Credit card chargebacks were invented with the Fair Credit Billing Act, a federal law enacted in 1974 in the United States. For the first time in history, consumers were protected against credit card fraud. If an unauthorized charge appeared on their credit card statement, they could now request a refund from the credit card issuer.

The law was a great step forward for the financial protection of consumers. Businesses, however, didn’t and still don’t have such tight protection in law. The onus lies on them to defend their case when a consumer requests a refund. In this article, we will talk about the negative impact chargebacks can have and what strategies you can use to prevent or reduce credit card chargebacks.

Key takeaways

• Chargebacks cost businesses billions annually, with fraud accounting for the vast majority of cases and friendly fraud alone representing nearly 40% of disputes.
• Automated bot attacks enable fraudsters to commit payment fraud on a massive scale using stolen credit card data, making traditional manual fraud prevention ineffective.
• Businesses that exceed their credit card issuer’s chargeback threshold ratio face increased fees, heightened scrutiny, and potential restrictions on their ability to process payments.
• Chargeback prevention strategies include deploying fraud prevention software, maintaining clear billing descriptions, processing transactions promptly, and keeping detailed records.

How do credit card chargebacks work?

Credit card chargebacks are initiated by the cardholder—usually, but not always, when they notice an unauthorized charge—by contacting their credit card issuer to dispute a charge and request a refund. The credit card issuer will then investigate the cardholder’s dispute to determine if the chargeback is warranted.

If the dispute is considered warranted, the credit card issuer will reverse the charge on the cardholder’s account and request a refund from the merchant. The merchant typically has a narrow window of time to dispute the chargeback with evidence that supports their position.

The credit card issuer will review the merchant’s evidence and make a final decision on the chargeback. If the credit card issuer decides in favor of the cardholder, the merchant will have to refund the cardholder and may also be asked to pay a chargeback fee. If the decision goes in favor of the merchant, the credit card charge will be reinstated on the cardholder’s account.  

The negative impact of credit card chargebacks on your business

The ratio of chargebacks to total processed transactions is called the chargeback ratio. For example, if you have ten chargebacks out of a thousand processed transactions, your chargeback ratio is 1%. You want to keep the chargeback ratio as low as possible, because credit card issuers have undisclosed chargeback thresholds ratios (CTRs) and will penalize your business when you cross the threshold—usually by raising your fees or subjecting your business to more scrutiny and restrictions. 

But that’s not the only downside of credit card chargebacks. Others include:

• Financial losses: If the chargeback goes in favor of the customer, by law you must issue them a refund. Because it’s unlikely you’ll be able to recover the goods or services provided to the customer, this means a direct financial loss.
• Reputational damage: Any customer who has had to go through the chargeback process for a transaction with your business will think twice before ordering from you again. Whether or not it’s your fault, credit card chargebacks have a direct impact on customer loyalty and brand reputation.
• Administrative burden: The credit card issuer automatically assumes the customer is right when they request a refund. The burden lies on the merchant to provide evidence supporting their position. Managing and responding to chargebacks is a tedious, time-consuming chore—but a chore that you can’t avoid if you don’t want to lose money.
• Chargeback fees: On top of the refunds that come with lost customer disputes, credit card issuers often charge a fee for every chargeback filed against them. When your chargeback ratio is high, these fees further increase the cost of credit card chargebacks.

Who is most at risk of chargeback fraud?

Consumers are well-protected in law against chargeback fraud. While certainly a nuisance, it’s quite likely they’ll get their money back when they notice an unauthorized charge on their credit card statements. That’s why businesses have the most to lose when it comes to chargeback fraud. The burden of evidence lies on them when a customer requests a credit card chargeback. If a business doesn’t provide sufficient evidence in time, it will suffer the consequences.

Additionally, not all customers act in good faith. Almost 40% of online merchants worldwide have experienced what’s called “friendly fraud,” where a customer knowingly completes a purchase and then requests a refund from their bank, claiming they didn’t authorize the transaction, didn’t receive the item, or are dissatisfied with the item’s quality or condition. It’s a difficult type of fraud to counter that requires a business to be diligent with its paperwork and chargeback administration.

What puts you at risk of chargebacks?

Fraud accounts for the vast majority of credit card chargebacks. This includes friendly fraud, but also payment fraud that can be the result of account takeover attacks, where a fraudster gains access to a customer account and buys goods or services with stolen credit card details.

Other factors that put you at risk of chargeback are poor customer service, poor product quality, and processing errors (e.g. when you charge a customer twice instead of once), but these make up only a small percentage of all your chargebacks. The biggest chargeback risk is fraud.

9 strategies to prevent credit card chargebacks

1. Use fraud prevention software

Because fraud accounts for the vast majority of credit card chargebacks, implementing real-time bot and agent trust management software is one of the most effective ways to reduce disputes. This type of card fraud prevention software analyzes every request to your websites, mobile apps, and APIs in milliseconds, identifying patterns that indicate fraudulent activity and blocking threats before they complete transactions.

Modern fraud prevention software evaluates intent rather than just identity, detecting both known attack patterns and sophisticated threats that evade traditional security measures. By stopping automated bot and AI agent attacks at the edge, businesses can prevent account takeover attempts, credential stuffing, and payment fraud that lead to chargebacks.

