Chargebacks explained
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Chargebacks explained
Explanation of a chargeback, detailing the types and flow from initiation to resolution

A chargeback is a protective financial mechanism initiated by the issuing bank, where funds are withdrawn from a merchant’s account and reimbursed to the cardholder.
is a process by which an issuing bank debits the merchant’s account to return funds to the Glossary
The cardholder is the person to whom the bank has issued a particular credit or debit card.
. This process is governed by the rules and regulations set by different card schemes, such as Visa, Mastercard, American Express (Amex), and others.

It is important to note that chargebacks can pose significant risks to merchants. Most card schemes impose limits on the acceptable monthly number of chargebacks. Exceeding the established threshold can lead to severe consequences, such as the cancellation or termination of the merchant’s trading account by the acquiring bank or payment processor.

Every credit and debit card provider has certain chargeback thresholds, and exceeding this threshold can have severe consequences for merchants. These include:

  • Significant increase in payment processing costs
  • Enrollment in a remedial program and potential additional fines
  • Continued bearing of these costs for several months after issues are resolved, even after being reclassified as a low-risk merchant


Ultimately, chargebacks are disputes between the merchant and the cardholder, who is not always the customer. The merchant’s acquiring bank handles some aspects of the chargeback, while the cardholder’s issuing bank investigates and decides the outcome of the dispute. Unlike a traditional refund, where the customer and merchant work together to resolve a problem, a chargeback allows the cardholder to initiate a forced refund through their issuing bank, bypassing the merchant’s involvement.

A chargeback occurs when the issuing bank reverses a card transaction due to:

🔘 Fraud
Fraud disputes include transactions:

  • where an available EMV chip was not used for authorization
  • where stolen payment card data was used in a card-present or card-not-present environment
  • flagged by the Visa Fraud Monitoring Program

🔘 Processing errors
Processing error disputes include:

  • late presentments of transactions
  • incorrect transaction codes, currencies, account numbers, or accounts
  • duplicate processing, duplicate payments involving payment by other means
  • transactions containing invalid or inaccurate data

🔘 Customer disputes
This category deals with issues arising between the customer and the merchant, such as:

  • goods or services not received
  • unwanted recurring charges that the customer aimed to cancel
  • counterfeit, defective, or misrepresented merchandise
  • failure to process a refund or credit as agreed, and others

🔘 Unauthorized access
Disputes in this category involve transactions processed without proper authorization or with a declined authorization code.


Chargebacks follow a process with multiple steps and have a defined stage types, allowing both merchants and cardholders to dispute a transaction, with the opportunity to provide additional evidence and challenge previous decisions.

Type Description
1st Chargeback

The customer initiates a chargeback by disputing a transaction with their card issuer.
You can dispute the chargeback at this stage, but you must provide evidence proving that the transaction is valid, not fraudulent, that the customer was properly verified, and that you fulfilled the service or delivered the goods as promised. Please note that there is a processing fee charged for each chargeback, and you should contact your account manager for details on the commission. It is crucial to monitor these disputes and respond promptly.
2nd Pre-arbitration

If the issuer declines your initial defense, they may initiate a pre-arbitration case, which will be reviewed by the card network.
The card issuer has rejected your evidence and objections to the cardholder’s initial chargeback claim. At this point, you have two options: accept the chargeback or dispute it further by entering pre-arbitration. During pre-arbitration, if either the merchant or the cardholder provides new evidence, the issuing bank may file a second chargeback.

If the issuer or cardholder disputes the merchant’s pre-arbitration response, the case proceeds to the card network, such as Visa or Mastercard, for arbitration.
At this stage, the parties involved - the bank, the cardholder, and the merchant - cannot resolve the dispute independently. Therefore, they request intervention from the card network’s representative to make a final decision. Fees will apply for the arbitration process, and due to the high costs associated with these fees, merchants can benefit from disputing only very high-cost chargebacks. Consequently, in most cases, the arbitration process results in a net loss for the merchant, even if they win.


The chargeback flow includes steps and may vary slightly depending on which banks and card networks are involved. The following parties are involved in the process: the cardholder, the cardholder’s issuing bank, the merchant, and the merchant’s acquiring bank. If the merchant hires a chargeback representative, they will also be involved.

The chargeback flow starts with the merchant deciding whether to accept or challenge the chargeback through representment. Representment occurs when the issuing bank reviews the merchant’s evidence to either cancel or support the chargeback.

  1. When a cardholder disputes a transaction with their issuing bank, the bank determines if the customer has valid grounds to claim a chargeback.
  2. If the chargeback request is granted, the bank notifies the merchant's acquiring bank and debits the merchant's account.
  3. The merchant can either accept the chargeback or fight it by resubmitting the payment along with a rebuttal letter and necessary evidence to refute the claims (this process is called representment).
  4. The issuing bank reviews the new evidence and decide. If they rule in favor of the merchant, the funds will be returned.
  5. At this stage, any dissatisfied party can challenge the decision by initiating pre-arbitration proceedings. This often happens when the issuing bank initially rules in favor of the merchant but then receives new evidence that casts doubt on this decision.
  6. If neither party admits liability during pre-arbitration, the chargeback will proceed to arbitration. Here, the card network examines the evidence and makes a final, non-appealable decision. The losing party will be required to pay substantial Glossary
    Chargeback fees are the fee merchants must pay when a chargeback occurs.

By default, merchants are liable for chargebacks. This means that when a chargeback occurs, the funds are withdrawn from the merchant’s account and returned to the cardholder. Although both the merchant and the cardholder may be victims of Glossary
Fraud occurs when a customer disputes a debit from their account under false pretenses.
, the merchant pays for it.
With each chargeback, the merchant loses the transaction amount and any goods or services already provided. In addition, merchants face chargeback fees from their acquirers and processors. The chargeback rate is tracked by the acquirer, and merchants that exceed the allowable threshold may be subject to severe penalties.

If the chargeback rate exceeds certain thresholds set by card networks and other financial institutions merchants do business with, they may face fines, additional chargeback fees, and even termination of their merchant account.