What Are Chargebacks & How Do They Affect Merchants?

How can a $50 sale become a $125 loss without anyone in the business realizing? In a word, chargebacks. When a customer disputes a transaction through their bank instead of requesting a refund, merchants don’t just lose the sale—they can lose the product, they pay processing fees, and they absorb penalties, all of which can add up to 2.5 times the value of the original sale.

What’s worse, for many businesses, the first sign of a chargeback is money missing from the merchant account at their bank or payment processor. There’s no heads-up from the customer, so there’s no chance to resolve the issue directly. The bank has already sided with the cardholder, and the merchant may have as few as 20 days, or as many as 45, to prove the charge was legitimate or accept the loss.

What Is a Chargeback?

A chargeback occurs when a customer disputes a transaction on their credit or debit card statement and the funds are returned to their account. Chargebacks were designed to protect consumers from fraud and unscrupulous merchants and can be initiated for several reasons, including billing and processing errors, along with dissatisfaction with products or services.

Unlike a refund, which occurs directly between a customer and a merchant, a chargeback is initiated by the customer through their card issuer—usually a bank or credit card company—with the aim of forcing funds back into their account. Another distinction between chargebacks and refunds is that chargebacks are governed by regulations, such as the Truth in Lending Act for credit cards and the Electronic Fund Transfer Act for debit cards. In addition to refunding the total cost of a customer’s purchase, merchants may be forced to pay processing fees, network costs, and additional penalties by their payment processor.

Chargebacks are especially prevalent in subscription-based industries like media and entertainment, online gaming, and software services, though they are a growing issue across sectors. For example, retail and travel companies face rising chargeback rates as their customers increasingly purchase goods and trips through digital channels, which raises the likelihood of fraud and merchant error.

Key Takeaways

• Chargebacks occur when a credit or debit cardholder disputes a transaction on their account statement, forcing a merchant to refund the sale amount.
• Common reasons for chargebacks include fraud, cardholder confusion, and merchant processing errors.
• Strategies to reduce the risk of chargebacks include accurate recordkeeping, customer-service team training, and using technology to manage billing and avoid human error.

Chargebacks Explained

The chargeback process begins when a cardholder notices a transaction they want to dispute. They contact the bank that issued their credit card, initiating a claim with institutions such as Chase, Capital One, or Bank of America. Upon review, if the claim appears valid, that bank pulls the transaction amount from the merchant’s acquiring bank (the bank that processes payments for the merchant). Only then does the merchant receive notice that a chargeback has been filed, along with a deadline to respond.

At this point, the merchant must choose to accept or dispute the chargeback. Accepting means absorbing the loss: the transaction amount, any fees, and potentially the merchandise. This reduces the company’s accounts receivable because money the business expected to collect must now be written off. If the merchant chooses to dispute the chargeback, a new process called “representment” initiates. In representment, the merchant must gather evidence such as signed receipts, proof of delivery, customer communications, then submit that evidence to the acquiring bank, which reviews the package before forwarding it to the card issuer for a final decision.

If the issuer rules in the merchant’s favor, the funds are returned. If not, or if either party disagrees with the outcome, the case can escalate to arbitration, adding more time, complexity, and cost.

Time frames for filing chargebacks and the merchant’s response deadline vary by card network. Cardholders typically have 60 to 120 days to file a dispute. (PayPal allows 180 days.) Merchants usually have only 20 to 45 days to respond—and that clock starts when the chargeback is filed, not when the merchant is notified.

The Chargeback Process

Common Reasons for Chargebacks

Some reasons for chargebacks are not necessarily within a merchant’s control, such as fraud. Others, such as double-charging and incomplete service delivery, are operational issues that merchants can work to prevent. No matter the cause, the outcome is the same: a payment dispute that can cause financial, legal, and reputational damage for merchants. The following are four of the most common reasons customers might initiate a chargeback:

