A credit card chargeback is a forced transaction reversal initiated by a cardholder's issuing bank, returning funds to the customer after a disputed purchase. Unlike a refund, which a merchant processes directly, a chargeback bypasses the merchant entirely and can result in fees, penalties, and damage to the merchant's account standing.
Whether you're the business or the customer, you understand this age-old agreement — a customer gives a business money in return for an agreed-upon product or service. Every business owner wants each transaction to be as smooth as possible, and in a perfect world, they would be. But the reality is this exchange of money for products or services, especially for those with high risk merchant accounts, will sometimes go differently than planned by both parties.
When a sale leaves the customer dissatisfied for any reason, they have a few courses of action they can take to reach satisfaction. The two most common responses are refunds and credit card chargebacks, which can heavily impact ecommerce merchant account providers. In this article, we'll take a closer look at what a credit card chargeback is, why you want to avoid them and what you can do to minimize the occurrence of a chargeback.
HOW THE CHARGEBACK PROCESS WORKS
Understanding the chargeback process helps merchants respond effectively. Here's how a typical chargeback unfolds:
Customer contacts issuing bank: The cardholder disputes a transaction with their credit card issuer, claiming fraud, non-delivery, or dissatisfaction.
Bank reviews the claim: The issuing bank evaluates the dispute and assigns a reason code based on the customer's complaint.
Provisional credit issued: The bank typically provides the customer with a temporary refund while investigating.
Merchant is notified: The acquiring bank notifies the merchant of the chargeback and debits the transaction amount plus fees (typically $20–$100 per chargeback).
Merchant responds (optional): The merchant has a limited window (usually 7–30 days) to submit evidence disputing the chargeback through representment.
Bank makes final decision: The issuing bank reviews all evidence and renders a final decision, either upholding or reversing the chargeback.
Arbitration (if contested): If the merchant disputes an unfavorable decision, the case may escalate to the card network (Visa, Mastercard) for arbitration, which involves additional fees.
Chargebacks occur for various reasons. Understanding these causes helps merchants implement targeted prevention strategies:
Fraudulent transactions: Unauthorized use of stolen card information
Product not received: Customer claims the item never arrived
Product not as described: Item differs significantly from the listing or advertisement
Duplicate charges: Customer was billed multiple times for a single purchase
Subscription billing issues: Recurring charges after cancellation or without clear consent
Unrecognized billing descriptor: Customer doesn't recognize the merchant name on their statement
Processing errors: Incorrect transaction amounts or currency issues
Refund not processed: Merchant agreed to a refund but failed to issue it
Customer dissatisfaction: General unhappiness with product quality or service
REFUNDS VS. CHARGEBACKS
It's important for you to know that chargebacks and refunds are two separate events. At first glance, you may think that chargebacks are harmless. After all, the customer has the right to get their money back in many situations — you may have heard the old adage, "The customer is always right." Whether the customer is actually right or wrong, chargebacks can have serious detrimental effects on your business.
Both business owners and customers have plenty of experience with refunds. On the business side of things, you've probably carried out several refunds to customers to make right by them. When you play the role of the customer outside of work, you've probably made plenty of return trips to the store to get your money back because of a malfunction or you bought the wrong item. There are many reasons to make a refund — and usually, these interactions end amicably.
Factor
Refund
Chargeback
Who initiates
Customer requests from merchant
Customer requests from issuing bank
Timeline
Typically 3–7 business days
30–90 days or longer
Fees involved
None for merchant
$20-$100 per chargeback
Impact on merchant account
None
Increases chargeback ratio; may trigger penalties
Parties involved
Two (customer or merchant)
Four or more (customer, issuing bank, acquiring bank, merchant, card network)
A customer may choose to pursue a chargeback for many reasons, including the following:
The merchant is unwilling to cooperate with the customer's refund request.
The customer is looking for a quicker process, so they go to their bank for a chargeback instead of seeking a refund.
The customer feels the more "separated" approach to chargebacks will allow them to give fewer details about the nature of their complaint with your product or service.
Ultimately, chargebacks exist so that customers can have protection or a fallback when dealing with bad merchants. Unfortunately, many customers — whether they do it subconsciously or on purpose — abuse their ability to demand a chargeback. This has caused many good businesses to experience repercussions from the banks, often unfairly.
There should be a balance of respect between businesses and their customers so that when transactions go the wrong way, both parties can be happy at the end of the day — and typically, a refund can make that happen.
WHY ARE CHARGEBACKS BAD FOR YOUR MERCHANT ACCOUNT?
