How to Handle Credit Card Chargebacks: A Guide for Small Businesses

A chargeback is a dispute of charges filed by a customer and their credit card company or bank. It’s an obstacle that can challenge a merchant’s customer relationships and their accounting process, sometimes resulting in fees or loss of income. Unfortunately, many merchants will have to deal with a chargeback claim at some point. 

Receiving payments electronically is a way of life for most businesses. Here, we’ll explain what chargebacks are, why they occur and how you can handle them effectively. Read on for an in-depth look at chargebacks, or use the links below to skip ahead to the section that best fits your query:

• What is a chargeback?
• Chargeback vs refund
• How do chargebacks benefit consumers?
• How can chargebacks affect merchants?
• Why do chargebacks happen?
• How to prepare for a chargeback claim
• Tips on avoiding potential credit card fraud
• Final notes

Key takeaways

• A credit card chargeback happens when a customer asks their bank or credit card company to reverse a payment, often due to fraud, error, or dissatisfaction.
• Chargebacks vs refunds: refunds are handled directly by the merchant, while chargebacks are started by the bank and may incur fees.
• Chargebacks can cost time and money. You can even risk losing your merchant account if your business has high rates of chargebacks.
• Prevent chargebacks by keeping records, communicating clearly, using transaction descriptions, and securing online payments.
• Be prepared with receipts, contracts, and order forms so you can respond quickly if a dispute occurs.

What is a chargeback?

A chargeback happens when a customer contacts their credit card issuer or bank to dispute charges they’ve incurred after shopping with a particular merchant. The process can be lengthy and usually involves a few steps:

• Charge disputes are usually filed if the customer believes they have encountered fraud or merchant error. 
• The bank/issuer provides a temporary credit to the customer and charges the amount back to the merchant.
• Once the business is notified, they’ll have the opportunity to respond to the credit card company or bank. 
• The merchant can accept the chargeback or appeal it by providing evidence.
• Even with valid documentation, disputes may still be prolonged or dismissed.

Since fraud is one of the most common triggers for credit card chargebacks, it’s worth understanding how to prevent fraud in your business. Taking proactive steps to protect against fraudulent transactions not only reduces disputes but also keeps your accounting cycle running smoothly if a claim does move forward.

The difference between chargebacks vs refunds

Although they both result in money being returned to a customer, a chargeback and a refund are not the same thing. Here are the key differences:

How do chargebacks benefit consumers?

Because chargebacks were designed as a method of consumer protection, they offer several benefits to consumers that use credit cards:

Peace of mind

Chargebacks give consumers peace of mind because they know that if they encounter fraud or merchant error, they won’t be responsible for taking on the burden of these costs. Knowing that they can buy from a merchant without having to worry about these threats allows consumers to shop comfortably.

Protection against criminal fraud

If a criminal gets hold of a cardholder’s information, chargebacks offer protection against fraudulent transactions that may occur as a result.

How can chargebacks affect merchants?

While chargebacks offer consumers a great deal of protection and peace of mind, they can have adverse effects on merchants.

Chargeback fees

Chargeback fees are implemented when a merchant accepts a chargeback claim or a card issuer determines that the merchant is at fault. A chargeback fee is imposed by banks in an effort to recover incurred costs while handling consumer chargebacks and disputes associated with your account. Chargeback fees tend to range from $20 to $100 and are usually categorised as operational expenses.

Loss of revenue

When merchants receive a chargeback, they’re not only held responsible for associated chargeback fees, but they’re also responsible for the lost revenue and merchandise. As you can imagine, this can be extremely damaging to your business over time.

Bank account termination 

If chargeback rates continue to exceed the appropriate level, the acquiring bank can close the merchant account. This means that your merchant account has been frozen and your right to process credit card payments has been revoked. Merchants who have a closed merchant account are unable to accept credit cards.

Why do chargebacks happen?

Understanding why chargebacks occur not only helps you deal with them, but also prevents them from happening in the first place. Let’s take a look at the reasons chargebacks might occur.

Clerical errors

Clerical or merchant errors are one reason a customer may file a dispute with their credit card company. Perhaps they were billed for an item that they didn’t purchase, or maybe they were billed for the incorrect amount. Merchant mistakes can happen for a number of reasons, like improper training or simple human error. We’ll discuss how small businesses can prevent these types of errors later on in this post.

