Understanding the Chargeback Process: Types & Challenges

Chargebacks were originally designed to help customers reverse transactions when they’ve fallen victim to fraud. This can include scenarios such as stolen cards, payment credentials, or account takeovers. However, before issuing a chargeback, customers are expected to try all other options with the merchant, such as requesting a refund.

There are three primary situations that lead to chargebacks:

• Legitimate chargebacks: These occur when a customer is defrauded by a third party, such as when their card details are stolen and used without their knowledge. In these cases, chargebacks function as intended, protecting consumers from unauthorised transactions.
• Erroneous chargebacks: This happens when a customer mistakenly believes a transaction was fraudulent, often due to a misunderstanding of their transaction history. Subscription services frequently experience this issue when customers forget about ongoing payments or fail to recognise a merchant name on their statement.
• Chargeback/friendly fraud: This occurs when a customer intentionally requests a chargeback for a legitimate transaction, even though they agreed to the terms and conditions at the time of purchase. This can range from buyer’s remorse to outright abuse of the chargeback system.

While these categories may seem straightforward, the issue of chargebacks is far more complex than it appears. Initially created to combat fraud, chargebacks have evolved into a tool for customers to resolve disputes with merchants, even when fraud isn’t involved. In some industries, chargebacks are increasingly being used in ways that go beyond their intended purpose.

For example, in hospitality, customers may raise chargebacks when they are billed for additional fees they agreed to, such as charges for bringing a pet into a hotel room or smoking in a non-smoking room. Similarly, in digital services and eCommerce, customers may dispute charges for non-refundable bookings, digital content, or online courses - even after accessing or using the service.

This shift in customer perception has made chargebacks an increasingly challenging issue for merchants across various industries. High chargeback rates can lead to financial losses, increased payment processing fees, and even penalties from card networks if chargeback thresholds are exceeded.

As digital payments continue to evolve, so too will the chargeback landscape. Merchants that take a proactive approach - combining fraud prevention, customer education, and robust dispute management - will be better positioned to minimise chargeback losses and maintain strong customer relationships.

Chargebacks aren’t going away, but with the right strategies, businesses can stay ahead of the challenge.

Source: Global Chargeback Management Market 2025

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