It's crucial to limit the number of chargebacks that occur on your merchant account to the smallest number possible. Here are a few of the reasons why chargebacks are so bad for your business's merchant account:
Penalties and fees: When you experience a chargeback, you'll have to pay the bank more than the amount being returned to the customer and an extra bank-issued penalty on top of that. Chargeback fees typically range from $20 to $100 per incident, which can be detrimental to any business's overhead costs, especially small businesses.
A higher chargeback-to-sales ratio: The banks will know how many chargebacks your merchant account has compared to the number of regular, completed sales you make. Card networks like Visa and Mastercard set threshold limits—typically 1.0% for standard monitoring and 1.5%–2.0% for high-risk classification. If the ratio gets too high, the bank could label you as a "high-risk" business. In that case, you may experience some consequences to your merchant account, including higher bank costs and even losing your merchant account.
Increased bank costs per transaction: Once the bank deems you "high risk," it can be hard to get your good reputation back. The bank will start treating you differently when you use bank cards or conduct e-commerce transactions. In fact, you may have to start paying the bank more money per transaction for use of their bank card services.
A loss of your merchant account: In the worst-case scenario, you could completely lose access to your merchant account. This usually occurs once the bank views you as too high-risk to work with any longer, like if your chargeback to sale ratio gets too high. When that happens, you'll lose the ability to use debit or credit cards at your store or conduct e-commerce.
CAN YOU GET CHARGEBACK PROTECTION?
Fortunately, you can get chargeback protection by partnering with the right merchant account provider.
One reason chargebacks are so dangerous is that most businesses are unaware they're even happening until many days after the customer has filed the request with the bank. This delay puts businesses at a severe disadvantage. Though businesses have the right to fight back or contest an alleged chargeback, a delay in awareness can cause a business to miss its window of opportunity. Then, it has to pay back the charge and fees and deal with a reduced reputation in the eyes of the bank.
As a business owner, you deserve the peace of mind to know you can always accept bank cards to complete your transactions. Alongside getting a reliable merchant account, partnering with a chargeback protection specialist will keep your merchant account up and running and persuade the banks to let you use bank cards, even if they see you as a high-risk business.
This type of protection can be a lifesaver for any sized business. With the right chargeback protection program, you can see a chargeback before the bank and before the customer completes the process. This provides you with valuable time to reach out to the customer to try to solve the problem without a chargeback. As a result, you'll have the opportunity to make things right, which can keep your chargeback numbers down and keep you processing bank cards in the future.
HOW TO PREVENT CHARGEBACKS
Now that you know more about the dangers of chargebacks and how damaging they can be for your business, you need to prepare yourself to limit chargebacks as much as possible on your merchant account. Here are some of the ways you can accomplish that.
Implement clear billing descriptors that customers will recognize on their statements to prevent confusion-based disputes.
Provide responsive customer service with multiple contact options so customers reach you before contacting their bank.
Display transparent refund policies prominently on your website, checkout pages, and order confirmations.
Use delivery confirmation and tracking for all shipments to provide proof of delivery when needed.
Require CVV verification and AVS (Address Verification Service) to reduce fraudulent transactions.
Send order confirmations and shipping updates to keep customers informed throughout the purchase process.
Make product descriptions accurate and detailed with clear photos to set proper expectations.
Process refunds promptly when customers request them within your policy guidelines—a refund is always better than a chargeback.
Enroll in chargeback alert services to receive early notification of disputes before they become chargebacks.
Work with your customers and be accommodating—sometimes keeping your customer happy and avoiding a chargeback means taking a small loss to secure future business, which is particularly important for businesses using a subscription merchant account.
ZEN PAYMENTS CAN PROTECT YOUR MERCHANT ACCOUNT FROM REPUTATION DAMAGING CHARGEBACKS
At Zen Payments, our goal is to provide honesty, flexibility, and transparency to every one of our clients. We're here to help protect your merchant account from chargebacks, and we'll stand up for your rights and dignity as a business if one does occur. With our help, you can have peace of mind knowing your merchant account is in good hands — even if the banks consider your industry high risk.
Contact us online today to get in touch with our caring and professional team or call us at 801-405-9888 to speak with a representative. We're ready to help you get back to focusing on running your business. We'll handle your merchant account so you can keep the transactions coming in and your profits increasing.
Lizzy joined the Zen Payments team following her graduation from Utah Valley University. As a dedicated customer service representative, she brings extensive experience in client relations and customer support. Lizzy is committed to delivering exceptional service to all Zen Payments clients.
