Chargeback 101: Credit Card Chargebacks Explained

Disputes with customers are no fun. This is especially true when it comes to chargebacks. Below, we’ll walk through the basics of the chargebacks process, what usually causes them, and the steps you can take to prevent chargebacks from happening.

In this article:

What Is a Chargeback?

A chargeback happens when a customer disputes a charge from your business and asks the card issuer to reverse it. Credit card chargebacks are meant to protect consumers from unauthorized transactions but they can mean big headaches for businesses.
When a chargeback happens, the disputed funds are held from the business until the card issuer works things out and decides what to do. Unfortunately, this can be a complicated and time-consuming process involving a lot of paperwork and documentation.

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Does Square Have Chargeback Fees?

No, Square doesn’t charge a fee for chargebacks. However if a payment dispute is resolved in your customer’s favour, we retain the normal 2.65% processing fee.

Most other major payment processors on the other hand, charge a non-refundable fee ranging from $10 to $25 the moment a customer initiates the chargeback, regardless of outcome. This is usually on top of the standard payment processing fees. Square is one of the only major payment providers that doesn’t charge chargeback fees.

The Chargeback Process Explained

Generally speaking, the chargeback process can differ between payment processors and it traditionally takes between 60–90 days to resolve. Here at Square we use our proprietary machine learning models to predict, and stop, many fraudulent transactions before they happen. We also keep you informed of the status of your chargeback via convenient in-app alerts in your Square Dashboard.

For educational purposes, here is an overview of the general chargeback process with most major processors:

Step 1: A purchase occurs – All chargebacks start with a customer making a purchase, either in-person, in-app, or online.

Step 2: Customer initiates the chargeback – After the customer reviews their credit card statement at the end of the month, they may notice a charge they didn’t authorize. The customer then contacts their credit card company (known as the issuing bank) asking to investigate the charge in question

Step 3: Issuing bank reaches out to the merchant’s bank – Once a customer initiates the chargeback process, the customer’s bank will reach out to the merchant’s bank asking them to provide proof that the customer purchased goods or services. This can include things like: invoices, receipts, proof of delivery—or anything else the merchant has to prove that the purchase was valid.

Step 4: Decision time – After reviewing all the proof provided by the merchant’s bank, the cardholder’s bank must decide whether or not the purchase was actually valid.

Step 5: Customer is informed – At this point, the customer must accept the proof provided by the acquiring bank and either pay for the goods, or continue to dispute the purchase and begin a process known as arbitration. If the acquiring bank determines the purchase was not valid, then the cardholder (customer) will receive a refund for the transaction.

Step 6: Arbitration – If the issuing bank and merchant bank fail to come to an agreement, as a last resort they’ll enter what’s called the arbitration process. The arbitration process is governed by the issuing credit card company, and their decision is absolutely final. The credit card company (Visa, Mastercard, etc.) will review the proof provided by the parties and will have the last word on who must pay for the charges. If a merchant loses the arbitration process, they may choose to seek recourse and repayment in a court of law, at their own expense.

Credit Card Chargebacks: Some Common Causes

Here are some of the most common chargeback culprits:

1) Fraudulent transactions

If someone sees a charge from your business but never bought anything from you, it could mean that there’s fraud at play. This will likely instigate a chargeback. To protect your business from this type of chargeback, it’s a good idea to have a point of sale (POS) that can accept chip cards and contactless payments like Apple Pay, which are the most secure ways to pay.

2) Shipping problems

If a customer never received an item in the mail, that could land you a chargeback. To prevent this situation, make sure you have a streamlined shipping system in place with tracking numbers at the ready.

3) Technical problems

If your website isn’t working properly, or customers fumbled something in the checkout process (user error), they may have been accidentally charged for something they didn’t intend to buy. Be sure to integrate a reputable POS and e-commerce system that has an easy-to-navigate checkout process.

4) Credit not processed

Another common reason for chargebacks is a mishap (or confusion) during the return or credit process. That is, customers return something expecting a refund and don’t see that credit in their bank account right away. To help avoid this, make sure you have a reliable system in place for handling returns and credits. Also make a point to clearly state your returns or cancellation policy to customers when they’re buying or returning something. That way everyone is on the same page.

5) Problems with items

Sometimes customers issue a chargeback if they’re dissatisfied with a product or service for one reason or another. Chargebacks for professional services can be the most difficult to arbitrate for this reason, as the quality of a service is widely subjective. The solution to this one is simple: Run a great business that prioritizes quality and customer experience.

6) Unrecognizable business name

One of the most common reasons for chargebacks is billing clients with an unrecognizable business name. Let’s say your business sells coffee and bagels. Your shop is called “Vancouver Cake Shop,” but your business’ name is registered as V.C.S. Enterprises. When customers see a mysterious charge by V.C.S Enterprises, customers may unintentionally initiate a chargeback for what they believe was a fraudulent purchase. Avoid customer confusion by having clear, consistent branding.

