What is a chargeback? How it works and how to avoid it

Published Tuesday 21 April 2026

Table of contents

• What is a chargeback in accounting?
• Chargebacks vs refunds: key differences
• Understanding the chargeback process
• Common reasons for chargebacks
• The effect of chargebacks on your business and finances
• Preventing chargebacks from occurring
• How to dispute and resolve chargebacks
• Managing chargebacks in your business
• FAQs on chargebacks

Key takeaways

• Prioritise offering refunds over letting disputes escalate to chargebacks, as refunds let you keep control of the process, avoid fees of £15–30 per dispute, and protect your relationship with the customer.
• Respond to any chargeback notification immediately, as you typically have only 10–45 days to submit evidence such as proof of delivery, customer communications, and signed receipts before losing your right to dispute.
• Keep your chargeback rate below 1% of transactions to avoid payment processor penalties, higher fees, and the risk of losing your ability to accept card payments altogether.
• Reduce the risk of chargebacks before they happen by using a clear billing descriptor that customers will recognise, displaying your returns and refund policy prominently at checkout, and resolving customer complaints quickly before they contact their bank.

What is a chargeback in accounting?

A chargeback is a payment reversal initiated by a customer's bank when they dispute a credit or debit card transaction. Unlike a refund you choose to give, a chargeback bypasses your business entirely and can result in lost revenue, fees, and potential account penalties.

Chargebacks affect small businesses in four key ways:

• Financial loss: losing both the sale amount and the processing fees
• Merchandise loss: losing products when customers keep them while receiving refunds
• Administrative burden: spending time responding to disputes and gathering evidence
• Relationship risk: damaging payment processor relationships through high chargeback rates

Chargeback managers have reported a rise of 76% in chargebacks year on year.

Chargebacks vs refunds: key differences

Chargebacks and refunds are not the same. A refund is a direct transaction where you voluntarily return payment to your customer, typically receiving goods back in exchange. A chargeback is a bank-initiated payment reversal that bypasses your business entirely.

Key differences between chargebacks and refunds:

• Control: refunds let you manage the process; chargebacks remove your involvement
• Timing: refunds process immediately; chargebacks take weeks to resolve
• Costs: refunds typically incur no fees; chargebacks include processing charges of £15–30
• Relationship: refunds preserve customer goodwill; chargebacks can damage trust

Are chargebacks or refunds better for merchants?

Refunds are better for merchants in almost every scenario. You maintain control, avoid fees, and preserve the customer relationship.

Government data shows that seven in ten UK consumers resolve problems directly with the business, avoiding formal disputes. A proactive refund policy can prevent chargebacks before they start.

If a chargeback or refund is approved, you'll need to account for it so your figures stay accurate.

Understanding the chargeback process

Customers typically have 120 days to raise a chargeback claim from the expected delivery date. According to the Financial Conduct Authority (FCA), this timeframe applies across major card networks including Visa, Mastercard, American Express, and Discover.

Some dispute types may have shorter deadlines, so check your payment processor's specific policies.

The chargeback process involves four key parties working through a structured dispute resolution system.

Key participants:

• Customer (cardholder): initiates the dispute with their bank
• Your business (merchant): responds with evidence to defend the transaction
• Your payment processor (acquirer): manages communication and fee collection
• Customer's bank (issuer): reviews evidence and makes final decisions

Understanding each party's role helps you respond effectively. Here's the basic chargeback process in six steps.

1. The customer disputes the charge

The customer believes a charge on their card is invalid and contacts their bank to dispute it within the valid timeframe (which can be within 13 months from the date of the payment).

Find out more about disputed charges.

2. The issuing bank evaluates the dispute

The issuing bank decides whether the reason is valid. If they find in favour of the customer, they grant a chargeback.

3. The issuing bank gives provisional credit

The bank credits the customer for now and contacts the merchant's acquirer. This credit will be reversed if the chargeback is denied at a later stage.

4. The acquirer notifies the merchant

The merchant's acquirer debits the merchant's bank account and charges them a chargeback fee. The fee covers the payment processor's admin costs.

5. The merchant responds

You then decide whether to accept or dispute the chargeback. You must reply within the allocated time or face a non-response fee.

Response deadlines vary by card network:

• Visa: 20 days to respond
• Mastercard: 45 days to respond
• Other networks: typically 10–30 days depending on your payment processor

6. The dispute resolution process

If the merchant disputes a chargeback, they must give evidence to support their position, like proof of delivery, communications with the customer that prove they received the item, photographs, and sales receipts.

You provide the evidence to your payment processor, who passes it to the bank for review.

The bank reviews all evidence and decides the outcome:

• If the bank upholds the chargeback: the customer keeps the refunded amount and you pay the chargeback fee
• If the dispute is resolved in your favour: the bank returns the transaction amount and any fees incurred

Independent research found 46% of consumers had problems with dispute resolution, so a clear, fair process benefits everyone.

Common reasons for chargebacks

Chargebacks happen when customers, businesses, or banks dispute card transactions for specific reasons. The most common causes fall into four categories: fraud, business errors, customer errors, and subscription issues. Understanding these causes helps you prevent future disputes.

Fraud

Fraudulent chargebacks occur when transactions are disputed due to unauthorised use or intentional deception.

• Unauthorised transactions: using a customer's card details without their knowledge, leading to a dispute
• Friendly fraud: claiming a legitimate purchase as fraudulent to avoid payment
• Business fraud: intentionally failing to deliver goods or services after receiving payment

Business errors

Operational mistakes can lead to chargebacks when customers receive incorrect charges or products.

