FinTech Glossary

Definition

A chargeback is a payment reversal initiated by the cardholder’s bank when a customer disputes a transaction. The disputed amount is pulled back from the merchant and returned to the customer after review. Chargebacks protect customers from fraud, unauthorised payments, or billing errors, but can impact a business’s revenue and risk profile.

Business Context

Chargebacks are a standard mechanism in card payments - credit, debit, and prepaid cards. For businesses, frequent chargebacks signal operational issues such as dispute management gaps, poor documentation, misleading charges, or fraud exposure.

Merchants may face:

• Revenue loss
• Penalties from card networks
• Higher transaction scrutiny
• Operational overhead to respond to disputes

For finance teams, managing chargebacks requires strong evidence collection, invoice and transaction matching, and timely responses to issuing banks.

How Chargebacks Work

A chargeback typically follows these steps:

• The customer raises a dispute with their issuing bank.
• The issuing bank reviews the claim and temporarily reverses the amount.
• The acquiring bank notifies the merchant to provide supporting documents.
• The merchant submits proof such as invoices, delivery confirmation, or transaction logs.
• Card networks evaluate the evidence and make a decision.
• The dispute is either resolved in the merchant’s favour or refunded to the customer.

Chargebacks may arise due to fraud, duplicate charges, service issues, unauthorised payments, or technical errors.

Reasons for Chargebacks

1. Fraudulent Transactions - Unauthorised use of the customer’s card.
2. Duplicate or Incorrect Charges - Multiple payments, wrong amount, or processing errors.
3. Product or Service Disputes - Item not delivered, defective, or not as described.
4. Technical Errors - System issues like failed reversals or delayed authorisations.
5. Friendly Fraud - Customers raise disputes despite legitimate transactions.