1. Fraud: Fraud occurs when an individual who is not authorized to use a credit or debit card makes a purchase using the legitimate cardholder’s payment information. After noticing the charge on their statement, the cardholder sends a chargeback request to their issuing bank, which, in turn, sets the chargeback process in motion. Merchants have little recourse in cases of actual fraud and will generally be forced to refund the sale amount plus penalties without recovering their goods.
2. Cardholder confusion (“friendly fraud”): Cardholder confusion is often called friendly fraud because a customer disputes a legitimate charge they believe is fraudulent. This might happen when customers forget they made a transaction or don’t recognize it. Friendly fraud is more likely in households where multiple people use the same card without keeping track of each other’s purchases. According to LexisNexis, first-party fraud—the category that includes friendly fraud—increased from 15% of all fraud reported by clients of the firm’s Digital Identity Network in 2023 to 36% in 2024 and continues to grow.
3. Service disruption or nondelivery: These chargebacks happen when a merchant fails to ship an order, the order does not arrive at its intended destination, or the product arrives faulty or different from what was advertised. If the merchant doesn’t resolve the issue, a customer may file a chargeback to retrieve their funds. The solution, of course, is for merchants to deliver a high standard of product quality and customer service.
4. Processing issues: Payment processing issues might include a cardholder being charged twice for the same purchase, being charged the wrong amount, or a merchant treating a product return as a sale instead of a credit. Processing issues may be unintentional but can still result in chargebacks.

How Do Chargebacks Affect Businesses?

Chargebacks can add up quickly and eat into a business’s revenue, profits, and reputation. Moreover, repeated chargebacks can put merchants at risk of losing relationships with credit and debit card issuers, compromising their ability to operate. Below are four serious implications of chargebacks for businesses:

• Lost revenue: The additional fees and penalties businesses must pay to cover chargeback claims can snowball quickly. According to Ethoca by MasterCard, chargeback fraud cost US merchants $11 billion in 2023 and is estimated to grow to $15.3 billion in 2026. In addition to cutting profits, these losses can complicate revenue management for the business, making it difficult to optimize pricing strategies and maximize the value of what they have to sell.
• Cash flow challenges: Chargebacks can negatively affect a company’s cash flow by voiding sales and forcing the business to pay additional costs, such as the operational cost of managing disputes and penalties levied by card issuers. This financial strain is especially challenging for small merchants and subscription-based businesses like internet service providers, which need enough cash flow to cover expenses and reinvest in growth. According to the US Chamber of Commerce, 50% of new businesses fail within their first five years, and cash flow problems are among the leading causes.
• Additional costs: The cost of chargebacks for merchants includes both direct and hidden components. Direct costs might include lost merchandise, chargeback fees, and operating costs to handle dispute management. Other direct costs might include higher transaction fees for businesses that are deemed “at risk” by payment processors, and, in the worst case, account termination for merchants that receive an unacceptable volume of chargebacks. The hidden costs of chargebacks include customer loss and reputation damage, as well as the time and opportunity cost associated with spending hours managing disputes instead of focusing on sales and business growth.
• Potential for legal scrutiny: If a merchant’s chargeback rate exceeds a payment processor’s threshold—which is generally 1% or less of transactions—they may be forced to pay excessive fines. If the business cannot reduce its chargeback rate, the processor may terminate the account. Merchants that have had their accounts terminated are placed on the Member Alert to Control High-Risk Merchants (MATCH) list, which means they will be unable to secure a standard account with a payment processor or acquiring bank for five years.

How to Minimize Customer Chargebacks

Preventing transaction disputes is in the best interest of merchants, card issuers, and banks. While the chargeback process is simple for consumers, the implications for merchants and card issuers are complex and costly. These six strategies can help businesses gain more control over their operations and minimize customer chargebacks:

1. Pinpoint your potential chargeback triggers: Chargeback prevention starts with identifying and understanding the triggers that cause card payment disputes. To start, merchants can analyze the reason codes that card issuers use to categorize common payment issues. Combining this data with an overall analysis of their transaction and customer history can help businesses zero in on the reasons for their chargeback challenges, be it fraud, friendly fraud, or payment processing errors.
2. Always provide merchant contact information: It may seem obvious, but accurate contact information can be the difference between a manageable customer dispute and a costly chargeback. Merchants should provide their legal business name, telephone number, and other contact details on their receipts and customers’ credit or debit card statements.
3. Make sure your billing descriptor is accurate: A billing descriptor is a short explanation that appears on customers’ credit or debit card statements describing what they purchased. When a billing descriptor is unclear, customers may not recognize the transaction and initiate a chargeback. To avoid this, businesses should keep their billing descriptors simple and to the point. It is also good practice to test descriptors across different card types and issuers.
4. Be clear about your cancellation policy: To avoid surprises for customers, businesses should be clear about their return, refund, and order-cancellation policies at the time of payment. For added insurance, these policies can be integrated into sales receipt templates and presented to customers in an electronic agreement as part of their online purchasing journey.
5. Train your customer service teams: At least one survey found that more than three-quarters of customers filed a chargeback out of convenience. Because chargebacks often occur due to issues that could have been solved by a customer service agent before getting out of hand, businesses can reduce their risk of chargebacks by making it easier for customers to resolve issues directly. In addition to training teams to handle common customer issues, businesses should make it easy for customers to contact them and incentivize service teams to treat their requests quickly, before the customer loses patience and escalates the dispute.
6. Minimize double payments at point of sale: Billing errors are likely to be noticed by customers and disputed. Whether a merchant bills too much or double charges its customers, these errors can be costly. If a customer’s card is declined at the point of sale, or if a transaction doesn’t go through, the merchant should request an alternative form of payment instead of trying to get authorization again. Businesses should also reconcile their accounts at frequent intervals to catch billing errors that slip through the cracks and rectify them proactively, informing customers of what has happened and how they have resolved the issue.