• Incorrect charges: charging wrong amounts due to processing mistakes
• Damaged or incorrect goods: receiving defective products or wrong items
• Failure to address complaints: missing or leaving customer issues unresolved, causing them to escalate to disputes

For credit card purchases over £100 (and less than £30,000), consumers have additional protection under Section 75 of the Consumer Credit Act, which holds the card provider jointly liable. This makes chargebacks more likely if your return policy is unclear or unhelpful.

Customer errors

Customers sometimes initiate chargebacks due to confusion or mistakes on their end.

• Unrecognised transactions: failing to recognise a charge because the billing descriptor differs from the business name they know
• Accidental double purchases: making multiple payments for the same item, prompting either the customer or business to request a reversal

Errors relating to subscriptions and recurring payments

Subscription-based businesses face unique chargeback risks from billing misunderstandings.

• Unwanted subscriptions: signing up unintentionally or forgetting about an existing subscription, leading customers to dispute charges as fraudulent
• Failure to cancel: continuing to charge customers after they've requested cancellation, prompting disputes

The effect of chargebacks on your business and finances

Merchants lose money on chargebacks, often up to 2.5 times the original transaction value. Chargebacks cost far more than just the disputed amount, creating cascading financial and operational impacts that can threaten your ability to accept card payments.

True chargeback costs include:

• Direct losses: transaction amount plus £15–30 processing fees
• Administrative time: 2–4 hours per dispute gathering evidence and responding
• Inventory loss: products shipped but never paid for
• Relationship damage: payment processor penalties and potential account termination
• Threshold risk: additional fees and monitoring when you exceed a 1% chargeback rate

Preventing chargebacks from occurring

Preventing chargebacks protects your revenue and keeps your merchant account in good standing. Focus on proactive strategies across customer service, payment security, and business operations.

Essential prevention strategies:

• Use clear communication: display recognisable business names on statements and provide detailed transaction descriptions
• Display transparent policies: show return, refund, and shipping policies prominently during checkout
• Choose secure processing: select payment processors with fraud detection and verification tools
• Respond quickly to complaints: address issues immediately before customers contact their banks
• Ensure accurate billing: verify charges match what customers expect and authorised

For online sales, consumers have a legal right to cancel for 14 days after goods are delivered, so your policies should reflect this to avoid disputes.

How to dispute and resolve chargebacks

Disputing a chargeback can recover lost revenue if you act quickly and provide comprehensive evidence. Success depends on following the process correctly and providing compelling proof.

Chargeback dispute process:

1. Respond immediately: contact your payment processor within 10–30 days of notification
2. Gather evidence: collect proof of delivery, signed contracts, customer communications, and transaction receipts
3. Submit documentation: provide clear, organised evidence proving the transaction was legitimate
4. Await the decision: allow time for the issuing bank to review evidence and decide the outcome
5. Accept the outcome: understand that complex cases may escalate to card networks for final resolution

Critical evidence includes:

• Proof of delivery: tracking confirmation with customer signature
• Customer communications: emails or messages showing satisfaction or agreement
• Transaction records: receipts and authorisation codes
• Terms of service: signed agreements or accepted terms at checkout

Record and manage chargeback fees in accounting

Record chargebacks in your accounting system with proper categorisation to maintain accurate financial records and audit trails.

Accounting treatment:

• Record chargeback fees: categorise as operating expenses under "bank fees" or "payment processing costs"
• Write off lost revenue: record disputed amounts as "bad debt expenses" or "chargeback losses"
• Keep documentation: store dispute correspondence and evidence for audit trails to meet the standard requirement to retain records for up to six years
• Consult professionals: work with your bookkeeper or accountant for complex situations or tax implications

Managing chargebacks in your business

Managing chargebacks effectively protects your revenue, maintains payment processing relationships, and improves customer satisfaction. Success requires ongoing monitoring, quick responses, and proper record-keeping:

• Monitor your chargeback ratio: keep it below 1% to avoid payment processor penalties
• Implement prevention strategies: focus on clear communication and secure payment processing
• Respond quickly to disputes: gather evidence immediately and submit within deadlines
• Track patterns: identify recurring issues and address root causes
• Get professional help: work with bookkeepers and accountants to manage financial impacts properly

Managing chargebacks alongside your other financial processes becomes much easier with Xero accounting software. Get one month free so you can focus on running your business, not your books.

FAQs on chargebacks

Chargebacks are a normal part of accepting card payments. Here are answers to common questions merchants ask about managing disputes.

How long do I have to dispute a chargeback?

You typically have 10–45 days to respond to a chargeback, depending on the card network. Visa allows 20 days, while Mastercard allows 45 days. Check your payment processor's specific rules and act quickly to avoid missing the deadline.

What happens if I get too many chargebacks?

Exceeding a 1% chargeback rate triggers penalties from your payment processor. Consequences include higher processing fees, mandatory monitoring programmes, and potential termination of your merchant account, which would prevent you from accepting card payments.

Do I still pay chargeback fees if I win the dispute?

Yes, in most cases. The chargeback fee of £15–30 is an administrative cost for processing the dispute. Even if you win and the transaction amount is returned, this fee is typically non-refundable.

Can you prevent chargebacks completely?

No, but you can significantly reduce them. Genuine fraud will always create some chargebacks. However, you can minimise disputes by providing excellent customer service, using clear billing descriptors, and displaying a transparent return policy.