What Is a Chargeback? How It Works, Causes & Prevention

If you frequently use corporate cards for your business expenses, you may already be familiar with the term "chargeback," particularly when disputing a transaction on your card.

But a chargeback is more than just a reversal of funds — it's a complex financial mechanism that can affect merchant relationships, processing fees, and your company's payment history.

This guide explains what a chargeback is, the main reasons it happens, and how to minimise disputes when using your corporate cards.

What Is a Chargeback?

Basic Mechanics

A chargeback is a forced transaction reversal initiated by a cardholder's bank. When a cardholder disputes a charge — believing it was made in error, without authorisation, or for goods that weren't up to standard — their bank demands the merchant's bank return the funds.

The cardholder's account is credited provisionally while this happens. The burden of proof then shifts to the merchant, who must show the transaction was legitimate.

Why It Exists, and What It Means for Merchants

This process exists to give consumers confidence in card payments, protecting them from fraud and dishonest merchant practices. It's a cornerstone of the rules set by major card networks like Visa and Mastercard.

But it also creates real work and risk for merchants. When a dispute is filed, the process can take time and may involve additional checks, since the merchant has the chance to respond. For your business, understanding how chargebacks work matters both for protecting company funds and for managing expectations around resolution timelines.

How Does Chargeback Protection Work in Hong Kong Specifically?

In Hong Kong, this mechanism is officially referred to by the Hong Kong Monetary Authority (HKMA) as "Chargeback Protection," and it's governed alongside the HKMA's broader oversight of card-issuing banks.

Under the HKMA's Code of Banking Practice — jointly issued by the Hong Kong Association of Banks and the Deposit-Taking Companies Association, and endorsed by the HKMA — banks are required to publish clear information about their chargeback dispute process on their official websites.

They're also required to return funds to the consumer as soon as possible once a chargeback request succeeds.

The HKMA takes this seriously enough to track it as a specific complaint category. It received 88, 329, 391, and 229 complaints concerning unauthorised credit card transactions in 2020, 2021, 2022, and the first quarter of 2023 respectively, following up on each case with the relevant bank.

A Notable Local Exception: Instalment Payment Plans

Chargeback protection generally doesn't apply to Instalment Payment Plans (IPPs) on Hong Kong credit cards. An IPP is effectively a loan the bank provides to pay the merchant in full upfront, which the cardholder then repays in instalments.

Since the merchant has already been paid outright, standard chargeback rules don't apply in the same way.

If a Chargeback Request Is Rejected

If the merchant acquirer or merchant rejects the dispute, the cardholder can escalate it for arbitration by the relevant card association, via their issuing bank. If a customer remains unsatisfied with how their bank handled the process, the Financial Dispute Resolution Centre (FDRC) offers an independent avenue for claims up to HKD 500,000.

What Are the Types of Chargebacks?

While the end result of a chargeback is a reversal of funds, they aren't all created equal. Chargebacks are typically categorised based on the reason for the dispute, which card networks codify into specific "reason codes" that standardise the process and inform the merchant why the transaction was reversed.

Credit Card Chargebacks

This is the most common form of chargeback, governed by the rules of major card brands like Visa, Mastercard, American Express, and Discover.

Each network has its own reason codes and dispute timelines. These chargebacks can stem from technical issues (duplicate processing), authorisation errors (an expired card), or customer disputes (a product not as described).

Debit Card Chargebacks

These function similarly to credit card chargebacks but are often governed by slightly different regulations, such as Regulation E in the United States, which provides a framework for resolving electronic fund transfer errors. The process involves the cardholder's bank, but timelines and evidence requirements can vary from credit card networks.

Other Payment Method Chargebacks

As the financial landscape evolves, so do payment disputes. Chargebacks can also occur with digital wallets, mobile payments, and other emerging transaction methods. Each platform has its own dispute resolution process, worth being familiar with if you use these payment methods for your business.

What Causes a Chargeback?

Regardless of the payment method, the core reason for a chargeback generally falls into 1 of 3 buckets: criminal fraud, merchant error, or friendly fraud.