This approach works well because fraudsters don’t commit fraud manually—that would take far too much time. Instead, they use automated scripts and malicious bots to find vulnerable online merchants, break into accounts, and commit payment fraud with stolen credit card information. Advanced bot detection and payment fraud prevention software stops these automated threats in real time.

2. Clearly communicate your refund policies

The better you communicate your refund and return policies with your customers, the fewer issues you will have with chargebacks related to misunderstandings or confusion. Providing a clear process for handling returns and refunds, and making it clear to customers what to expect in the event of a dispute, both reduce the risk of chargebacks.

Provide information about your policies up front and in clear language. Don’t skimp on important details such as refund eligibility, what delivery times customers can expect, what your shipping policies are, restocking fees for returned items, what documentation you require before accepting a return, and what warranties come with particular products.

3. Process transactions quickly and accurately

Some chargebacks can be caused by errors in the transaction process, where the customer is accidentally charged more than once or charged the wrong amount. This usually happens when there’s a glitch somewhere in the transaction process. You want to ensure your payment process is as bug-free as possible so these transaction errors don’t happen.

Similarly, you want to process transactions as quickly as possible—ideally right away. When it takes a few hours or days for a transaction to process, customers may ask for a chargeback in the belief that they didn’t authorize the payment. Processing transactions immediately also makes it easier for customers to manage their finances.

4. Keep detailed transaction records

The better you keep records of all transactions, the easier it will be to dispute chargebacks. So keep all receipts, invoices, date and time of transactions, and correspondence with customers. Name all these records appropriately so they’re easy to find too. Build a process around transaction documentation so you don’t have to reinvent the wheel for every chargeback.

Not only will this raise your chances of winning more customer disputes, but you will also spend less time gathering evidence. These records can also prove helpful for other purposes, such as tracking sales and analyzing customer behavior. It never hurts to keep well-organized transaction documentation.

Always make sure you have a secure protocol for storing your customers’ personally identifiable information (PII), to keep bad actors from stealing it.

5. Improve your customer service

The faster and better you respond to customer questions or complaints, the fewer chargebacks you will have. Consider a customer who doesn’t understand how to use a product they just ordered from your website. If they have no means of contacting you, or if it takes days for you to send your first reply, chances are they may request a refund through their credit card issuer.

Great customer service will reduce chargebacks, but that’s of course only one of its benefits—you’ll have happier customers, a better reputation, more repeat sales, and ultimately a more profitable business. It’s always worth investigating how you can improve your customer service. Some companies, like Zappos, even managed to turn customer service into a competitive advantage.

6. Use clear billing descriptions

Using clear and accurate billing descriptions makes it easier for the customer to recognize and remember their purchases, which in turn will reduce the number of chargebacks related to confusion or misunderstandings.

The more specific and accurate the description, the better. For example, “Merchant Name – Annual Software Subscription” is better than “Merchant Name – Purchase”. Not only will clear and accurate billing descriptions reduce the number of chargebacks, but they also make it easier for customers to manage their finances and track their spending. 

7. Respond to chargebacks promptly

The deadline for responding to a chargeback varies between card issuers, but generally sits somewhere between 30 and 45 days. Still, there’s no benefit to waiting to respond. Responding quickly will put you on good (or at least better) footing with both the customer who opened the dispute and the credit card issuer who’s managing it.

You should always aim to respond promptly and professionally to every chargeback, with as much evidence as possible. Ideally, you systematize this process so you don’t lose time with every chargeback.

8. Use customer relationship management software

Customer relationship management (CRM) software can be a great tool to track customer interactions and manage customer relationships in a centralized place. The software will make it easier to keep transaction records and analyze customer behavior.

By tracking your interactions with customers, you can identify and prevent issues any particular customer will have, which in turn will reduce the risk of credit card chargebacks. A CRM is also useful for tracking sales and managing customer relationships.

9. Stay up-to-date on chargeback best practices

The fraud landscape is ever-changing. The best practices for fraud prevention today are very different than they were five years ago, which is why you always want to stay updated on the latest chargeback best practices. You can do so by:

• Attending industry conferences and events.
• Reading industry publications.
• Consulting with industry experts.

Protect your business against e-commerce fraud with DataDome

DataDome delivers real-time bot and agent trust management, protecting your websites, mobile apps, and APIs against all forms of automated threats—including those that lead to credit card chargebacks.

Our multi-layered AI engine evaluates intent, not just identity, analyzing every request in under 2 milliseconds to differentiate between legitimate users and fraudulent traffic. Processing 5 trillion signals daily across thousands of AI models, DataDome stops sophisticated bot attacks, account takeover attempts, and payment fraud before they impact your business.

DataDome integrates with any infrastructure and deploys in hours, not months. Named a Leader in The Forrester Wave™ for Bot Management, DataDome delivers 99.99% detection accuracy with the industry’s lowest false-positive rate—protecting your revenue while ensuring that legitimate customers experience zero friction.

If you’re struggling with credit card chargebacks or any other fraud or bot-related problem, schedule a live product demo today.