and the reason code.
How emerchantpay can help
Chargebacks play an important role in maintaining a secure and reliable card payment ecosystem for both customers and merchants. However, when merchants believe a chargeback has been raised incorrectly, they have the right to challenge it and protect their revenue. This is where a trusted payment service provider can support effective dispute management.
At emerchantpay, we help safeguard businesses against fraud through data driven insights tailored to their specific needs, including advanced fraud monitoring and prevention tools. Combined with our full suite of payment services, we support merchants in managing chargebacks while continuing to grow and scale their business.
Want to know how to protect your business against chargebacks? Speak with our team of payment specialists today.