How a chargeback works
The customer calls their bank or taps a button in their banking app and says a charge is wrong: they do not recognize it, they canceled, they never got what they paid for, or the card was stolen. The bank opens a dispute and pulls the money back from the merchant straight away, usually along with a dispute fee from the gateway. The merchant is not asked first.
The merchant then gets a chance to respond with evidence before a deadline: the signup and terms the customer agreed to, proof the product was used, the invoice and receipt, and any messages about canceling. The bank decides. If the merchant wins, the disputed money comes back; if it loses, or does not answer in time, the money is gone. The fee may stay gone either way, depending on the processor.
Some disputes start lighter. A bank may first send an inquiry asking what a charge was for, or a network may send an early fraud warning. A clear answer, or a quick refund, at that stage often stops a full chargeback.
dispute rate = disputes received in the period ÷ card payments in the period
Worked example
A made-up software business processes 2,000 card payments of $50 in March and receives 6 disputes. It wins 2 of them and loses the other 4.
- Card payments in March
- 2,000
- Disputes received
- 6
- Dispute rate: 6 ÷ 2,000
- 0.3%
- Money pulled back when the disputes opened: 6 × $50
- −$300
- Returned after 2 disputes were won: 2 × $50
- +$100
- Lost for good: 4 × $50
- −$200
The $200 is before fees. Each dispute usually also carries a fee from the gateway, which it may keep even on the disputes the business won.
Why chargebacks matter
A chargeback costs more than a refund of the same charge: the money, a fee, and the time it takes to put evidence together. A customer who would have accepted a refund is often cheaper to refund than to fight.
The count matters as well as the money. Card networks and gateways watch each merchant's dispute rate, and a merchant whose rate climbs too high can face extra fees, monitoring programs, held funds or a closed account. The thresholds vary by network and gateway, so check the rules of yours.
On subscriptions, most chargebacks are avoidable. They usually come from a renewal the customer did not expect, a cancellation that was hard to find, or a charge name they did not recognize on their statement, and each of those has a plain fix.
Common mistakes
- Making it hard to cancel A customer who cannot find the cancel button asks their bank to stop the payment instead. Put cancellation where customers look for it.
- Renewing without warning An annual renewal or a trial that converts with no reminder is the classic source of "I did not authorize this". Send a reminder before the charge.
- Ignoring a dispute An unanswered dispute is lost by default. If you will not fight it, accept it and move on; if you will, answer before the deadline.
- Fighting every dispute A gray area with a small amount is often better settled with a refund than with evidence, especially when your dispute rate is already high.