What is a chargeback?

2 min read

Quick answer #

A chargeback is when a customer disputes a card transaction directly with their bank, and the bank reverses the payment without your involvement. The money is automatically pulled back from your settlement, and you have a limited window to respond with evidence proving the transaction was legitimate. Chargebacks are different from refunds — a refund is something you choose to give; a chargeback is forced on you by the customer’s bank.

Why chargebacks exist #

Chargebacks are a consumer-protection mechanism built into the card payment system. They give cardholders a way to dispute fraudulent transactions or transactions where the merchant failed to deliver. Without chargebacks, card payments would carry significant risk for consumers, and online commerce as we know it probably wouldn’t exist.

The trade-off: merchants carry the financial risk. A customer can dispute a transaction up to 120 days after the payment date in most cases, and the bank generally sides with the customer unless you provide compelling evidence otherwise.

The chargeback lifecycle #

A chargeback goes through several stages, and your action is needed at one specific point.

Stage 1: The customer disputes #

The customer contacts their bank — either by phone, app, or in person — and tells them a transaction on their statement is wrong. The bank takes their statement at face value and opens a dispute.

Stage 2: The bank claws back the funds #

The customer’s bank notifies our acquiring bank that the transaction is disputed. Our acquiring bank automatically deducts the disputed amount (plus the chargeback fee) from your next settlement. This happens before you’ve had any chance to respond. You’ll see the deduction in your dashboard as a “Chargeback Initiated” entry.

Stage 3: You receive the dispute notification #

Pay@ Gateway emails you a chargeback notification with the dispute reason code, the disputed amount, the deadline for your response, and a link to the evidence-submission page in your dashboard.

Stage 4: You respond with evidence (or accept) #

You have a fixed window — usually 7–14 days — to respond. You can either:

Submit evidence that the transaction was legitimate, in which case the bank reviews and may reverse the chargeback
Accept the chargeback and forfeit the disputed amount

If you don’t respond within the window, the chargeback stands and the money stays with the customer.

Stage 5: The bank decides #

If you submit evidence, the customer’s bank reviews it. If they side with you, the funds are returned to your account (this is called “winning” the chargeback). If they side with the customer, the chargeback stands.

The most common chargeback reasons #

Fraudulent transaction — customer says they didn’t make the payment. Often a stolen card was used on your site.
Product not received — customer didn’t get what they paid for. Common in delivery delays.
Product not as described — what the customer received didn’t match the listing.
Duplicate transaction — the customer was charged twice.
Cancelled subscription — the customer thought they cancelled a recurring payment but the next charge went through.
Refund not received — you issued a refund but it hasn’t shown up in their account yet (often a misunderstanding about refund timing).

Why chargebacks cost more than just the disputed amount #

Beyond losing the transaction amount, chargebacks have three other costs:

The chargeback fee charged by the card networks (this is unavoidable, even if you win the dispute)
The time to prepare evidence and respond
Your chargeback ratio — if your chargeback rate exceeds 1% of your transaction volume, card networks can place you in a monitoring programme, increase your fees, or in extreme cases terminate your merchant account

This is why preventing chargebacks matters more than winning them.