What is a Chargeback and How to Prevent Merchant Chargebacks

What is a Chargeback and How to Prevent Merchant Chargebacks

On 19 October 2022

The question “ What is a chargeback?” keeps popping up in online card fraud cases. The history of chargebacks dates to the early 1970 in the United States even though the first case of identity theft is said to have occurred in 1899. During this period card holders were vulnerable to scammers who stole money from their debit cards. In addition, business owners were accused of inflating prices or adding extra charges to customers' bills. Fraud threats made customers skeptical of using their cards when shopping.

The Fair Credit Billing Act was enacted in the USA in 1974 to protect customers from unfair billing practices. The Fair Credit Billing Act of 1974 created chargebacks as a consumer-protection mechanism against fraudulent charges. The idea of chargebacks has been borrowed in the payment space globally to help customers whose cards have been frauded and needs a refund.

What is a Chargeback?

A chargeback, also known as a "payment dispute," is a reversal of credit or debit funds after a customer has raised a dispute about a purchase made through the card. Chargebacks are common in E-commerce, where customers use their cards to pay for goods online.

Types of Chargebacks

There are three types of chargebacks: criminal fraud, friendly fraud, and merchant error.

Merchant Error Chargeback

Merchant error chargeback occurs when a client disputes a purchase because of an error caused by the merchants, such as the delivery of a wrong product, delivery of damaged products, duplication or failure to deliver. 

Criminal Fraud

Criminal fraud chargeback happens when a client's card is used to make a payment without his consent. An example of a criminal fraud chargeback is when a criminal hacks a customer’s cards detail and uses it to purchase items online then the legitimate cardholder disputes the purchase. Clients are advised to report card losses to their banks.

Friendly Fraud

Friendly fraud chargeback occurs when a dishonest customer disputes payment despite receiving goods or services ordered. The customer intends to abuse the chargeback process though it has been argued that the payment dispute can result from confusion or mistake. Friendly fraud is the most common chargeback, accounting for 60% to 80% of all chargebacks.

Chargeback vs. Refund: What’s the Difference?

What is the difference between a chargeback and a refund? These two terms have been used interchangeably to mean the same thing in the payments space. However, there is a slightly small difference between the two. Refund is when the merchant voluntarily sends the customer money after a dispute has been raised while chargeback it is the card issuer who sends the customer money after the dispute has been raised.

How The Chargeback Process Works:

Step 1: The Cardholder Files a Chargeback

The customer initiates the chargeback process by contacting his bank asking for a refund.

Step 2: The Issuer Reviews

The issuer (customer’s bank ) sends the transaction back to the acquirer (financial institution that processes credit card payments on behalf of a merchant) after confirming validity of chargeback

Step 3: The Acquirer is Notified and Reviews the Chargeback

The acquirer receives the chargeback and resolves or forwards it to the merchant.

Step 4: The Merchant Receives and Reviews the Chargeback

The merchant either accepts the chargeback or decides the chargeback is invalid or unfounded by sending compelling evidence to the acquirer.

Step 5: Acquirer Reviews Evidence Shared by the Merchant

The acquirer reviews the evidence shared by the merchant and ensures it meets the requirement before sending it to the issuer.

Step 6: The Issuer Reviews the Evidence and Makes a Decision

The issuer reviews the evidence shared by the acquirer and decides on the chargeback case.

Step 7: The Cardholder and Merchant Get Notified.

The issuer notifies the cardholder and the merchant about the decision. If the decision favors the customer, they don't have to pay the charge. However, the disputed funds will go to the merchant if he wins the determination. The party that disagrees with the decision can go to arbitration.

How to Prevent Merchant Chargebacks

Chargebacks negatively impact businesses as they can result in losses and poor reputation. Though chargebacks will never end, here are tips to prevent chargebacks depending on the sector your company operates.

Tour and Travel

  • Collect clients' identification documents
  • Maintain photographic and video evidence of clients enjoying the services paid for
  • Have open and flexible terms and conditions that make resolving complaints easier without the client needing to issue chargebacks or dispute the transaction
  • Have a complaint resolution mechanism that documents how complaints were resolved


  • Ensure that clients are aware of their terms and conditions before payment has been made, e.g., cancellation charges and no-show fees
  • Confirm that the person booked in is the one who checks in by asking for identification documents (ID, Driver's Licence, or Passport)
  • Ensure that the client signs a check-in form and that details match the IDs provided
  • Where the cardholder is not a guest, confirm that the cardholder has authorized the transaction in writing. This can be done using a pre-auth form


  • Assign tracking numbers to orders and require signatures at delivery. This ensures that the merchant can track the transaction from when it was initiated to when the customer acknowledges receipt of the item.
  • Chanel refunds back to the card used. Most scammers will request for refunds to be done via mobile money or direct bank deposits; after that, a chargeback will be raised against the same payment.
  • When in doubt, ask for verification - Trust your gut. If suspicious, ask the customer to provide proof of identification proof that matches card details.
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Published In: Payments

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