Chargebacks Explained – What is it and How Does it Work?

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A chargeback is the reversal of a payment that is derived straight from the bank when a customer successfully disputes an entry in their bank statement. Chargebacks symbolize a safety shield between the customer and fraudulent businesses. They were formed to support consumers to defend themselves from fraud.

While chargebacks may be frustrating for merchants, the intent behind this was to equally incentivize them to put fraud prevention in place and provide customers added control. The chargeback procedure is similar across most online merchants and issuing banks, with a few specific changes.

It works its way from the card-issuing bank through the card network (Master Card, Visa, etc.) and the business’s account. The company can dispute the claim, and if this dispute is found genuine, then there will be no chargeback. 


What is the Purpose of Chargebacks?

At the outset, chargebacks may seem very similar to traditional reimbursements. However, there is one very significant difference. A  customer requests the bank to pay back the money instead of interacting with the merchant for a refund in a chargeback. An inquiry follows, and if the bank identifies that the cardholder’s appeal is justified, funds are drawn from the merchant’s account and refunded to the consumer.

At the same time, customers are not obligated to return what they purchased. A chargeback is primarily oriented towards providing the cardholder’s safety. It does so in multiple ways:


1. The threat of a forced reversal of funds keeps merchants attentive to providing excellent customer service.

2. Chargebacks act as a warning to businesses that may be tempted to sell sub-standard products or services. Cardholders will claim the products or services that were not as defined, leading to a chargeback situation.

3. The threat of chargebacks forces businesses to stay transparent. Customers cannot be expected to pay for something they never received.


When Should You Ask for a Chargeback?

Several situations make it suitable for demanding a chargeback. Some of them are:

unapproved or fraudulent card charges


1. Fraudulent or unapproved charges on your card: 

If you do not identify a particular transaction or are sceptical, it was from fraud. 



undelivered parcels


2. Parcels that were never delivered:

You may get a notification that an item was delivered, but in fact, you never received it.



Broken or faulty items


3. Broken or faulty items:

If a product came opened, damaged, or had certain misplaced portions.



Inappropriate charges on your account


4. Inappropriate charges on your account: 

The cost of the piece bought was different than what you were actually charged. This situation occurs most frequently at local businesses that enter bills manually.



How Can a Merchant Prevent Chargebacks?

Businesses can work to mitigate the risk of chargebacks, both appropriate and illegitimate. Here are just a few ways they can do it:

  • If merchants confirm they are presenting prompt and focused customer service, offering excellent quality products and services, transparent transaction details, customers will not have a valid reason to file a chargeback.
  • Businesses can go the extra mile to inform customers about the cancellation and return policies. This will minimize the risk of a possible chargeback.
  • Collecting all the necessary information to confirm the legitimacy of each transaction will reduce the risk of chargebacks.
  • Shipping high-value orders with tracking numbers and delivery confirmation are proven to make the process easy for businesses.
  • Suppose the customer has difficulties with their purchase, delivery facilities, or payments. In that case, businesses need to ensure that they continuously stay in touch with their customers until the transaction is complete.
  • Businesses should keep customers on top of the repayment procedure if they are going through chargebacks and ensure that customer care makes it stress-free to resolve problems.


Tactful customer service can go a long way in dealing with a disagreement. Reaching out to the customer to resolve the problem by finding more evidence about the reason for a chargeback will prevent them from making claims from the business.

Businesses should not wait for fraud to escalate and become a huge problem. One of the best possible practices to minimize chargebacks is to partner with a recognized and popular payment processor. By stopping fraudulent payments, businesses can avoid future chargebacks.



A high rate of chargebacks harms the reputation of a business and leads to financial bans. To protect themselves, dealers must always be careful about reviewing their processes regularly. At the same time, it is also necessary to implement delivery of high-quality products and improve customer service as a company policy to avoid such situations. 


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