The merchant's guide to chargebacks: from reason codes to dispute strategy

Sarah Boehmer, Senior Director, Payments & Chargebacks Strategy at Justt, elaborates on everything merchants need to know about chargebacks, from how they work and what reason codes reveal to the real cost of disputes and how to build a strategy that protects revenue.

What is a chargeback?

When I was in college, someone stole my purse and went on a shopping spree with my credit card. While unsettling, it turned out not to be a big deal. I called my bank and explained what happened, and they reversed the fraudulent charges and sent me a new card. This was my first experience with chargebacks.

Many countries around the world have enacted consumer protection laws that are meant for situations like this. Especially as ecommerce and card-not-present transaction volumes have grown, there is significant potential for card information to end up in the wrong hands, or for more mundane processing errors to occur. Chargebacks give consumers a remedy.

Years later, working on the merchant side, I saw the other half of the story. Unfortunately, some consumers exploit these protections. Multiple industry studies suggest that around one-third of American adults admit to disputing a legitimate charge, costing merchants upwards of USD 100 billion annually. Thus, chargeback management is a strategic issue for merchants of all sizes.

How chargebacks work: the lifecycle

The process starts when a customer contacts their issuing bank to dispute a charge. The window for doing so varies based on the applicable regulation, the reason, and the network. Because disputes can be filed weeks or even months after the original transaction, merchants may feel the impact of past operational issues long after they occur. This delayed visibility makes dispute management both a customer experience issue and a risk forecasting challenge.

The issuing bank has a few options for handling the dispute:

• If the amount disputed is small, the issuing bank may decide to credit the customer and forgo raising a chargeback with the merchant because of the associated costs.
• The issuing bank may ask the merchant for more information about the charge. This is known as a retrieval and typically does not move funds, though it still requires operational handling.
• If the case meets network eligibility criteria, the issuing bank may attempt to hold the merchant liable by initiating a chargeback.

Once a chargeback has been initiated, funds are taken from the merchant, and the ball is in their court. The merchant can accept it or represent it (often referred to as ‘fighting’ the chargeback) with compelling evidence (CE) demonstrating that the charge is legitimate. The networks and the merchant’s payment service provider (PSP) set time limits for taking action. If no action is taken, the case will expire. There may be fees associated with each path.

If the merchant represents the case, the issuing bank will review the CE and decide in favour of either the customer or the merchant. If the merchant wins, the funds are credited once again. But the process doesn’t necessarily stop there: customers may have the right to request their bank to do another review, potentially resulting in the process repeating itself. This ‘second chargeback’ is called pre-arbitration.

Pre-arbitration is high-stakes for merchants. They get another chance to represent, but they must provide new CE. If they win, and the customer presses on the bank again, the case will be sent to binding arbitration. At arbitration, the networks make a binding decision based on the existing case file. Arbitration carries substantial case fees, typically USD 500 to USD 600 in the US, which are borne by the losing party. Thus, the merchant has to consider the potential for arbitration when deciding how to respond at the pre-arbitration stage. This often results in low-value pre-arbitration cases being accepted by the merchant.

Reason codes

When submitting a chargeback, the issuing bank must assign a reason code based on the claim made by the customer. The reason codes reported to merchants vary by network and PSP, but fall into three broad categories: fraud, service, and processing errors.

• Fraud: the customer claims they did not authorise the transaction, though in practice, both true third-party fraud and first-party misuse end up coded here.
• Service: the customer authorised the transaction, but there was a problem, such as product not received, product unsatisfactory, credit not processed, or cancelled recurring transaction.
• Processing errors: the customer authorised the transaction, and there was no service issue, but rather a processing issue, such as a duplicate charge or incorrect amount charged.

The impact of chargebacks on merchants

It might seem like chargebacks are just a back-office nuisance, but they impact many facets of a business: financial, operational, risk, and reputation.

Direct costs: financial and operational

Chargebacks impact a company’s P&L in many ways. Industry studies estimate that every USD 1 of chargebacks ends up costing businesses USD 2 to USD 4. Let’s break that down:

• Lost revenue and cost of goods sold: unless the merchant wins the case, they will lose the original revenue. In many cases, they won’t be able to recover the associated cost of goods sold, leaving them in a loss position.
• PSP fees: PSPs typically charge the merchant USD 10 to USD 30 for every chargeback, regardless of the outcome.
• Network fees: networks charge a plethora of fees to incentivise faster resolution and more efficient processing protocols. Technically, these are charged to the acquirer, but they are often passed through to merchants.