Accounting for Chargebacks

Proper chargeback accounting requires distinguishing among three separate considerations: the reversal of the original sale, any fees imposed by payment processors, and a potential impact on inventory.

In accounting terms, the chargeback amount itself is not, technically, an expense—it’s a reduction of revenue. Most businesses record this in a contra-revenue account called “Sales Returns and Allowances” or “Chargebacks,” which provides visibility into chargeback trends while maintaining a clear record of gross sales. The fees assessed by processors are legitimate business expenses and recorded separately in an account, such as “Chargeback Fees” or “Bank Fees.” Misclassifying the revenue reversal as an expense would distort a business’s gross profit calculations and financial analysis.

For businesses selling physical goods, accounting treatment for inventory depends on whether merchandise is returned. If goods come back in salable condition, the business restores them to inventory at their appropriate value. If the customer keeps the merchandise, no inventory adjustment is needed—the cost of goods sold remains on the business’s books and the loss is reflected in the revenue reversal.

How Do You Record a Chargeback?

To illustrate how chargebacks are recorded in a company’s books, let’s consider the following hypothetical scenario and the journal entries it requires. ABC Company sold merchandise for $500 on credit. The cost of goods sold (COGS) was $300. The customer later disputed the charge, resulting in a $500 chargeback plus a $25 processing fee. The customer did not return the merchandise.

The impact of this chargeback on ABC’s books is a reduction in net income of $325 (product costs and chargeback fee). Because a successful sale would have added $200 in profit ($500 – $300), the chargeback results in a net negative economic impact to the business of $525 ($325 + $200).

It’s important to record chargebacks promptly upon notification, use consistent account classifications, and reconcile regularly against the payment processor’s statements. Merchants with frequent chargebacks usually establish an allowance for anticipated chargebacks to help match revenues and expenses properly.

Manage Customer Chargebacks With NetSuite

Managing chargebacks requires accurate records and fast access to transaction details. NetSuite Cloud Accounting gives finance teams real-time visibility into sales, returns, and customer accounts—making it easier to track chargeback trends, record reversals in the proper contra-revenue accounts, and pull the documentation needed to dispute claims. Plus, NetSuite’s automated workflows reduce the manual errors that can lead to billing disputes in the first place.

For businesses whose invoicing complexity contributes to customer confusion, NetSuite SuiteBilling provides accurate, consistent invoices with clear descriptions, curtailing the “I don't recognize this charge” disputes that drive friendly fraud.

As customers gravitate toward digital shopping channels and raise their expectations for quick, convenient, and accurate purchasing experiences, the threat of chargebacks grows. By putting the right strategies, technologies, and skills in place, companies can reduce their risk of payment fraud and internal human error, driving down their chargeback rate and positioning themselves to build stronger, longer-lasting customer relationships.

Chargebacks FAQs

Is a chargeback the same as a dispute?

No. A dispute refers to a customer’s initial complaint about a transaction on their bank or credit card account. A chargeback refers to the next step in the process, in which a merchant is forced to return the transaction amount back into the customers’ account.

What is the most common chargeback type?

The most common type of chargeback is cardholder confusion, also known as friendly fraud. This occurs when a credit or debit cardholder disputes a valid charge on their account statement because they don’t recognize the transaction. Cardholder confusion can also manifest in a more nefarious way: when legitimate cardholders use this mechanism to obtain a refund because they don’t meet the conditions of a merchant’s return policy.

What happens if a merchant contests a chargeback?

The formal process for contesting a chargeback is called representment. It requires merchants to submit evidence proving that the charge in question was valid, such as proof of delivery, transaction data, or other relevant documentation. Once the cardholder’s bank receives these documents, it decides whether to reverse or uphold the chargeback. If the dispute cannot be resolved at this stage, it might be escalated to an arbitration process.