Chargeback: Meaning, types, and common reasons explained

What is a chargeback?

A chargeback is a forced transaction reversal initiated by a cardholder’s bank, known as the issuing bank. It's a demand by the issuer to a merchant's bank, the acquiring bank, to return funds for a disputed or fraudulent transaction. Essentially, it's a way for consumers to get their money back directly from their bank when they believe a charge on their credit or debit card was made in error, without authorisation, or for goods and services that weren't up to standard¹.

The chargeback mechanism was established to give consumers confidence in using card payments, protecting them from fraud and dishonest merchant practices. When a cardholder disputes a transaction, their bank provisionally credits their account. The burden of proof then shifts to the merchant to demonstrate that the transaction was legitimate and valid. This consumer-centric process is a cornerstone of the rules set by major card networks like Visa and Mastercard, ensuring a secure payment ecosystem.

While chargebacks are often seen as a tool to protect cardholders, they also affect merchants behind the scenes. This means that when you file a dispute, the process can take time and may involve additional checks, as the merchant has the chance to respond.

For your business, it’s important to understand how chargebacks work not only to protect company funds but also to manage expectations around resolution timelines and outcomes.

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 the card networks codify into specific "reason codes." These codes help standardise the process and inform the merchant why the transaction was reversed. Broadly, these reasons fall into a few key categories³.

Credit card chargebacks

This is the most common form of chargeback, governed by the stringent rules and regulations of major card brands like Visa, Mastercard, American Express, and Discover. Each network has its own set of reason codes and specific timelines for the dispute process. These chargebacks can stem from technical issues (e.g., duplicate processing), authorisation errors (e.g., expired card), or customer disputes (e.g., product not as described)³.

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 the timelines and evidence requirements can vary from those of credit card networks⁴.

Other payment method chargebacks

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

Common causes of chargebacks

Ultimately, regardless of the payment method, the core reason for the chargeback generally falls into one of three buckets: criminal fraud, merchant error, or friendly fraud².

Fraud

This is the most straightforward cause of a chargeback. 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 has been compromised through a data breach, phishing scam, or malware.

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 have used advanced fraud protection tools like 3D Secure⁵.

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. This can happen for several reasons²: 

• Accidental: The customer forgot about the purchase, doesn't recognise the business name on their statement (unclear billing descriptor), or a family member made the purchase without their knowledge.
• Opportunistic: The customer experiences "buyer's remorse" or wants to avoid a store's return process, finding it easier to call their bank.
• Intentional (Chargeback Abuse): The customer knowingly claims a legitimate transaction was fraudulent to get a product or service for free. This is essentially a form of digital shoplifting.

Service issues

This category covers legitimate customer disputes where the merchant is at fault. These chargebacks serve their original purpose: protecting consumers from poor service. Common reasons include⁵:

• Product Not Received: The customer paid for an item that was never delivered.
• Product Not as Described or Defective: The item received was significantly different from its description, was damaged, or did not function correctly.
• Recurring Billing Issues: The customer was charged after cancelling a subscription or was billed an incorrect amount.
• 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.

Understanding the chargeback process

The chargeback process is a multi-step, time-sensitive procedure involving several parties: the cardholder, the issuing bank, the card network (e.g., Visa), the acquiring bank, and the merchant. Navigating this complex workflow is critical for any business⁶.

1. Cardholder initiates dispute

The process begins when a cardholder sees a transaction on their statement that they don't recognise, didn't authorise, or have an issue with (e.g., a product was never delivered). They contact their bank (the issuing bank) to dispute the charge.

2. Issuing bank review

The issuing bank reviews the cardholder's claim. If the claim appears valid under the card network's rules (for example, it falls within the allowed timeframe, which is typically 120 days from the transaction date), the bank will initiate a formal chargeback. The bank provisionally credits the cardholder's account for the disputed amount⁶.