Fraud

Criminal fraud, also known as true fraud, occurs when a credit card is used by an unauthorised individual. This typically happens after a card has been physically stolen or its data compromised through a data breach, phishing scam, or malware. The Consumer Financial Protection Bureau publishes guidance on cardholder rights in exactly this scenario.

When the legitimate cardholder discovers the fraudulent transactions, they rightfully dispute them. In these cases, the merchant is almost always held liable for the loss, especially in "card-not-present" (online) transactions, unless they've used advanced fraud protection tools like 3D Secure.

Friendly Fraud

Friendly fraud is a significant and growing problem for merchants. It occurs when a legitimate cardholder makes a purchase with their own card and then disputes it, for several possible reasons.

1. Accidental. The customer forgot about the purchase, doesn't recognise the business name on their statement, or a family member made the purchase without their knowledge.
2. Opportunistic. The customer experiences buyer's remorse or wants to avoid a store's return process, finding it easier to call their bank instead.
3. Intentional (chargeback abuse). The customer knowingly claims a legitimate transaction was fraudulent to get a product or service for free — essentially a form of digital shoplifting.

Service Issues

This category covers legitimate customer disputes where the merchant is at fault, serving the chargeback mechanism's original purpose of protecting consumers from poor service.

1. Product not received. The customer paid for an item that was never delivered.
2. Product not as described, or defective. The item received was significantly different from its description, damaged, or didn't function correctly.
3. Recurring billing issues. The customer was charged after cancelling a subscription, or billed an incorrect amount.
4. Credit not processed. The merchant failed to issue a promised refund for a returned item.

Many of these chargebacks can be prevented by providing excellent customer service, clear communication, and transparent policies.

How Does the Chargeback Process Actually Work?

The chargeback process is a multi-step, time-sensitive procedure involving several parties: the cardholder, the issuing bank, the card network, the acquiring bank, and the merchant.

Starting the Dispute

1. Cardholder initiates dispute. The cardholder sees a transaction they don't recognise, didn't authorise, or have an issue with, and contacts their issuing bank.
2. Issuing bank review. The bank reviews the claim. In Hong Kong, cardholders generally have 180 days from the transaction date to file, though this can vary by card association and bank. If valid, the bank starts a formal chargeback and provisionally credits the cardholder.
3. Debit and notification. The issuing bank retrieves the funds from the merchant's acquiring bank. The acquiring bank debits the disputed amount, plus a chargeback fee (typically USD 20 to 100), from the merchant, then notifies them with the reason code.

Responding and Resolving

4. Merchant response (representment). The merchant has 20 to 45 days to accept the chargeback or fight it through "representment" — submitting evidence like receipts, proof of delivery, and verification records to prove the transaction was legitimate.
5. Final decision. The issuing bank makes a final ruling on the evidence. If the merchant wins, the chargeback reverses and funds return to them. If the cardholder wins, the merchant loses both the revenue and the chargeback fee.

Representment is typically the lengthiest stage, so it's worth preparing your finance team for possible delays before funds are permanently credited. If the parties still disagree, the dispute can escalate to a second chargeback or arbitration with the card network.

Chargeback vs Refund: What's the Difference?

Though both result in money being returned, a chargeback and a refund are fundamentally different processes with very different implications for merchant and customer alike.

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In summary, a refund is a proactive customer service tool, while a chargeback is a reactive, forced reversal that's more costly, time-consuming, and damaging to a merchant's relationship with their payment processor.

How Can You Avoid Unauthorised Card Transactions?

As covered above, chargebacks generally stem from 3 causes: fraud, friendly fraud, and service issues. While merchants typically focus on preventing service-issue chargebacks, your priority as a cardholder should be preventing fraud or unauthorised transactions, which requires robust internal controls.

Monitor Transactions Regularly

The most fundamental step is keeping a close watch on all company card transactions. A corporate card and expense management platform with real-time notifications and a centralised dashboard lets finance teams spot suspicious activity instantly, catching fraudulent charges or out-of-policy spending before they escalate.