7) Customer saw a similar product for cheaper elsewhere

Some chargebacks occur well after purchase, when the customer sees a similar or identical product at a more affordable price elsewhere. To avoid this kind of chargeback, consider offering a “grace period” or price adjustments if you frequently sell brand name retail goods.

If you sell with Square and are dealing with a chargeback, we’re here to help. All you have to do is provide us with some basic information regarding the payment in question, so we can fight the dispute on your behalf.

8) Duplicate charges

Duplicate charges occur when customers believe their card has been charged twice for a single transaction. If it’s a mistake on their part, reach out to the customer with proof and ask them to call their bank to drop the chargeback. If it was a billing error on your part, you’ll need to accept the chargeback.

9) Failure to cancel subscription
Recurring payments for subscriptions are convenient for customers and provide businesses with a consistent revenue stream, but they can also create a risk for chargebacks. To prevent recurring billing chargebacks, start by ensuring that customers understand your recurring transaction agreement (RTA), and explain the billing frequency and date, the set payment amount, refund and cancellation policies, and any trial or promotional periods included with the subscription.

A few other steps to take to help you avoid chargebacks include:

  • Obtain consent from a customer to start billing — for example, by having them check a box to ensure they understand your RTA.
  • Cancellation should be simple and straightforward for customers.
  • Customer service should be easy to reach and readily available to provide answers for customers’ questions.
  • Communicate each recurring transaction with a quick acknowledgement, so customers know what the charge is for. This could be sending an email to alert subscribers of a billing before a recurring charge, and/or a receipt when the transaction goes through.

If you sell with Square and are dealing with a chargeback, we’re here to help. All you have to do is provide us with some basic information regarding the payment in question, so we can fight the dispute on your behalf.

How to Prevent Chargebacks

Although there’s no guaranteed way to prevent chargebacks, merchants can take some steps to prevent some kinds of chargebacks from happening. This includes:

  • If possible, always try to obtain a customer signature for in-person purchases.
    Require a valid government-issued IDs before every credit card purchase, and keep proof of all credit card orders.
  • Have a clear, easy-to-understand return policy.
  • Have a recognizable business name on credit card statements.
  • Use a delivery service that requires signature upon arrival.
  • Train employees on best practices for card-present and card-not-present transactions.
  • If you’re taking online orders, be sure to use a payment gateway or online payment processor that verifies the AVS on file for the card being used.
  • Accurately describe items. Customers who receive items that are not as described have valid grounds for a chargeback.
  • Responding to customer service issues promptly and courteously.
  • If you plan to initiate a series of recurring payments, be sure to obtain a signed credit card authorization form

Remember: If you do get hit with a chargeback, it’s important to respond to your bank or payment processor promptly. Many banks will simply process the chargeback for the customer if a merchant does not respond in the allotted time.

Square Protects Sellers from Chargeback Fraud

What is Chargeback Fraud?

Chargeback fraud, also known as “friendly fraud”, occurs when a customer receives the item or goods promised, then files a claim with their issuing bank claiming the goods were never received. Although merchants can normally protect themselves from chargeback fraud by keeping exhaustive delivery records, fighting chargeback fraud can be a time consuming and tedious process. According to The Nilson Report, global card fraud losses are on the rise—from 2016 to 2025, they are projected to nearly double, climbing from $22.8 billion to nearly $50 billion.

If you sell with Square and are dealing with a chargeback, we’re here to help. All you have to do is provide us with some basic information regarding the payment in question, so we can fight the dispute on your behalf.

FAQ:

What’s the difference between chargebacks vs. refunds?

A refund is a transaction initiated by the merchant, repaying a customer who is dissatisfied with the goods or service purchased. A chargeback is a dispute initiated by a customer, usually for a fraudulent transaction. In a chargeback, the transaction is reversed and funds are returned to the customer by the merchant’s bank.

How will I know if a customer has filed a chargeback?

In the event of a chargeback, you will be alerted with a notification in your Square Dashboard and via email.

What is a chargeback fee or chargeback settlement fee?

A chargeback fee, or chargeback settlement fee, is an additional fee your credit card processing company may charge you in addition to the reversed funds, if they find you at-fault for a chargeback. Many payment processing companies may disallow you from accepting credit cards entirely if you have an unusual amount of chargebacks on your account.

Is there a chargeback time limit?

Most acquiring banks put a timeframe on when customers can initiate a chargeback for a purchase. This ranges anywhere from roughly 60 to 90 days after purchase. Chargeback time limits vary widely depending on the issuing bank, and the chargeback code or reason. Check with the issuing banks to determine what time limits may apply to you.

How do I write a chargeback rebuttal letter?