3. Debit and notification

The issuing bank then retrieves the funds from the merchant's bank (the acquiring bank) through the card network's settlement system. The acquiring bank, in turn, debits the disputed amount, plus a chargeback fee (typically ranging from $20 to $100), from the merchant's account. The acquiring bank then notifies the merchant of the chargeback and the corresponding reason code¹.

4. Merchant response (Representment)

The merchant now has a limited window (usually 20-45 days) to respond. They can either accept the chargeback or fight it through a process called "representment." To fight it, the merchant must gather and submit compelling evidence that proves the transaction was legitimate and followed all proper procedures. This evidence could include sales receipts, proof of delivery (tracking numbers), AVS/CVV verification results, and any communication with the customer³.

Because this is the lengthiest stage of the process, you should inform your finance team to prepare for possible delays before funds are permanently credited if a chargeback occurs.

5. Final decision

The evidence is submitted to the acquiring bank, which forwards it to the issuing bank. The issuing bank reviews the evidence and makes a final decision.

• If the Merchant Wins: The chargeback is reversed, and the funds are returned to the merchant's account.
• If the Cardholder Wins: The chargeback stands, the provisional credit to the cardholder becomes permanent, and the merchant loses the revenue and the chargeback fee.

In some cases, if the parties still disagree, the dispute can proceed to a second chargeback or even arbitration with the card network, which involves additional costs and complexity⁶.

Chargeback vs Refund: What's the difference?

Though both result in you getting your money back, a chargeback and a refund are fundamentally different processes with vastly different implications for both the merchant and customer¹.

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

How to avoid unauthorised card transactions

As mentioned earlier, there are 3 common causes of chargebacks, which consist of fraud, friendly fraud, and service issues. While merchants typically focus on preventing chargebacks related to service issues, your priority should be preventing fraud or unauthorised card transactions that can lead to chargebacks. Minimising this type of internal fraud requires robust controls and clear policies.

Monitor transactions regularly

The most fundamental step is to keep a close watch on all company card transactions. Using a corporate card and expense management platform that provides real-time notifications and a centralised dashboard allows finance teams to spot suspicious activity instantly. Regular, even daily, reviews can catch fraudulent charges or out-of-policy employee spending before they escalate.

Implement Maker/Checker Process

For significant payments or vendor additions, a "maker/checker" or "four-eyes" principle adds a crucial layer of security. This process requires at least two individuals to complete a transaction. One person (the "maker") initiates the payment, and a second, authorised person (the "checker") must review and approve it. This prevents both internal fraud and errors by ensuring oversight on all major fund movements.

Enforce Clear Spend Policies

A business cannot enforce rules that don't exist. A clear, well-documented corporate spend policy is essential. This policy should outline⁷:

• Who is authorised to use a corporate card?
• What categories of expenses are permissible (e.g., travel, software, supplies)?
• Specific spending limits per transaction, per day, or per month?
• Procedures for reporting lost or stolen cards?

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

Stay protected from unauthorised card use with Aspire Corporate Cards

Using corporate cards can streamline your expense management as they come with detailed transaction records and spending limits to prevent misuse. However, from our experience, many small businesses still struggle to manage these cards effectively. For example, relying on a single card for the entire company means everyone has access to the same card details, which increases the risk of small-scale fraud. On the other hand, using multiple cards without proper tracking and monitoring can also lead to unauthorised transactions.

This is why we introduced Aspire Corporate Cards. With Aspire, you can issue unlimited multi-currency debit cards for your team members and customise spending limits for each card. You can also assign cards to specific merchants, teams, or projects, helping you reduce the risk of misuse and unauthorised spending.

What’s more, you can track and monitor all card expenses in real time from a single dashboard, giving you full clarity on who spends what and when. And you get all these features with no annual or subscription fees.

The benefits don’t stop there. Aspire Corporate Cards also give you 1% cashback on SaaS and digital spend, plus the ability to spend directly in USD to avoid unnecessary conversion fees on cross-border transactions. Designed for both local and global use, Aspire’s cards provide the flexibility and control today’s businesses need to manage expenses efficiently across borders.