Chargeback

What Is a Chargeback?

A chargeback is a reversal of a card transaction initiated by a customer’s bank (also referred to as the issuing bank) after the customer raises a dispute for a specific transaction. This dispute may arise due to reasons such as an unauthorized or fraudulent transaction, non-receipt of goods or services, dissatisfaction with the product or service, duplicate billing, or other transaction-related issues.

Chargebacks form part of the formal dispute resolution framework prescribed by card networks and are intended primarily as a consumer protection mechanism. Once a chargeback is initiated, the disputed amount is typically provisionally credited back to the customer, while the transaction is reviewed through the card network’s defined processes and timelines.

Unlike a refund, which is voluntarily initiated and processed by the merchant directly upon request or resolution with the customer, a chargeback is triggered externally by the issuing bank. The chargeback is routed through the applicable card network—such as Mastercard or Visa—and passed on to the acquiring bank or payment aggregator, who then notifies the merchant for further action.

It is important to note that chargebacks are governed by card network rules and banking regulations, and the final decision on a disputed transaction rests with the issuing bank, based on the reason code assigned and the evidence submitted by the merchant, if any.

Chargeback vs Refund

A refund is a transaction reversal that is initiated and processed directly by the merchant, typically in response to a customer request for reasons such as order cancellation, returns, or service-related issues. Since refunds are merchant-driven, the merchant retains control over the timing, process, and communication with the customer, subject to their own refund and cancellation policies. Refunds are generally processed immediately or within timelines defined by the merchant and usually do not attract additional dispute-related fees.

A chargeback, on the other hand, is initiated by the customer through their bank (the issuing bank) when the customer disputes a transaction. Once raised, the chargeback is processed through the applicable card network and is governed by predefined network rules, timelines, and evidence requirements. In this case, control over the process shifts away from the merchant, and the outcome is determined by the issuing bank based on the dispute reason and supporting documentation. Chargebacks may also involve additional processing or dispute-related fees and can have an impact on a merchant’s overall dispute metrics.

As a general best practice, merchants are encouraged to proactively address customer concerns and, where appropriate, issue refunds directly to customers. Timely refunds can help prevent disputes from escalating into chargebacks, thereby reducing operational overhead, dispute costs, and the likelihood of adverse chargeback outcomes.

How the Chargeback Process Works

Below is a simplified overview of how a chargeback is typically processed within the card payment ecosystem. The process begins when a customer raises a dispute for a specific card transaction with their bank (the issuing bank). The customer may dispute the transaction for various reasons, such as suspected fraud, non-receipt of goods or services, or dissatisfaction with the transaction.

Upon receiving the dispute, the issuing bank reviews the claim and, if found valid for further examination, assigns an appropriate chargeback reason code in accordance with the applicable card network rules. The issuing bank then formally initiates the chargeback, which is routed through the relevant card network to the acquiring bank or the payment aggregator that processed the original transaction.

Once the chargeback is received by the acquiring bank or payment aggregator, the merchant associated with the disputed transaction is notified and provided a defined timeframe within which to respond. At this stage, the merchant is required to review the dispute details and decide whether to accept the chargeback or contest it by submitting relevant supporting documentation.

If the merchant chooses to contest the chargeback, the submitted evidence is forwarded through the acquiring bank and card network to the issuing bank for evaluation. The issuing bank then reviews the evidence in line with the assigned reason code and card network guidelines and makes a final determination on the dispute.

In cases where the merchant does not respond within the prescribed timeline or submits insufficient or incomplete documentation, the chargeback may be automatically decided in favour of the customer, in accordance with card network rules.

Timely responses and accurate documentation play a key role in ensuring that disputes are assessed fairly and in line with applicable network guidelines.

Common Chargeback Reasons

Chargebacks are typically raised under standardized dispute or “reason codes” defined by the applicable card networks. These reason codes classify the nature of the customer’s dispute and determine the documentation required from the merchant, as well as the timelines within which a response must be submitted. While the exact codes and descriptions may vary across networks, chargebacks commonly arise from reasons including, but not limited to, the following:

It is important to note that each card network maintains its own reason-code framework, along with specific evidence requirements and response timelines for each category of dispute. Merchants are therefore required to review the applicable reason code carefully and submit evidence that is relevant and aligned with the requirements prescribed by the respective card network.

Merchant Responsibilities During a Chargeback

When a chargeback is raised, merchants are expected to take certain actions within the timelines prescribed under the applicable card network rules. These actions are critical to ensuring that the dispute is reviewed appropriately.

1. Review the Chargeback Promptly Chargebacks are inherently time-sensitive and are governed by strict response deadlines. Upon receiving notification of a chargeback, merchants should promptly review the transaction details, the assigned reason code, and the response timeline. Delayed or missed responses may result in the chargeback being decided against the merchant by default, irrespective of the merits of the case.

