What is Chargeback?

A chargeback is a forced reversal of a credit or debit card transaction, initiated by the cardholder’s issuing bank on behalf of the customer. Unlike a standard refund where the merchant voluntarily returns funds, a chargeback is imposed on the merchant by the payment network after a customer disputes a charge. Chargebacks were originally designed as a consumer protection mechanism to guard against unauthorized transactions and merchant fraud, but they have become a significant operational and financial challenge for e-commerce businesses, particularly as “friendly fraud”—disputes filed on legitimate purchases—has increased.

Why It Matters

Chargebacks are far more costly than refunds. When a chargeback is filed, the merchant loses the transaction amount, the product (if already shipped), and is assessed a chargeback fee by their payment processor—typically $15–$100 per incident. If the merchant’s chargeback rate exceeds the card network’s threshold (usually around 1% of transactions), the business may be placed in a monitoring program with higher processing fees, reserve requirements, or—in extreme cases—termination of the merchant account entirely.

Beyond direct financial losses, chargebacks consume significant staff time. Each dispute requires investigation, evidence gathering, and formal response within tight deadlines. The merchant must compile order details, shipping confirmations, delivery signatures, customer communications, and fraud screening results into a representment package to contest the chargeback. Even with compelling evidence, merchants win only about 30–40% of disputes on average. For growing e-commerce operations, managing chargebacks without structured processes can overwhelm customer service and finance teams.

How It Works

The chargeback process follows a regulated workflow governed by the card networks (Visa, Mastercard, etc.):

• Dispute Initiation: The cardholder contacts their issuing bank to dispute a transaction. Common reasons include unrecognized charges, items not received, items significantly different from the description, duplicate charges, or unauthorized use of the card.
• Provisional Credit: The issuing bank provides the cardholder with a provisional credit for the disputed amount and notifies the merchant’s acquiring bank. The disputed funds are debited from the merchant’s account.
• Merchant Notification: The acquiring bank or payment processor notifies the merchant of the chargeback, providing the reason code and a deadline for response. Reason codes categorize the dispute type and determine what evidence is required for representment.
• Evidence Gathering and Representment: The merchant compiles documentation to challenge the chargeback—order confirmation, proof of delivery, customer communication logs, AVS and CVV verification records, and any other relevant evidence. This package is submitted to the acquiring bank within the response window, typically 20–45 days.
• Resolution: The issuing bank reviews the merchant’s evidence and makes a final decision. If the merchant prevails, the provisional credit is reversed and funds are returned to the merchant. If the cardholder prevails, the chargeback stands and the merchant absorbs the loss plus fees.

How Nventory Helps

Nventory helps you prevent chargebacks before they happen and respond effectively when they do occur. Accurate real-time inventory sync prevents overselling that leads to cancellations and “item not received” disputes. Automated order confirmations, shipping notifications with tracking links, and delivery updates keep customers informed throughout the fulfillment process, reducing the confusion that triggers “unrecognized charge” disputes. When a chargeback does occur, Nventory’s detailed order timeline—capturing every status change, communication, and fulfillment event with timestamps—provides the documentation you need to build a strong representment case. By maintaining a complete, auditable record of every order from placement to delivery, Nventory gives you the evidence trail that wins chargeback disputes.