A chargeback is a reversal of a payment initiated by the cardholder's bank. It happens when a customer disputes a charge and the bank agrees that the transaction was fraudulent, unauthorized, or for goods and services that were never delivered. The bank reverses the payment, taking the money from the merchant and returning it to the customer.

The chargeback process is governed by card network rules, not by law. Visa, Mastercard, and American Express set the timelines and procedures. The customer files a dispute with their bank. The bank investigates and, if it finds merit, issues a provisional credit and sends the chargeback to the merchant's bank. The merchant can accept the chargeback or fight it with evidence, like a delivery receipt or a signed contract. If the merchant fights and wins, the chargeback is reversed.

Chargebacks are a consumer protection. They cover fraudulent transactions, undelivered goods, and billing errors. But they are also abused. Some customers file chargebacks instead of requesting refunds, a practice called friendly fraud. Merchants pay chargeback fees, typically $20 to $100, on top of losing the sale. High chargeback rates can get a merchant kicked out of card processing entirely.

Merchants can reduce chargebacks by using clear billing descriptors, shipping with tracking, and responding quickly to customer complaints. Prevention is cheaper than fighting.