Chargebacks also create an operational burden for merchants. They need people and processes to try to mitigate some of the financial impacts described above. This requires investing in labour, service providers, and/or tooling.

Indirect costs: risk and reputation

The financial and operational costs described above are just the tip of the iceberg. The chargeback rate is one of the key indicators of a merchant’s risk level. The networks and PSPs require merchants to keep their chargeback ratios under specified thresholds. In 2025, Visa consolidated their monitoring into the Visa Acquirer Monitoring Program (VAMP). As of 2025, the excessive threshold is 2.2%, tightening to 1.5% in April 2026. Mastercard has the Excessive Chargeback Merchant (ECM) and Excessive Fraud Merchant (EFM) programs. Merchants that consistently exceed these thresholds may incur steep fines, and ultimately risk being shut off.

But PSPs and networks aren’t the only ones who notice chargebacks. Behind many of these cases is a dissatisfied customer, who could damage the company’s reputation through word of mouth, negative reviews on social media, etc.

A strategic approach to dispute management

Given the high stakes of chargebacks, merchants need to play both offense (prevent chargebacks before they happen) and defense (deflection, alerts, and/or representment). The most effective dispute strategies treat these as interconnected levers rather than standalone solutions.

Prevention

The goal is to prevent customer issues and, when they do happen, to quickly resolve them outside of the chargeback process. To get started, merchants should identify the common root causes of their chargebacks and design targeted prevention strategies. Reviewing top-level data on chargeback reason codes, combined with sampling individual cases to get a sense of the customer experience, is a strong start. Cross-functional collaboration is critical, as many areas besides payments, such as product and operations, impact the customer experience and, therefore, chargebacks.

See below for a quick checklist of prevention strategies for some of the top chargeback reason codes. You will notice some themes across the categories. Clear communication and customer-centric policies go a long way towards preventing chargebacks!

 

Chargeback Reason Code	Prevention Strategies
Fraud	Utilise controls available through your PSP, such as AVS, CVV, and 3DS. Leverage AI/ML to review orders for fraud during the checkout process. Use clear billing descriptors, including accurate contact information (to help customers recognise authorised transactions).
Product Not Received	Provide clear tracking information for shipments. Make it easy and fast for customers to contact support and get a resolution.
Product Unsatisfactory	Use clear product descriptions on websites. Offer a customer-centric refund/exchange policy (consider store credit).
Credit Not Processed	Clearly communicate the expected timing for refunds.
Cancelled Recurring Transaction	When processing a cancellation, clearly communicate whether or not a refund will be given. Offer a customer-centric refund policy.

 

Post-transaction: deflection, alerts, and representment

Most merchants will benefit from using a dynamic combination of deflection, alerts, and representment, tailored to meet their goals.

Visa and Mastercard offer deflection and alert products to help merchants keep their chargeback rates in check. While these can help merchants manage their chargeback rates, they come with tradeoffs: they add cost, and with alerts, the merchant loses the opportunity to represent the case.

Deflection products are actually one final layer of prevention. Verifi’s Order Insights and Ethoca’s Consumer Clarity are enhanced digital receipts within consumer banking apps. Their aim is to reduce customer confusion (and therefore chargebacks) by providing additional details about the transaction. Visa’s CE 3.0 and Mastercard’s First-Party Trust (FPT) are perhaps the most powerful post-transaction tools available to merchants. They prevent first-party misuse by establishing a history of ‘good’ orders that counter a customer’s current fraud claim. Visa’s CE 3.0 is currently the only product that can prevent eligible fraud disputes from generating TC40 fraud reports, and is therefore a key component of many merchants’ VAMP strategies. However, because CE 3.0 applies only to specific fraud reason codes and requires documented historical transactions under the same account, it may be effective only in limited scenarios. These products also require meaningful investment in data infrastructure.

