The Chargeback Lifecycle

The chargeback lifecycle often looks like this:


Step 1: Initiating the Chargeback

Chargebacks typically start when a cardholder questions the validity of a charge and files an official dispute with their issuing bank. Cardholders can issue disputes for any number of reasons, such as not recognizing the charge on their bill, not receiving a refund or credit that was initiated or promised by the merchant, dissatisfaction with the product or service rendered, delivery issues, or suspected fraud.



Issuing banks can also initiate chargebacks when they identify authorization or processing errors, or suspect merchant fraud. These types of disputes are known as bank chargebacks.

The issuing bank may initially try to resolve the dispute by submitting an inquiry (also known as a retrieval) for further information about the charge. Card brands regulate the inquiry process, managing the communication between the merchant and issuer; as such, the process works slightly differently depending on the brand of the cardholder’s card. The information gathered can clear up the cardholder’s original concern and bring the dispute process to a quick resolution.

If the issuer or merchant doesn’t participate in this process, however, the dispute escalates. At this point, the issuer generally gives the cardholder a provisional credit on their account equal to the amount of the disputed change and submits the chargeback through the card brand network. The card brand then routes the chargeback to the merchant’s acquiring bank, along with a reason code that represents how the issuer interpreted the cardholder's reason for the dispute.

Reason Codes

Chargeback reason codes fall into four general categories:

  1. Authorizations – These include processing a transaction without obtaining an authorization, processing on a declined authorization, or failing to include an authorization in the settlement file for a transaction
  2. Processing errors – These are mostly bank chargebacks, and often result from late presentment, processing the incorrect currency, or duplicate processing
  3. Fraud – These can indicate either true fraud or friendly fraud
  4. Consumer-initiated disputes – These are largely related to service issues, such as the customer not receiving the merchandise or services, canceled recurring payments, merchants failing to properly process a customer’s return, or items not appearing as described or defective

Step 2: Passing the Chargeback to the Merchant

After receiving a chargeback from the issuing bank, the acquiring bank may auto-reply on the merchant’s behalf. Otherwise, they’ll forward the chargeback along to the affected merchant and immediately debit the amount of the chargeback—plus any associated fees—from the merchant’s daily settlement report.



If the merchant’s total sales for the day are less than the sum of all refunds, credits, and chargebacks, this can result in a rejection of some initiated refunds (which can lead to even more chargebacks). As such, it's critical that merchants monitor their net daily and settlement transaction values.

The merchant then either accepts the chargeback (effectively ending the process) or defends themselves against the chargeback to the acquirer. This process is known as representment.

To determine how to proceed, the merchant will start by comparing the chargeback documentation to their own transaction records of sale. If the merchant feels confident they’ve met their obligations to the customer—and therefore, no credit is due—they can reach out to the customer to gather more information about the reason for the dispute. This can sometimes lead to a quick resolution of the customer’s concerns, especially in the case of friendly fraud. Even when this communication doesn’t resolve the issue, it can sometimes help the merchant identify problems in their fulfillment or customer service processes that could prevent future chargebacks and restore goodwill with customers.

Step 3: Presenting Evidence Against the Chargeback

If the merchant decides to defend themselves against the chargeback, they must provide compelling evidence in accordance with card brand rules to contradict the chargeback claim and prove the transaction’s validity. Such proof can include:

  • The merchant’s public Terms of Service
  • Proof of accurate terms of sale communicated to the customer prior to the transaction
  • A substitute record of charge that clearly states the date of sale
  • Proof of shipping records or product delivery
  • Copies of customer service communications where the transaction was discussed and agreed to by the customer, or where the customer attempted to cancel the transaction when such an action was not within the merchant’s policies
  • The status of any returns

The acquirer then reviews the evidence provided and—if they agree with the merchant’s conclusion—submits the defense to the issuer.

Step 4: Resolving the Chargeback

The final step of the chargeback lifecycle involves the issuer reviewing the evidence presented by the acquirer and delivering a final verdict on the disputed transaction. If they accept the presented evidence, the issuer will debit the chargeback from the cardholder’s account, thereby initiating the process of crediting the merchant for the disputed amount. If they stand by their original decision, the merchant loses the chargeback and the cardholder retains their credited funds.