The difference between chargebacks and disputes

Matthew Blenkarn, Content Writer
26 Aug 2022
Iconography of debit card with two arrows circling around it

Chargebacks and disputes alike are generally bad news for businesses. Each is a sign of customer dissatisfaction or even fraud, and for merchants, it can lead to financial penalties. 

But while chargebacks and disputes are related to one another, they don’t actually mean the same thing. It’s easy to understand the confusion — disputes often result in chargebacks. In fact, dealing with disputes effectively can help prevent some chargebacks and mitigate the harm that goes with them.

So what is the difference between a chargeback and a dispute? And how can you address both of them properly? This article will outline a few key distinctions that will help you ensure your payment challenges don’t escalate.

What is the difference between a chargeback and a dispute?

The words ‘chargeback’ and ‘dispute’ are often used interchangeably. Both can refer to a customer contesting a charge placed on their payment card. But disputes actually represent the first step of that process, while chargebacks are penalties that may be imposed at the end of it.

So what does a dispute mean in payments? Generally, it involves a customer contacting their bank to reverse a charge on their card. The customer must then give a reason for the dispute and provide evidence that supports their assertion.

If the bank decides their customer’s dispute is valid, it will initiate a chargeback. This entails refunding the customer for the charged amount and applying an additional fee to the merchant that took the payment. Introduced in the US in 1974 with the Fair Credit Billing Act, chargebacks provide additional consumer protections for cardholders.

Generally, merchants want to avoid chargebacks in all circumstances. Not only do they carry costly penalties, but a high volume of chargebacks can also make it more difficult for merchants to access payment processing services at a reasonable rate.

How do disputes work?

To file a dispute, customers must contact their issuing bank. Before that, they must attempt to work the issue out with the merchant involved. In the event that the merchant is unresponsive or uncooperative, the customer can file a dispute with their issuing bank. Depending on the payment processor involved, this must happen within 60 to 120 days of the billing date.

There are a number of valid reasons for a customer to dispute a charge on their card. For example, the transaction itself may be fraudulent. Card-not-present fraud — which caused businesses to lose £456 million in 2020 — often results in chargebacks against merchants.

Legitimate charges can also be disputed if the purchase is damaged or never arrives. In the latter case, merchants can offer a refund to address the situation proactively. Failure to do so may lead to the customer disputing the charge, resulting in a chargeback.

Disputes can also result from mistakes on the customer’s end. For example, a company may bill them under a different name for a legitimate charge, or the customer could forget they’d enrolled in a subscription or recurring payment. Again, effective customer service can help businesses mitigate these issues.

Unfortunately, some disputes do stem from chargeback fraud, where a customer knowingly challenges a valid charge. As much as 86% of all chargebacks stem from either intentional or unintentional fraud, so it’s important for merchants to be aware of the risks and take proactive measures to avoid them, such as requiring a signature upon delivery or sending confirmation emails with orders.

In cases where merchants and customers fail to come to an understanding, customers can proceed with their dispute. If the bank decides the challenge is appropriate, it will credit the customer’s account temporarily until the issue is resolved.

How does a dispute become a chargeback?

A dispute becomes a chargeback when the issuing bank sends it to the card network. From there, it goes to the merchant’s bank, which notifies the business. It’s at this point that the dispute escalates to the chargeback stage. The merchant’s account is automatically debited for the amount in question. 

Sometimes the issuing bank will notify a merchant before proceeding with a chargeback. The business can then submit evidence of the charge’s validity or settle the dispute with the merchant directly. 

After a chargeback occurs, merchants have a few options. In the event of legitimate fraud, they must accept the chargeback. If the chargeback is invalid, though, merchants can challenge it in a process known as ‘representment’. The onus is now on the business to submit evidence showing that the charge was warranted in the first place.

How can you prevent a dispute from becoming a chargeback?

Proactive support is the best way to prevent a dispute from becoming a chargeback. When customers find a suspicious charge, they’ll often reach out to the merchant before contacting their bank. Resolving issues at this point will ensure they don’t escalate to the chargeback stage.

Merchants can also take steps to reduce confusion around charges on their customers’ bills. For example, selecting a clear and appropriate billing descriptor helps consumers know exactly who’s initiating a payment on their card. This makes them less likely to initiate a dispute in the first place.

Eliminating chargebacks with open banking

Another great way for merchants to prevent chargebacks is to avoid card processing entirely in favour of open banking payments. No card network is involved, eliminating both chargebacks and hefty processing fees

Open banking payments also provide an ideal ecommerce experience. Customers benefit from embedded strong customer authentication (SCA), which provides added security while ensuring a smoother process. The result: a safe and secure checkout that allows consumers to pay in a few clicks.

Resolving disputes before they escalate is a great way to prevent chargebacks. Open banking payments can help merchants take that extra step to protect themselves.

Read our definitive guide to open banking to learn more about how open banking payments can benefit your business.

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