Chargeback

What it means

A chargeback is a card payment dispute that the cardholder raises through their own bank rather than directly with the merchant. The card-issuing bank pulls the money back from the merchant, who is then given the chance to prove the transaction was legitimate. The rules and deadlines are set by the card schemes, Visa and Mastercard.

The reasons vary: an unauthorised payment with a stolen card, goods not delivered, goods significantly different from the description, a double charge, a cancelled subscription that keeps being charged, or money not refunded after withdrawal from a contract. A cardholder can usually raise a chargeback within 120 days of the transaction or the expected delivery.

A chargeback hits the merchant twice: it loses the payment amount and the payment gateway provider charges a fee, even if the merchant later wins the dispute. With a high chargeback ratio the provider may raise fees, hold back part of the takings or terminate the contract.

How it works in practice

When a chargeback notice arrives, the merchant has a short time to respond, often just a few days. It gathers the order confirmation, invoice, proof of delivery with tracking, correspondence with the customer and, for digital services, login or usage records. Payments authenticated through 3D Secure are easier to defend against fraud claims.

In the accounts the reversed amount is treated according to the situation. If the merchant will clearly lose, a credit note is issued and revenue and VAT are reduced. If the dispute is ongoing, the amount is carried as a receivable from the gateway provider and written off if lost. The chargeback fee is an expense either way.

Prevention is cheaper than disputes: a clear merchant name on the card statement so the customer recognises the payment, quick responses to complaints, easy cancellation of subscriptions and a voluntary refund before the customer goes to the bank. Many chargebacks happen only because the customer could not get through.

What to watch out for

A major risk is so-called friendly fraud, where the customer receives the goods but still claims they did not or that they did not make the payment. Without a signature on delivery or a record of delivery to the letterbox the dispute is hard to win. For more expensive goods, delivery with confirmation is worth it.

Merchants often ignore chargebacks because the amounts are small. Gateway providers, however, monitor the ratio of chargebacks to transactions, and when it exceeds the limit they act on the whole contract. It is worth answering every dispute and tracking why they arise.