2. Decide Whether to Accept or Contest the Chargeback After reviewing the chargeback details, the merchant must determine whether to accept or contest the dispute. Accepting a chargeback indicates that the merchant agrees to the transaction reversal and does not intend to challenge the dispute. Contesting a chargeback involves disputing the customer’s claim by submitting supporting documentation in accordance with the applicable reason code and card network requirements.

3. Submit Supporting Evidence (If Contesting) If the merchant chooses to contest the chargeback, relevant and complete supporting evidence must be submitted within the prescribed timeframe. Depending on the nature of the dispute, such evidence may include:

Merchants should note that the submission of evidence does not guarantee a reversal of the chargeback. Final decisions are made by the customer’s issuing bank, based on the assigned reason code, the evidence submitted, and the applicable card network rules.

Possible Outcomes

Once the chargeback process is completed and the issuing bank has reviewed the dispute in accordance with applicable card network rules, one of the following outcomes may occur:

Chargeback upheld:

If the issuing bank determines that the dispute is valid, the chargeback is upheld. In such cases, the disputed transaction amount is debited from the merchant’s account and the provisional credit provided to the customer is made permanent.

Chargeback reversed:

If the issuing bank is satisfied with the evidence submitted by the merchant and determines that the transaction was valid, the chargeback may be reversed. In this scenario, the disputed amount is credited back to the merchant.

No response or insufficient evidence:

If the merchant does not respond within the prescribed timeline or submits evidence that is incomplete, unclear, or not aligned with the assigned reason code, the chargeback may be automatically decided in favour of the customer, in accordance with card network rules.

In addition to the transaction reversal, chargebacks may involve additional processing or dispute-related fees. Repeated or excessive chargebacks may also impact a merchant’s overall risk assessment or monitoring status, as determined by the acquiring bank or payment aggregator, in line with applicable network and regulatory guidelines.

How Chargebacks Impact Merchants

Chargebacks can have both financial and operational implications for merchants, particularly when they occur frequently or in high volumes. While an occasional chargeback is a normal part of card-based payments, excessive chargebacks may lead to increased operational effort and closer scrutiny. High chargeback volumes can increase operational costs due to chargeback-related fees and the additional time and resources required to manage disputes. Chargebacks may also affect settlement timelines, as disputed amounts are typically withheld until the chargeback process is concluded.

In addition, chargeback trends are commonly considered as part of a merchant’s overall risk assessment and monitoring framework. Where a merchant’s chargeback levels exceed the permissible thresholds specified under the merchant agreement, applicable card network rules, and/or acquiring bank policies, the payment aggregator and/or acquiring bank may, in accordance with contractual terms take certain risk-mitigation measures. These measures may include the levy of penalties or dispute-related fees, withholding or delaying settlements to manage potential exposure, placing the merchant under enhanced monitoring or review, requiring corrective actions, or, in adverse or high-risk cases, temporarily suspending payment acceptance, terminals, or transaction processing facilities.

Maintaining low chargeback ratios through transparent business practices, clear customer communication, and timely resolution of customer issues is therefore important for ensuring long-term payment acceptance stability and uninterrupted access to card payment services.

Best Practices to Reduce Chargebacks

Merchants are encouraged to adopt certain best practices that can help reduce the likelihood of chargebacks and improve overall transaction quality. Clear and accurate billing descriptors should be used so that customers can easily identify transactions on their bank statements, reducing the risk of disputes arising from unrecognised charges.

Maintaining transparent and easily accessible refund, return, and cancellation policies is equally important. Customers should be informed of these policies before completing a transaction, as clarity at the time of purchase helps manage expectations and reduces post-transaction disputes. Providing prompt and responsive customer support also plays a key role, as timely resolution of customer concerns often prevents disputes from escalating into chargebacks.

Merchants are further advised to share order confirmations, invoices, and delivery tracking details with customers, as these records help build trust and serve as useful references in the event of a dispute. Where applicable, implementing fraud-prevention and authentication measures, such as OTP-based authentication or other card network–supported security mechanisms, can help reduce unauthorised or fraudulent transactions.

Overall, proactive and transparent communication with customers at every stage of the transaction significantly reduces the likelihood of disputes and contributes to a healthier payment acceptance environment.

Regulatory & Network Context (India)

In India, chargebacks are processed in accordance with the rules, operating guidelines, and dispute resolution frameworks prescribed by the applicable card networks, which govern timelines, reason codes, and evidence requirements. These processes are further subject to banking and payment system regulations issued by the Reserve Bank of India, which set out overarching compliance and risk-management obligations for banks and payment aggregators.

Chargeback handling is also guided by the internal policies and procedures of acquiring banks and payment aggregators, developed in line with regulatory requirements and card network standards. These policies typically cover merchant monitoring, dispute escalation, settlement handling, and risk mitigation measures.

It is important to note that payment aggregators act as facilitators in the chargeback process, enabling communication and documentation flow between merchants, acquiring banks, card networks, and issuing banks. Payment aggregators do not independently adjudicate disputes, and final decisions on chargebacks rest with the issuing bank, in accordance with applicable card network rules and regulatory guidelines.

Frequently Asked Questions (FAQs)