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How to dispute and prevent chargebacks as a small business

Thursday, December 22, 2022

For many small business owners, the holiday season brings peak traffic and sales. But with that, a tradeoff: the more sales you generate, the more chargebacks you’re likely to see.

As that season wraps and you find yourself on the receiving end of chargebacks, we know you might need some help navigating them.

We’re going to go over what they are (and aren’t), how they happen and your rights as a merchant:

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What is a chargeback?

At its core, a chargeback is the reversal of a single transaction that was disputed. Disputed is the key word, because unlike voids or refunds (which we’ll touch on shortly), the customer contacts their bank to challenge the merchant — instead of working with the merchant directly.

What would cause someone to open a customer dispute? In many cases, a cardholder saw a charge on their credit card that they didn’t recognize or approve. Their bank will open an investigation, and if they find the claim valid, they issue a chargeback to the business.

The transaction amount of the original sale is deducted from the business’ account, and the funds are returned to the cardholder.

OK, then what’s a refund?

Refunds also involve returning funds to a customer, but unlike chargebacks, they are more often handled between the customer and merchant, without third-party involvement.

Why do customers issue credit card chargebacks?

  • They did not authorize the purchase

  • Their card was charged twice (or more)

  • They never received the goods or services they paid for

  • They were dissatisfied with a service

  • They returned an item, but the merchant never processed the refund

  • They requested a refund and the merchant refused

  • Goods or services were purchased on a stolen credit or debit card

  • Fraudulent transaction

Types of chargeback fraud

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Friendly fraud
A customer makes a legitimate, authorized purchase on their card, then disputes it

A woman sitting at a desk looking at her laptop and holding a credit card to submit a small business chargeback

How do chargebacks work?

Let’s break down the chargeback process.

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Purchase and payment dispute initiation

A customer spots a suspicious or unauthorized charge on their credit card statement or deduction from their bank account. Or, they want to dispute a charge due to inadequate service or never receiving the products they were charged for. They contact their bank (which we’ll refer to as the “issuing bank”), and they open an investigation.

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Communication and evidence collection

The issuing bank alerts the merchant’s bank (also commonly referred to as the “acquiring bank”) of the chargeback and includes a chargeback code.

Chargeback reason code: A standardized code that indicates the reason a charge was disputed and a chargeback occurred. They help categorize cardholder disputes and determine next steps, and they vary by card network. Visa, Mastercard, Discover and American Express all have unique chargeback reason codes.

Next, the merchant’s bank works with the merchant to collect and provide to the issuing bank any evidence that may refute the chargeback — more on that later.

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Issuing bank decision

The issuing bank’s investigator reviews all of the available evidence and determines whether or not the cardholder’s claim is justified. They either issue a chargeback to the merchant’s bank, or they find that the charge is authentic and side with the merchant.

If a chargeback is issued, the cardholder’s bank reverses the fraudulent charge by giving them a provisional credit. Then, they charge the merchant this credit amount to compensate for the bank’s loss, plus a chargeback fee.

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Arbitration

If the two parties still do not agree, we step into a chargeback dispute process called arbitration. This gets the credit card company involved. Both the issuing and merchant banks present their evidence, and the card company makes a final decision to settle the dispute.

A man in a back office on phone hunched over a computer disputing a chargeback

How do I dispute a chargeback?

A chargeback can feel like a punch in the gut, but if you’ve been hit with one, don’t panic.

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Connect with the customer directly

Frequently, chargebacks are misunderstandings and can be resolved through speaking with the issuing customer. They may have even tried to contact you already, but failed and thought a chargeback was their only option.

(Side note: Stay diligent about responding to customer service inquiries to avoid such a case! This will build rapport with your customers and prevent future chargebacks.)

Once you’ve made contact, see if you can resolve their issue directly. The case could be as simple as the customer forgot they placed an order with you, or they didn’t recognize your business name on their credit card statement.

If the issue is resolved and the customer decides a chargeback is unnecessary, they need to contact their bank to cancel it. Keep a record of all correspondence, so you can submit it in the next step if necessary.