If you’re a merchant who’s been charged with a fraudulent chargeback, you may want to start the chargeback representment process. In addition to providing proof of purchase and goods delivered to the customer specified, you’ll also need to write a chargeback rebuttal letter to the acquiring bank. Before starting your letter, be sure to look up the chargeback reason code (listed below), and provide compelling proof of purchase.

In your chargeback rebuttal letter, you may want to include:

  • Receipts or invoices
  • Proof of delivery confirmation, particularly with signature
  • Proof that the item was acceptable (the customer used the item, didn’t complain upon delivery, etc.)
  • The correct recording and delivery of the customer’s CVC or AVS

The good news is, if you sell with Square, you never need to worry about writing chargeback rebuttal letters, but we do ask our sellers to address their customer’s claim promptly in the Information Request Form that we email for every dispute. We then use that information to formulate a compelling rebuttal letter on your behalf. With Square, sellers can rest easy about frivolous chargebacks and time consuming paperwork.

Chargeback Reason Codes

Chargeback Reason Codes List for American Express Chargeback Code Authorization Errors A01 Charge Amount Exceeds Authorization Amount A02 No Valid Authorization A08 Authorization Approval Expired Chargeback Code Type: Fraud F10* Missing Imprint F14* Missing Signature F22 Expired or Not Yet Valid Card F24* No Card Member Authorization F29 Card Not Present Chargeback Code Type: Card Member Dispute C02 Credit (or Partial Credit) Not Processed C04 Goods/Services Returned or Refused C05 Goods/Services Cancelled C08 Goods/Services Not Received C14 Paid by Other Means C18 “No Show” or CARDeposit Cancelled C28 Cancelled Recurring Billing C31 Goods/Services Not as Described C32 Goods/Services Damaged or Defective M10 Vehicle Rental – Capital Damages M49 Vehicle Rental – Theft or Loss of Use Chargeback Code Type: Processing Error P01 Unassigned Card Number P03 Credit Processed as Charge P04 Charge Processed as Credit P05 Incorrect Charge Amount P07 Late Submission P08 Duplicate Charge P22 Nonmatching Card Number P23 Currency Discrepancy Chargeback Code Type: Inquiry Related Chargeback R03* Insufficient Reply R13* No Reply M01* Chargeback Authorization Code Type: Chargeback Programs FR2 Fraud Full Recourse Program FR4 Immediate Chargeback Program FR6 Partial Immediate Chargeback Program

*These American Express chargeback codes require an inquiry first.

Retrieved on 5/26/2016 from AmericanExpress.</sub>

Chargeback Reason Codes List for Visa Chargeback Code Chargeback Reason 30 Services Not Provided or Merchandise Not Received 41 Cancelled Recurring Transaction 53 Not as Described or Defective Merchandise 57 Fraudulent Multiple Transactions 62 Counterfeit Transaction 71 Declined Authorization 72 No Authorization 73 Expired Card 74 Late Presentment 75 Transaction Not Recognized 76 Incorrect Currency or Transaction Code or DomesticTransaction Processing Violation 77 Non-Matching Account Number 80 Incorrect Transaction Amount or Account Number 81 Fraud—Card-Present Environment 82 Duplicate Processing 83 Fraud—Card-Absent Environment 85 Credit Not Processed 86 Paid by Other Means

Visa chargeback reason codes retrieved from Visa.com on 5/26/2016.</sub>

Detailed Chargebacks Reason Codes List for Mastercard

Mastercard chargeback codes fall into four categories:

  • Authorization
  • Cardholder disputes
  • Fraud
  • Point-of-interaction error
Chargeback Reason Codes List for Mastercard Chargeback Code Chargeback Reason 4801 Requested Transaction Data Not Received 4802 Requested / Required Information Illegible or Missing 4807 Warning Bulletin File 4808 Requested / Required Authorization Not Obtained 4812 Account Number Not on File 4831 Transaction Amount Differs 4834 Duplicate Processing 4835 Card Not Valid or Expired 4837 No Cardholder Authorization 4840 Fraudulent Processing of Transaction 4841 Canceled Recurring Transaction 4842 Late Presentment 4846 Correct Transaction Currency Code Not Provided 4847 Requested / Required Authorization Not Obtained and Fraudulent Transaction 4849 Questionable Merchant Activity 4850 Credit Posted as Purchase 4853 Cardholder Dispute – Defective / Not As Described 4854 Cardholder Dispute – Not Elsewhere Classified (U.S. Region Only) 4855 Non-receipt of Merchandise 4857 Card-Activated Telephone Transaction 4859 Services Not Rendered 4860 Credit Not Processed 4862 Counterfeit Transaction Magnetic Stripe POS Fraud 4863 Cardholder Does Not Recognize – Potential Fraud 4870 Chip Liability Shift 4871 Chip / PIN Liability Shift

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