How Do Chargebacks Work?

The first step to preventing chargebacks is understanding how chargebacks work. Learn about the chargeback process, and how to protect your business.

How Do Chargebacks Work

No one wants to open an email with the subject line “Chargeback Notification.” Chargebacks cause enormous amounts of grief for merchants, but they also protect consumers from fraudulent charges.

Unfortunately for a merchant, receiving a chargeback is not a question of “if” but “when.” Whether genuine, fraudulent or simply a customer’s bad memory, merchants should expect to experience the chargeback process at least once in their lifetime. The best way to prepare is to understand why they happen in the first place.


What is a chargeback?

A chargeback occurs when a customer files a complaint with their bank regarding a fraudulent or suspicious charge.


Types of chargebacks

The four most common types of chargebacks are fraudulent, credit not processed, item not received, and technical.

  • Fraudulent – The customer believes that someone else used their card to purchase this item. Fraudulent can include friendly and true fraud.
    • Friendly (aka not-so-friendly) fraud happens when a cardholder disputes a charge that they made to get their funds back after receiving the goods or services. It can also be an honest mistake of forgetfulness, or not recognizing the purchase descriptor.
    • True fraud occurs when card information is actually stolen, either from phishing or other scams from fraudsters.
  • Credit Not Processed – The customer returned the product in question and never received the agreed upon refund or credit.
  • Item Not Received – The customer never received the product.
  • Technical – There was a technical issue at the point of checkout. Often the customer was charged twice for one item.


Walk me through the whole process.

The claim

  1. Dwight was looking at his credit card statement and saw a transaction for an office printer that he doesn’t remember purchasing from Sabre. After confirming, he calls his bank and reports a dispute.
  2. Dwight’s bank examines the dispute. If they believe the dispute to be invalid, the chargeback process stops, and the merchant would never know. If they believe the dispute to be valid, then the credit card company gets involved.

The investigation

  1. The credit card company opens an investigation. There will be a non-refundable fee to this investigation which is passed to Sabre.
  2. The funds are immediately credited into Dwight’s account from his bank from Sabre’s merchant account.
  3. Dwight’s credit card company notifies the payment processor for Sabre to report the chargeback.
  4. Sabre’s bank opens an investigation and alerts Sabre’s owner of the chargeback, who has 30 days to respond.

The rebuttal

  1. The owner of Sabre can dispute the chargeback or can accept the chargeback and fee. Should they choose to dispute, Sabre must compile evidence to prove the chargeback is invalid. Evidence can include AVS, CVV, date and time of purchase and a whole list of other details.
  2. Sabre’s bank, the card networks, and Dwight’s bank reviews the evidence. After reviewing the evidence, there are two outcomes:
      1. The dispute is invalid, and Sabre has won! The funds are re-charged to Dwight, but the fee of the investigation is not refunded. Plus, Sabre will never get back those lost hours and resources spent fighting the chargeback.
      2. The dispute is valid. Dwight has won, and the funds remain in his bank account.
  3. Things don’t stop here. If Dwight is unsatisfied with losing (he must have some really, really good evidence for this chargeback), he can file for a second chargeback. This starts the process all over again and automatically incurs a $250 fee for Sabre (which they will get back if they win, again.)

A chargeback dispute can take anywhere between six weeks to six months. If a merchant loses a chargeback, they don’t just lose the money from the dispute. The merchant also loses money from the chargeback fee, and possibly the money from the product itself. If a merchant receives a lot of chargebacks, their account can be canceled and flagged as fraudulent.

Partnering with a software provider that has an integrated payment solution, or going directly to a payment provider, a merchant can access the tools that will help prevent chargebacks. Learn more about the different fraud protection tools here.