Implement a Maker/Checker Process

For significant payments or vendor additions, a "maker/checker" or "four-eyes" principle adds a crucial layer of security. This requires at least 2 individuals to complete a transaction — 1 person initiates the payment, and a second, authorised person reviews and approves it, preventing both internal fraud and errors.

Enforce Clear Spend Policies

A business can't enforce rules that don't exist. A clear, well-documented corporate spend policy should outline who's authorised to use a corporate card, what expense categories are permissible, specific spending limits, and procedures for reporting a lost or stolen card.

When employees understand the rules, accidental out-of-policy spending is reduced, and deliberate misuse is easier to identify.

Stay Protected From Unauthorised Card Use With Aspire

Using corporate cards can streamline expense management, with detailed transaction records and spending limits to prevent misuse.

From experience, many small businesses still struggle to manage cards effectively — relying on a single shared card increases the risk of small-scale fraud, while using multiple untracked cards can also lead to unauthorised transactions.

This is why we introduced Aspire Corporate Cards. You can issue unlimited multi-currency debit cards for your team, customise spending limits per card, and assign cards to specific merchants, teams, or projects — reducing the risk of misuse.

You can also track and monitor all card expenses in real time from a single dashboard, with no annual or subscription fees.

Why Hong Kong Businesses Choose Aspire

Preventing unauthorised transactions is one part of running a secure finance operation — Aspire is built to support the rest too.

💱 FX spreads from 0.18%, up to 3x cheaper than traditional banks. This applies across 130+ countries and 40+ currencies through Aspire's multi-currency account. It's useful for anything from paying overseas suppliers to settling international payments without losing margin to markup.

💰 1.2% unlimited cashback applies on every corporate card transaction, with no monthly cap. It kicks in automatically on eligible spend, with no minimum threshold to hit first. Over time, it quietly turns routine business spend into working capital.

🌐 Local transfer network, not multi-hop SWIFT chains, is how Aspire routes most payments. This means faster settlement and fewer intermediary fees eating into your payment before it reaches the recipient. It also reduces the chance of funds being held up for review at a correspondent bank along the way.

💸 Fixed USD 8 inbound SWIFT fee, tracked end-to-end with SWIFT GPI, applies when SWIFT is the right rail for your payment. There are no surprise deductions from correspondent banks along the way, so the amount you're quoted is the amount that arrives. You can also download payment confirmation instantly from the app, without calling the bank.

⚡ Approved in as little as 1 business day, with no branch visits and no paperwork stacks. Applications are completed entirely online, from document upload to approval. There's no waiting weeks on a relationship manager to call you back.

Open a free multi-currency business account built for Hong Kong SMEs, or explore how Aspire's corporate card fits into your day-to-day spend.

Frequently Asked Questions

What is a chargeback?

A chargeback is a forced transaction reversal initiated by a cardholder's bank, demanding the merchant's bank return funds for a disputed or fraudulent transaction.

What's the difference between a chargeback and a refund?

A refund is a direct, informal agreement between customer and merchant, resolved quickly. A chargeback is a formal, bank-mediated dispute process that's slower, costs the merchant a non-refundable fee, and counts against the merchant's chargeback ratio.

What is friendly fraud?

Friendly fraud occurs when a legitimate cardholder makes a purchase with their own card and then disputes it, whether accidentally, opportunistically, or intentionally to get goods or services for free.

How long does a cardholder have to file a chargeback?

Typically up to 180 days from the transaction date in Hong Kong, though the exact window depends on the specific card association and issuing bank.

What can I do if my bank rejects my chargeback request in Hong Kong?

You can ask the issuing bank to escalate the dispute for arbitration by the relevant card association. If you remain unsatisfied with how the bank handled the process, the Financial Dispute Resolution Centre (FDRC) offers an independent route for claims up to HKD 500,000.

How can a business reduce its risk of fraudulent chargebacks?

By monitoring card transactions regularly, implementing a maker/checker approval process for significant payments, and enforcing clear, well-documented spend policies across the team.