Converting a customer is widely regarded as the “finish line” for businesses. But there are many factors—such as a less-than-secure website, foggy shipping details, or unreachable customer service—that can lead to chargebacks.

Chargebacks, also known as disputes, are reversals of card transactions. Even the best-laid conversion funnels sometimes lead to a situation in which a customer wants their money back after completing a purchase. Below, we’ll cover what you should know about chargebacks: what they are, how they work, what causes them, and how business owners can be proactive in preventing them.

What’s in this article?

• What is a chargeback?
  
• How often do chargebacks happen?
  
• Ways to prevent chargebacks
  
• Chargeback vs. refund: Key differences
  
• Common reasons for chargebacks
  
• How do chargebacks work?
  
• How much do chargebacks cost businesses?
  
• How to dispute a chargeback
  
• How Stripe Radar can help
  

What is a chargeback?

A chargeback is a reversal of funds following a debit or credit card purchase, set in motion when the customer files a dispute over the charge with their bank or credit card provider. Chargebacks are almost always initiated by customers, but businesses can request them as well. (This is rare.) Chargebacks are governed by legal frameworks and card network rules.

How often do chargebacks happen?

Chargebacks are a widespread and costly problem that’s entangled with business fraud more broadly. In a 2023 survey, 75% of businesses said instances of friendly fraud, also known as chargeback fraud, had increased in recent years. According to “The True Cost of Fraud” report by LexisNexis, businesses end up paying $3.75 for every $1.00 in chargebacks.

Ways to prevent chargebacks

Even the most vigilant businesses are going to end up with some chargebacks, but there are steps you can take to minimize their frequency. We have an article that goes deeper into the important steps you can take to reduce chargebacks, but here are a few key points to keep in mind:

• Prioritize security for credit card payments.
  
• Make returns as easy as possible.
  
• Manage shipping expectations.
  
• Be available to your customers.
  
• Make sure your real company name shows up on credit card statements.
  

Chargeback vs. refund: Key differences

A refund is when the business returns funds to the customer, whereas a chargeback is when the customer’s bank or credit card provider reverses the charge and pulls back the funds from the business. In both cases, funds are returned to the customer. The main difference between a chargeback and a refund is which party initiates the reversal of funds, but there are a few other key differences:

Refund

• Initiated by the business, usually after a customer request
  
• Customer and business communicate directly
  
• Business controls and processes the refund
  
• Typically takes 3–7 business days after approval
  
• Used for voluntary resolutions (returns, cancellations)
  
• Lower impact; business voluntarily returns funds
  

Chargeback

• Initiated by the customer’s bank after a dispute is filed
  
• Customer, issuing bank, and business are all involved
  
• Bank pulls funds from the business account and holds them during the review
  
• Can take several weeks to months, especially if the charge is contested
  
• Used for disputed or unauthorized charges
  
• Higher impact; may involve fees, lost revenue, and reputational risk
  

Who is actively involved in a chargeback?

With chargebacks, the issuing bank drives the action, staying in contact with the customer and the business throughout the process. With refunds, the customer usually deals directly with the business, who will then initiate the reversal of funds from their end.

Who controls the money in a chargeback?

With refunds, the business is in control of the disputed funds, whereas with chargebacks, the customer’s bank is in the driver’s seat. Refunds involve the business telling their payment processor to return funds to the customer. Until they initiate this transfer, money doesn’t move.

With a chargeback, the customer’s bank will usually go ahead and pull the funds in question from the business’s account and hold onto them while they decide whether the chargeback request is valid.

How long does a refund take?

The refund process usually takes three to seven business days. This doesn’t count the time it takes for the customer and business to communicate and reach the decision that a refund is warranted, which could take anywhere from one brief conversation to several weeks of emails. From start to finish, a chargeback could take as little as a few weeks to as much as several months, especially if the business contests the disputed charge.

Common reasons for chargebacks

In order to make an actionable plan for mitigating how many chargebacks your business incurs, it’s important to understand the reasons why chargebacks happen. Here are some of the most common scenarios:

Fraudulent purchases

Fraudulent purchases is the reason why chargebacks exist in the first place. The inciting idea behind them is to give consumers a tool to reverse transactions that show up on their account due to fraudulent activity—and legitimate fraud still constitutes a large portion of chargebacks.

Friendly fraud

“Friendly fraud” is the umbrella term for a variety of chargeback reasons that don’t have to do with legitimate fraud. Technically, cardholders are only supposed to dispute a charge and trigger a chargeback for a limited number of reasons. In reality, customers might dispute a charge for a variety of reasons aside from true fraud.

Here are a few common examples:

• They don’t recognize the charge.
  If a customer looks at their credit card statement and sees a charge they don’t remember incurring, they might choose to dispute it and get a chargeback. Maybe they made the purchase and forgot, or perhaps it’s a recurring fee for a subscription they forgot they had signed up for. Maybe the business’s name didn’t appear clearly on the card statement. If a transaction doesn’t look familiar to a cardholder, there’s a chance they’ll dispute it.
  
• There are delivery problems.
  If an item never arrived or is taking longer than expected, the customer might assume it’s lost and request a chargeback. This is especially likely if the customer was never given shipping details or a tracking number, or they couldn’t easily contact the business to inquire about the status of their order.
  
• They want to avoid the return process.
  Sometimes, customers use chargebacks to avoid processing a return. A customer might initiate a chargeback if they are unhappy with an item they purchased, found the business’s returns policy to be opaque or cumbersome, or wanted to return an item but were already outside the allotted window of time.
  

