Chargebacks and Merchants’ Business Operations

Business owners want to ensure smooth business operations while recording high conversion rates and low expenses. 

Receiving too many refund or chargeback requests is the fly in the ointment regarding such plans. 

We’ve done some updated research on chargebacks, so here’s our new blog post. When you read this, you’ll know much more about chargebacks, when they’re filed, and how to control their numbers and rates. 

Chargebacks Explained

Let’s start with a clear definition of chargeback – it’s a complaint that a consumer files against a merchant to the issuing bank (the bank that issued the consumer’s payment card). The subject of such a demand is requesting the reversal of a certain payment. 

The chargeback-resolving procedure includes the consumer, the issuing bank, and the merchant. We’ll explain below how chargebacks are different from refunds. 

If we start with the premise that the customer is always right, you might wonder what’s the big deal about chargebacks. We’ll cover in detail why chargebacks are problematic for merchants and issuing banks. For now, let’s just say that reversed payments incur additional costs for issuing banks, and affect merchants’ revenue. Merchants with a high chargeback rate face high processing rates or issues with opening a merchant account. 

The Three Kinds of Chargebacks

Based on the plaintiff’s intention behind a chargeback, we can divide them roughly into three main groups:

Friendly Fraud

A chargeback request is considered friendly fraud when a cardholder makes an intentional purchase with their credit card and then submits a chargeback. In this kind of “fraud”, the consumer has authorized the transfer, so there’s no actual fraud. There are two main reasons behind friendly fraud. On the one hand, the chargeback request can be honest, meaning that the consumer doesn’t remember the purchase and payment. On the other hand, it can be deliberate, meaning that the cardholder wishes to get their money back but keep the bought service or product. 

TPP Intel: Find out minute details about friendly fraud in our blog post How to Protect Merchants from Friendly Fraud. ThePayPortal offers various fraud-minimizing and chargeback-detecting options for merchants to reduce costs originating from such occurrences. 

True Fraud

True or criminal fraud is a kind of scam that includes a consumer who makes an online purchase using someone else’s credit card. In this instance, the bank card is genuine, but the consumer is not. Merchants typically can’t dispute chargebacks deriving from criminal fraud. 

Merchant Error Chargeback

When a merchant makes a mistake when charging the consumer’s bank card, and the consumer requests a payback, we have a merchant error chargeback. How does this happen? For instance, the merchant might ship the wrong product to the consumer or carry out an unauthorized payment (like withdrawing funds for a subscription that has expired). Also, the consumer might authorize the payment in question but the merchant withdraws the wrong amount of money. 

How Does the Chargeback Process Work

The chargeback process consists of the following stages: 

  1. The consumer detects a payment issue, informs the merchant, and requests a refund. 
  2. The merchant declines the refund request. 
  3. The consumer files an official chargeback at their issuing bank. 
  4. The bank specifies the reason for the chargeback. 
  5. The problematic payment is then analyzed by the reviewing body (typically the issuing bank). The money is forwarded from the merchant’s bank account to the consumer’s card if the filed complaint fulfills the chargeback criteria. 
  6. The payment service provider (PSP) in charge of the merchant’s payment processing procedures notifies the merchant of the reversed payment. 
  7. The merchant’s bank (payment acquirer) inspects the payment and scrutinizes the data obtained from the card issuer. If it’s clear that the consumer is right, the acquirer sends the chargeback to the merchant. 
  8. If the merchant submits relevant documentation to prove that the chargeback isn’t legitimate, the issuing bank can reinspect the payment. 
  9. As the issuer, i.e., the issuing bank, additionally goes through the provided proof, they bring the decision. If they take into account the merchant’s evidence, the assets are then sent from the consumer’s account to the merchant’s account. In the case the chargeback request is approved, the money remains in the consumer’s bank account. 

TPP Intel: Regardless of the outcome, the merchant always pays the chargeback expenses and fees. 

Chargeback Fees and Costs

The issue of chargebacks is tricky because a merchant has to pay special fees for every chargeback submitted against them. Even if they prove that the request wasn’t justified, they still need to pay a chargeback fee. The cost a merchant has to bay per chargeback submitted against them typically varies from $20 to $100, in accordance with the type of transaction. 