Friendly fraud

“Friendly fraud” refers to customers contacting their bank or credit card issuer to file a dispute instead of seeking a return or refund directly from the store. This may occur if the customer is unfamiliar with return processes or they don’t know the difference between a regular refund and a bank-forced refund. However, friendly fraud can also be a result of customers knowingly taking advantage of loopholes in the chargeback process. For example, a customer could theoretically make a purchase and dispute the charge so they can be refunded and keep the item for free.

Unrecognised or forgotten purchases

Sometimes consumers simply forget they made a purchase or don’t recognise the charge on their credit card statement, which also falls under the umbrella of friendly fraud. This often happens with recurring payments for subscriptions and other purchases the cardholder doesn’t pay attention to. As a result, they may choose to file a cardholder dispute with their financial institution to protect their credit score and financial standing.

Quality complaints

Another form of friendly fraud has to do with quality complaints. If a customer places an order and finds that it doesn’t meet quality standards, they might use the chargeback system to address the issue.

Credit card fraud

Credit card fraud or “true fraud” occurs when a criminal steals a cardholder’s identity and makes unauthorised purchases on their behalf. In cases of identity theft, the cardholder could dispute the charges, limiting their responsibility for the fraudulent charges.

How to prepare for a chargeback claim

While you can’t prevent every chargeback, you can use these best practices to reduce the risk of invalid claims:

• Receipts at the ready: Keep all receipts well-labelled, dated, and linked to specific transactions. This helps you demonstrate the legitimacy of the sale and quickly respond to disputes. Digital copies are especially useful for easy retrieval.
• Signed contracts: Store copies of contracts, service agreements, or terms and conditions that customers have agreed to. These documents show the customer consented to the transaction and understood the scope of the purchase.
• Purchase orders and order forms: Maintain detailed records of every order, particularly for larger or custom jobs. Clearly itemised order forms help prove that the product or service was requested by the customer.
• Evidence tied to the reason code: Each chargeback comes with a specific reason code. Tailor your response by matching supporting evidence (such as delivery confirmation for “goods not received” claims) directly to the customer’s dispute.
• Adhere to your refund policies: Publish your refund and return policies in plain language and stick to them consistently. When customers know what to expect and can resolve issues with you directly, they’re less likely to turn to their bank for a chargeback.
• Add transaction descriptions: Use clear and specific descriptors on billing statements so customers instantly recognise your business. For example, include your business name and product or service type rather than a vague or shortened label.
• Communicate clearly with customers: Send confirmation emails, invoices and shipping updates. Proactive communication reduces misunderstandings and gives customers less reason to dispute a charge.

Tips on avoiding potential credit card fraud

Fraud is a major reason chargebacks happen, as customers can dispute transactions if their card is used without permission. Preventing fraud helps reduce chargebacks, protecting both your revenue and your merchant account.

Here are some practical ways to protect your business:

• Stay informed about scams: Use trusted resources like ACCC ScamWatch to stay aware of common scams. Knowing the trends can help you spot suspicious activity before it becomes a costly chargeback.
• Monitor for suspicious activity: Look for unusual purchase patterns, high-value orders, or multiple failed payment attempts. Fewer fraudulent transactions mean fewer chargebacks, which helps maintain your chargeback ratio. Banks monitor this, and high ratios can lead to account termination.
• Use security measures for online transactions: Add safeguards like CVV verification and two-factor authentication to make fraudulent charges less likely. When you verify cardholder details (like CVV or AVS) and monitor for unusual activity, fraudulent charges are caught before the payment is processed, meaning fewer disputes later.
• Maintain records of payments: Keep accurate, well-organised records of all transactions. A reliable payments platform such as QuickBooks Payments can help you track payments and automate recordkeeping. Even if fraud attempts slip through, having security measures and evidence of careful verification strengthens your case when responding to disputes.

Check out more tips for protecting your small business from fraud. 

Final notes

Credit card chargebacks are an unavoidable part of doing business with electronic payments, but they don't have to derail your operations. The best way to handle chargebacks is to be proactive: keep clear records, communicate openly with customers and use secure payment processes. 

Remember that chargeback fees apply whether you win or lose the dispute, making prevention your most cost-effective approach. For small businesses, the administrative burden of managing chargebacks can be significant. Sometimes it makes more sense to accept smaller disputes (particularly those under $100) rather than spending time fighting them. Instead, channel that energy into prevention strategies that reduce future disputes.

By focusing on prevention, you'll not only reduce chargebacks but also build stronger customer relationships.