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Compile evidence and prepare a rebuttal case

If the consumer still wants to pursue a chargeback, you either need to accept it or collect evidence to refute it, which is called representment.

Chargeback representment: A process in which the merchant contests the chargeback by providing relevant data and proof that the charge was legitimate.

Remember those chargeback reason codes? That will come in handy here, since it will tell you what kind of evidence to collect — could be signed receipts, proof of delivery, correspondence with the customer or other authorization confirmations. You have a tight time limit to do so – usually only 7-10 days – so don’t put it on the back burner.

Next, within that time frame, you present the evidence with a written rebuttal to your acquiring bank or payment processor. They will pass it along to the issuing bank, and the acquiring bank will work as a mediator.

A male and female employee sitting in a restaurant with a tablet reconciling multiple receipts

What do I do if I lose a chargeback?

The blunt truth: Chargebacks aren’t great for business. The representment process is tedious on its own, but then throw in the fees, credit you owe the customer and possibly lost merchandise? They’re a time and money suck.

Plus, if you get a lot of them (accounting to over 1% of your total transactions), your business might be flagged as high-risk by payment processors. That could mean higher payment processing costs, additional fees and even the risk of having your merchant account frozen.

Once a decision in the arbitration process has been made, there is little more you can do. But, you can take steps to avoid chargebacks in the future.

A male and female employee in a home goods store mailing online orders

How can I avoid chargebacks?

From technology to transparency, you can minimize your chargeback risk in several ways.

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Be transparent with customers

Reduce the miscommunication that leads to chargebacks by creating clear policies and setting expectations:

  • Keep customers updated about things like shipping delays, product recalls and staff errors. For example, if you notice that a credit card transaction was processed incorrectly, get in front of it by contacting the customer right away.

  • Write a clear refund policy and/or return policy and make it (as well as your contact info) visible around your business, on your website and receipts.

  • Respond to customers promptly and suggest a resolution to keep them from going to their credit card issuer.

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Use a reliable shipping partner

If you’re an online retailer, don’t skimp when it comes to choosing a shipping service. Last-mile courier services may appear less expensive than the major national mail carriers, but if you don’t use a reputable one, it’ll cost you in the long run.

Consider a shipping app that integrates with your POS and ecommerce platform. Tracking numbers are automatically added to order confirmations, so you can quickly reference them without having to pull data from multiple places.

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Avoid card-not-present transactions when possible

Card-not-present, or CNP, transactions are just what they sound like: The card isn’t present at your business when you process the transaction. They’re particularly risky. For one, it’s often easier for a fraudster to get ahold of someone’s card information versus stealing a physical card, which they’d only get away with using in CNP transactions.

If you must accept card-not-present transactions, here are a few best practices for securely doing so:

  • In addition to the card number, take the name on the card, billing address, phone number, expiration date and CVV code

  • Use address verification service (AVS), which helps you compare the billing address the customer gave you to the billing address on record at the issuing bank

  • Take the payment using a secure virtual terminal

  • Record tracking numbers and delivery confirmations

  • Opt for a signature proof of delivery

If you’re a takeout restaurant that traditionally takes customers’ payment information over the phone, consider moving to an online ordering platform with a secure built-in payment terminal.

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Opt for modern, secure payments and POS technology

If you’ve been hit with a chargeback and need to open a dispute of your own, you need data. And the more data you have, the better. So when evaluating small business point of sale systems, go for one that lets you build out customer profiles, get granular with inventory and access any of this data from any device in real time.

On the payments side: EMV payments are no longer a nice-to-have. Accepting them is a non-negotiable when it comes to keeping your business safe and compliant. The good news is, Heartland’s payment terminals are all EMV-capable, so as long as you accept them, take comfort in knowing that your risk is already reduced.

If we aren’t already working together, let this be the year that you partner with a payment processor and POS service provider that puts your business’ security first. Our solutions help close the loop on in-person card fraud, while giving you the tools you need to minimize chargeback risk.


Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us