Clerical mistakes

Mistakes happen, and chargebacks are one mechanism for correcting them. If a customer was charged more than once, or if they’re still being billed for a canceled subscription, they might file a dispute with their bank or credit card company to rectify the errors. If the customer can’t easily request a refund from the company, they might consider a chargeback to be their best recourse.

How do chargebacks work?

Chargebacks occur only after the initial transaction ends: The payment is processed, the funds are transferred to the business’s account, and the charge appears on the customer’s credit card statement.

This is when the chargeback process begins:

1. The customer files a dispute.
   Once the customer sees a charge on their account statement that they believe to be fraudulent, they file a dispute against the charge with the bank or financial institution that issued the credit card used for the purchase (the issuing bank). Consumers typically have 120 days to dispute a transaction.

2. The issuing bank initiates the chargeback.
   When the customer disputes a charge, the issuing bank begins the chargeback process.

3. The business has the chance to refute the chargeback.
   As soon as a customer requests a chargeback, their bank will reach out to the business’s bank and give them a heads up that the chargeback has been requested. At this point, the business has the opportunity to provide any evidence that refutes the customer’s claim that the charge is illegitimate.

4. The bank makes a decision.
   The issuing bank will review evidence on both sides of the chargeback dispute and render a decision about whether or not to proceed. At this point, if the business declined to provide any evidence to support the charge’s validity, the issuing bank generally will approve the customer’s request for a chargeback.

5. If the issuing bank rules in the business’s favor…
   If the cardholder’s bank decides the charge was valid and declines to proceed with the chargeback, then the funds are not returned to the customer. If the issuer had already credited the cardholder’s account for the disputed amount before the charge was investigated, and the charge is then found to be valid, those funds or credit will be removed again from the cardholder’s account.

6. If the issuing bank rules in the customer’s favor…
   If the bank determines that the customer has legitimate grounds to request the chargeback, the funds are withdrawn from the business’s account and credited back to the customer.

7. Arbitration may follow the decision.
   If the bank decides in favor of the business, and the customer still wants to fight for the chargeback, the customer has the option of pursuing arbitration. This takes the issue to the credit card company, and is in effect an appeals process for the issuing bank’s decision. The credit card companies—Visa, American Express, Mastercard, Discover, etc.—have the final word in a chargeback dispute.

How much do chargebacks cost businesses?

Fees associated with chargebacks vary depending on which payment processing provider you use and are typically detailed in your merchant account agreement. There is a $15 fee for each chargeback. Other providers’ fees can reach $50 or even $100. Obviously, the goal is to have as few chargebacks as possible, but they do happen on occasion, so it’s important to find out what your payment processing provider charges.

How to dispute a chargeback

Even if you do everything possible to prevent chargebacks from happening, you can’t avoid them entirely. And when they happen, it’s important to have a plan of action for vetting the authenticity of fraud claims and moving forward. Here’s how to dispute a chargeback claim:

• Determine the legitimacy of the dispute.
  If you are notified about a chargeback, first you’ll want to determine whether it’s being prompted by fraud or if a customer service issue is behind it.

• If the charge is genuinely fraudulent…
  If your initial investigation into the charge reveals true fraud, you should let the customer’s issuing bank know that you won’t be contesting the chargeback and that they should return the funds to the customer. You’ll also want to let your payment processing provider know about the fraud and look into whether it was an isolated occurrence or a bigger issue affecting other transactions.

• If it’s friendly fraud…
  If you look into the issue and determine that no actual fraud occurred, addressing the chargeback with the customer ultimately depends on why they initiated it in the first place. Regardless, you’ll probably want to dispute the chargeback, which involves doing a few things:

• Reach out to the customer.
  Many chargeback situations can be handled by contacting the customer directly, expressing a desire to resolve whatever issue prompted them to file for a chargeback, and listening to what they have to say. You might end up refunding them anyway, but even if you do, a refund is better for your business than a chargeback.

• Provide evidence to refute the chargeback.
  If pursuing a resolution with the customer doesn’t work, and you’re confident that no real fraud took place, you should provide evidence to that effect. Proof such as receipts, confirmation numbers, and shipping information can help affirm the legitimacy of the transaction. Your payment processing provider will likely be the one to communicate with the customer’s issuing bank. Then you’ll wait for the issuing bank to come to a decision about whether to approve the chargeback.

How Stripe Radar can help

Stripe Radar uses AI models to detect and prevent fraud, trained on data from Stripe’s global network. It continuously updates these models based on the latest fraud trends, protecting your business as fraud evolves.

Stripe also offers Radar for Fraud Teams, which allows users to add additional controls, such as custom rules, to address fraud scenarios specific to their businesses and access advanced fraud insights.

Radar can help your business:

• Prevent fraud losses: Stripe processes over $1 trillion in payments annually. This scale uniquely enables Radar to accurately detect and prevent fraud, saving you money.

• Increase revenue: Radar’s AI models are trained on actual dispute data, customer information, browsing data, and more. This enables Radar to identify risky transactions and reduce false positives, boosting your revenue.

• Save time: Radar is built into Stripe and requires zero lines of code to set up. You can also monitor your fraud performance, write rules, and more in a single platform, increasing efficiency.

Stripe also offers dispute prevention and management solutions:

• Dispute prevention: Proactively mitigate and resolve disputes to reduce your dispute rate and automate your dispute resolution process.
  
• Smart Disputes: Stripe uses AI to automatically respond to disputes on your behalf with tailored evidence to help improve win rates.
  

Learn more about Stripe Radar, or get started today.