Chargeback 101- All you need to know

Backspace Tech
5 min readMay 5, 2023


Chargebacks are part and parcel of the payment ecosystem. For the end customer, chargeback is a protective measure that safeguards them from fraudulent transactions and sketchy merchants. But for a merchant, it translates to loss, fees and reputation impact. For acquirers and issuers, it is all about customer retention.

In recent times, the steep incline in e-commerce activity has a parallel effect on the rise of chargebacks. Yet, many today do not understand the anatomy of a chargeback and how it works?

So, let’s dive into the basics

What is Chargeback?

Chargeback is a process where a customer disputes a transaction with their bank or credit card issuer, and the transaction amount is returned to the customer’s account. It is essentially a way for customers to get their money back when they believe they were unfairly charged for a product or service.

Chargebacks are initiated for a variety of reasons, such as fraudulent transactions, goods or services not being delivered as promised, or unauthorized charges on the customer’s account. In such cases, the customer can contact their bank or credit card issuer to initiate a chargeback request.

What are the types of chargeback?

Chargebacks are broadly categorized into three categories:

  • Friendly Fraud
  • Criminal Fraud
  • Consumer Dispute

Friendly Fraud: The most popular category of chargebacks, Friendly fraud chargebacks refer to situations where customers report legitimate charges as fraudulent with the intent of reversing the charges. This could be a deliberate act , or it could be due to impatience or confusion about the refund process or skipping the merchant entirely. In many cases, these chargebacks are disguised as criminal fraud chargebacks, where the customer falsely claims that they did not authorize the charge.

Criminal fraud: The chargeback system was originally designed to combat these types of chargeback where the card information is stolen and used by illegal elements. It is standard industry practice to place proper protocols in place by financial institutions and merchant to safeguard their customer information. Typically, this type of chargebacks are usually in favor of the customer.

Consumer Dispute: A consumer dispute chargeback happens when a customer contacts their bank or credit card issuer to request a chargeback, alleging that they didn’t receive the goods or services they paid for or that they didn’t match the description. In response, the merchant is usually required to provide evidence to support the transaction, such as proof of delivery or documentation proving that the product or service met the description. If the merchant fails to provide adequate evidence or if the chargeback is deemed valid, the transaction amount is refunded to the customer’s account.

Before we get into how does a chargeback work , it is important to understand the difference between a refund and chargeback. They are in fact poles apart! Refund is a conversation that takes place between the merchant and customer. But, in chargebacks, the merchant is completely left out of the conversation and the customer communicates directly with the card issuer. And that’s not all, there are monumental differences between a chargeback and refund.

How does a chargeback work?

Chargebacks often take months if not years to resolve. It is ardrous cycle that involves many partcipants to have back and forth on-time conversations to resolve the dispute. Typically, the process begins when a customer contacts their bank or credit card company to dispute a charge. Following an investigation, if the bank determines that the customer is entitled to a refund, they will initiate a chargeback to the merchant’s account.

Here is a detailed process of how a chargeback happens!

Step 1:

Cardholder sees the statement and bam! Doesn’t recognize a transaction or does and is not happy with it. So, they immediately raise a dispute that triggers that chargeback protocol. Now that the wheels are in motion, it is time for the investigative procedures to start

Step 2:

The issuer reviews the dispute and assigns a reason code to the dispute. These reason codes are 2–4 numeric characters that indicate the dispute type, and it varies from network to network.

Step 3:

Now the reason code has been assigned, the next step is placating the aggrieved customer. Here’s where a provisional credit comes in. This credit would serve as a placeholder until the issuer gets to the bottom of the chargeback claim. It can be a permanent credit or reversed based on the investigation result.

Step 4:

Just like the issuer acts in the interest of the customer, it is the acquirer who takes the merchant’s side. Here the acquirer can take two routes. One, where the acquirer on behalf of the merchant gathers the compelling evidence and sends it to the issuer. In the second route, the chargeback is directed to the merchant via the acquirer through an email intimation.

Step 5:

In this step, once the conversation is directed to the merchant, the onus is on them to fight the chargeback. So, they must gather documents such as bills, delivery recipts and such to put together a representment package that disproves the customer’s claim.

Step 6:

Once the package is ready, the communication happens in reverse and the issuer gets the rebuttal. After proper investigation of both parties, the chargeback decision is taken by the issuer.

By the way, did you know? That a customer can only raise 15 chargebacks during the lifetime of their credit card!

While this process looks to be clear and simple, it is not so. Chargeback processes and protocols have undergone a major transformation over the years. It has become a complex system that has evolved from over the table conversation into many stakeholders holding multiple checkpoints all over the graph.

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Backspace Tech

Backspace Tech offers Fintech-as-a-Service to automate,simplify, and disrupt the payment industry by handling chargeback requests through a plug-and-play model.