Chargebacks 101: How to Prevent and Handle Disputes
Chargebacks can be an unexpected business headache that impacts your bottom line. Whether you operate a busy salon, a pop-up stand, or an online store, receiving a chargeback can feel frustrating and bewildering. However, by understanding how chargebacks work and implementing strategies to prevent them, you can save yourself a significant amount of time, money, and stress.
What Is a Chargeback?
A chargeback occurs when a customer disputes a transaction directly with their bank or credit card company rather than requesting a refund from the business. The bank will then withdraw the funds from your account while they investigate the claim.
You can think of a chargeback as a forced refund, but it comes with additional fees, the potential loss of the product or service, and the risk of penalties for your business.
Why Do Chargebacks Happen?
Not all chargebacks are fraudulent, and many can be avoided. Common reasons for chargebacks include:
Fraud or unauthorized use of a stolen card
Business names on billing statements that customers do not recognize
Customer dissatisfaction or services that were not provided
Delays in shipping or items that are missing
Recurring charges that the customer forgot about
Miscommunication regarding return or refund policies
The Rising Threat
Projected rise in chargebacks: Global volume expected to reach 337 million by end of 2025: up 27% from 265 million in 2022.
US-centric damages: In 2025, merchants will lose roughly $4.61 for every $1 lost to fraud: a 37% increase since 2020.
Staggering scale of fraud: Small businesses across the U.S. are projected to lose $15 billion in chargeback fraud in 2025
What It’s Really Costing You
Fees add insult to injury: Merchants often pay $15-$100 per dispute, on top of losing the sale.
Third-party recovery rates: Merchants win 45% of disputes, but net recovery averages only 18% after expenses.
Time is money too: Handling chargebacks manually strains staff: 61% of small teams (1-3 people) spend 10+ minutes per dispute.
Industry-Specific Win Rates
Digital goods: 72.6% merchant win rate
Physical goods: 53.4% merchant win rate
Services: 46.8% merchant win rate
By sector:
Apparel: 35.8%
Travel & hospitality: 30.5%
Consumer electronics: 16.6%
Why This Matters for Small Business Owners
Financial Drain: Each successful chargeback can cost 2-4x the purchase price when factoring in fees, merchandise loss, and admin time.
Account Risk: If your chargeback rate exceeds 2.5% of total sales, major card networks may suspend or terminate your processing and aggregators often close accounts and freeze funds without your even being aware of a problem.
Operational Burnout: Small teams or solopreneurs stretched thin by disputes can lose focus on growth and core activities.
How to Prevent Chargebacks (Before They Start)
Steps you can take to minimize the risk of chargebacks:
1. Be Crystal Clear About Billing Descriptors
Ensure the name displayed on the credit card statement matches the name of your business or brand. If your legal name differs from your business name, update your merchant profile.
2. Set Clear Expectations on Products/Services
Whether you're selling skincare, offering services, or shipping handmade goods, spell out:
What is included
When it ships or starts
What the return/refund policy is
A little clarity up front = fewer surprises = fewer chargebacks.
3. Use Digital Receipts and Tracking
Always provide receipts via email or text. For physical goods, use trackable shipping and keep those records handy. Documentation is your best friend in a dispute.
4. Train Your Staff
Ensure that everyone handling transactions or providing customer service is familiar with your policies and knows how to explain them clearly.
5. Watch for Fraud Flags
Use tools that check for:
AVS (address verification system)
CVV code
Suspicious activity or mismatched data
If you spot something unusual, don't hesitate to cancel the transaction and follow up.
What to Do When You Are Hit With A Chargeback
First, don’t panic, but do not ignore the situation either. Remember there is usually a limited time frame (often 7 to 10 days) to respond.
Steps to Take:
1. Review the Chargeback Reason Code: Your payment processor will provide this information.
2. Gather Documentation: Collect all relevant materials, including signed receipts, emails, delivery confirmations, screenshots, etc.
3. Submit a Rebuttal or “Representment”: Your payment processor should be able to guide you through this process.
4. Stay Organized: Maintain a folder or system for all chargeback-related records.
Pro Tip: The better your documentation, the stronger your case will be when disputing a chargeback.
Use a Processor That Supports You
Some payment processors offer tools to automatically flag disputes, provide chargeback alerts, or even manage the process on your behalf. But, not all providers are created equal. And some aggregators, like Square or PayPal, only offer digital portals and bots to “assist” you and typically leverage more protections for the buyer than the seller. If you’re handling chargebacks alone and feeling frustrated, it might be time to consider a new partnership.
The Bottom Line
Chargebacks aren't just one-time hits. They drain resources, time, and trust. With rising fraud rates and costly disputes, they’re becoming a full-blown crisis, especially for small businesses. Staying ahead means smarter prevention, better dispute management, and perhaps partner tools that reduce your burden.
If you’re unsure whether your current setup is adequately protecting you, we can help! Schedule a no-obligation review with Todd
We’ll talk through your current system and see where you could tighten things up, save on fees, help prevent chargebacks and stay one step ahead of the curve.
Sources: Forbes, News.Com, Wired, Reddit, B2B Matercard, TechRadar
FAQ: Common Questions About Chargebacks
Q: How long do I have to respond to a chargeback?
Most processors give you 7-10 days to respond, but timelines vary. Always check the notification for the exact deadline.
Q: Will I get my money back if I win the chargeback dispute?
Yes. If you win, the disputed funds (and sometimes the fee) will be returned to your account. But it can take several weeks to months.
Q: Can I stop a chargeback once it’s filed?
No. Once a customer files with their bank, you must go through the formal dispute process. You can, however, proactively refund before the case is decided in some instances.
Q: Do too many chargebacks affect my business?
Absolutely. A high chargeback rate can lead to higher fees, a frozen account, or even termination by your processor. Aggregators can terminate your account without notice and, in some cases, before you even get a chance to dispute.
Q: Are chargebacks the same as refunds?
No. A refund is issued by you, the business owner directly to the customer. A chargeback is initiated by the customer’s bank, and, you don’t get to negotiate upfront.
Q: How do I know if my current payment processor is protecting me from chargebacks?
The answer varies depending on your setup. Some platforms offer built-in fraud tools and alerts, while others leave you on your own. If you’re unsure, or you’ve already experienced chargebacks, it’s smart to review your risk exposure with your processor. Don’t have anyone to consult? Schedule a complimentary, no-obligation call with Todd to assess your current payment system, explore chargeback protection options, and identify cost-saving strategies tailored to your business.