For instance, when a merchant faces a friendly-fraud chargeback request, they can lose both the product and money. 

Also, if the merchant’s chargeback rate goes beyond 1%, the credit card association could impose higher fees for the business in question. 

Chargeback and Refunds – Similarities and Differences

A refund is the money a merchant pays out to a customer who isn’t satisfied with the service or product in question. It happens on a lower financial and legal level and is settled between a merchant and a consumer. The merchant accepts the refund request and pays the money out to the consumer’s bank account. 

If a merchant refuses to accept the refund request, the consumer then usually takes one step up and hands in an official chargeback. This is a more complex and longer procedure that includes the consumer, merchant, and the issuing bank. 

TPP Intel: The chargeback procedure could last from 30 to 90 days, depending on the card company in question. On average, most chargeback requests are sorted out within 30-45 days. Also, it’s good to know that the Mastercard and Visa payment rulebooks allow customers to submit a chargeback within 120 days from the purchase date. 

Merchants who want to keep their reputation neat and the chargeback rate low avoid letting consumers into the chargeback stage. 

Cutting the Chargeback Rates

Here are some practical measures for avoiding excessive chargebacks and staying within the boundaries of acceptable chargeback rates:

  • Reasonable refund policy. Merchants that bring a reasonable and consumer-centric refund policy typically experience fewer chargeback requests. Even if you sometimes don’t feel a refund is justified, remember that going through a chargeback course of action will probably have the same outcome; the additional negative point is that you’d end up with a worse chargeback ratio. 
  • Impeccable products and services. More chargeback demands come from dissatisfied consumers whose expectations haven’t been met. Offering impeccable products and properly specified services reduces the risk of disappointing your consumers. Moreover, it’s a vital step in reducing refund requests, which is a crucial step in establishing healthy business operations. 
  • Boosted payment security. Merchants and their payment processors must work together to implement the optimal payment security features for their respective needs. From the CVV and CID numbers on the credit card to several authentication factors: the more security layers there are, the lower is the threat of fraud. Still, don’t harm the smooth user experience at the checkout by overburdening it with too many elements.  
  • Checkout consumer registration. It’s easier to monitor the payment process for each customer if you ask them to register and log in to your commercial website. 
  • Applied address verification. Fraudsters often use false identities – fake addresses included – to damage merchants. Merchants can prevent this by applying the address verification system, which verifies that the consumer’s credit card address and their billing address overlap.
  • Simplified cancellation. It might come as a surprise that subscription-based businesses are considered high-risk merchants. The reason behind this classification is the potentially high chargeback rate, due to subscription cancellations. Consumers commonly forget to cancel their subscriptions and merchants withdraw the funds from their accounts. Then the customer requests a refund or goes all the way to delivering a chargeback request. The best panacea for this issue: simplify the cancellation policy, plus, always remind the subscriber about the forthcoming payment, so they can cancel the subscription before the withdrawal date. 
  • Analyze your business data. A merchant that faces increased chargebacks should analyze the business and payment data on their website, contact section, and payment forms. It might happen you’ve entered certain information that raises suspicion among your consumers. As they check out their bank statements, they might not realize it’s your business that has charged them. 
  • Outstanding support center. If a troubled consumer gets a chance to talk to someone in front of your brand as soon as possible, you could control the damage and avoid the chargeback. Therefore, form an outstanding customer support center to stand out from your rivals and meet your consumers’ expectations. 
  • Hire a reputable delivery service. Merchants that sell tangible goods often receive many refund and/or chargeback requests due to poor delivery services. Hence, if you already have the impeccable products, as suggested above, and a cutting-edge e-store, leave nothing to chance and work with a reputable delivery provider. 


Every merchant is aiming at high revenue and low costs, while keeping their business operations simple. When excessive chargeback requests are added into this formula, the expenses go up, the reputation plummets, and things get complicated. Apply the tips shared above to limit your chargebacks to a reasonable level and feel free to talk to us on everything pertaining to merchant accounts, payment risk mitigation, and other related topics.