Alerts give merchants a short window to refund the customer and thereby avoid a chargeback. There are three main types of alerts: Ethoca alerts from Mastercard, and RDR and CDRN offered by Verifi (a Visa company). Each one has unique features – see the table below for details. Merchants should use the alert product(s) that will effectively address their goals, and monitor and adjust their use of alerts as their chargeback rate fluctuates. For example, seasonal businesses such as travel and retail may choose to use more alerts during peak season when their chargeback rates are high and then taper off as it normalises. It’s important to note that none of the alert products removes the fraud report (TC40) from the VAMP ratio. Thus, merchants with heavy Visa fraud exposure may need additional tools beyond alerts.

 

Alert Product	Network(s)	How It Works
RDR	Visa only	Merchant sets criteria, and chargebacks meeting the criteria are auto-accepted
CDRN	Primarily Visa; some coverage of others	Chargeback never materialises if transaction is refunded by the merchant
Ethoca alerts	Primarily Mastercard; some coverage of others	Chargeback never materialises if transaction is refunded by the merchant

 

Representment is the merchant’s chance to make their case that the disputed charge is legitimate. As discussed above, this is done by submitting CE to the issuer. The issuer makes the final decision, although the merchant’s PSP may review the CE and rule against the merchant before the CE is ever sent to the issuer. It’s worth noting that issuers are structurally incentivised to prioritise cardholder satisfaction, which can influence how disputes are adjudicated.

How can merchants set themselves up for success? There are some elements that are fundamental to strong CE, regardless of the reason code:

• Start with a clear, executive summary. Issuers review a high volume of cases. Don’t make them hunt for the story. If it takes more than 2-3 minutes to understand, it’s likely too complex. Provide a clean, organised PDF with the following information at the top:
  • Transaction date, amount, and ID
  • Cardholder name and billing details
  • Clear reason the dispute is invalid (1-2 sentences)
  • A short timeline of events
• Show, don’t tell. Highlight key sections of policies and use screenshots (clear and legible).
• Demonstrate customer engagement. Issuers are persuaded by behaviour patterns that show recognition of the merchant relationship. If the cardholder did any of these things, be sure to show it:
  • Logged in multiple times
  • Used the service
  • Contacted support
  • Made previous successful purchases

Additionally, CE should be tailored to the chargeback reason code:

• Fraud – aim to include compelling metadata that shows a pattern of legitimate activity, not just a single data point, such as:
  • AVS and CVV match results
  • IP address + geolocation
  • Device fingerprint
  • Login history
  • Prior successful transactions
  • Account age and usage patterns
  • Delivery confirmation (with signature if possible)
• Product not received – focus on fulfilment, make the delivery undeniable:
  • Order confirmation
  • Shipping carrier + tracking number
  • Delivery confirmation (signature or GPS delivery scan)
  • Proof of digital delivery (download logs, login access, timestamps)
• No-show/cancellation/refund disputes – issuers care that the customer was informed, so focus on policy clarity and acknowledgement:
  • Cancellation or refund policy (highlighted)
  • Timestamp showing customer accepted policy
  • Cancellation deadline
  • Proof that no cancellation request was received
  • Any refund already issued (date + amount)

Assembling detailed information, in a concise format that is easy for the issuer to understand, can feel overwhelming. Fortunately, there’s been significant advances in automation and AI that can help merchants prepare strong CE at scale, even tailoring beyond the reason code, down to the network, PSP, and issuer level, while meeting the networks’ tight timelines.

Looking ahead

Numerous industry studies predict that chargebacks will continue to grow as we march towards 2030. Agentic commerce will add even more complexity to the mix. Will ‘my agent went rogue’ become a new reason code? At the same time, merchants are facing increased pressure from networks and PSPs to keep chargeback rates in check. It can feel like an impossible position.

Chargebacks are often framed as a cost of doing business. But in reality, they are a diagnostic tool. They reveal where fraud controls are misaligned, where customer expectations are unclear, and where internal processes break down. The merchants who treat disputes as strategic feedback, not just loss recovery, will be the ones who thrive in the next decade of digital commerce.

About the author

Sarah Boehmer is a payments and chargebacks strategy leader at Justt, where she works with merchants and digital platforms to improve dispute outcomes and recover revenue at scale. She specialises in chargeback operations, fraud trends, and network monitoring programs. Prior to joining Justt, Sarah led Payments and Fraud Strategy at Super.com, an online travel agency and fintech. She brings hands-on expertise in navigating complex payments ecosystems for high-growth businesses.