Chargebacks are more than a financial hit to your business — they can hurt your reputation, disrupt operations, and even lead to the loss of your merchant account if they happen too often. The good news? With the right strategies, you can minimize the risk of disputes and forced refunds — or avoid them altogether.
In this guide, we’ll break down the types of chargebacks your business might face. We’ll also share practical tips to help you prevent chargebacks, protect your transactions, keep your customers happy, and maintain your selling momentum.
What’s a Chargeback?
A chargeback happens when a cardholder asks their issuing bank to reverse a charge they didn’t authorize or agree with. It allows the cardholder to recover funds if they didn’t receive the goods or services they paid for or were the victim of fraud. However, chargebacks can be problematic for merchants, especially when issues like late deliveries, missing transactions, or fraudulent activity occur.
Refunds vs. Chargebacks
While chargebacks and refunds may seem similar, they serve different purposes. The merchant typically handles a refund, while the issuing bank processes a chargeback without the merchant’s consent. Refunds are generally more straightforward, but chargebacks often involve a formal dispute process and may incur additional fees and penalties.
Let’s say a customer buys a pair of shoes from an online retailer. When they arrive, the customer realizes they don’t fit, contacts the retailer, returns the shoes, and receives a refund to their original form of payment. The retailer issues the refund directly.
But what if the shoes never arrived — or the customer says they didn’t? Instead of contacting the retailer, the customer disputes the charge with their card’s issuing bank. The bank reverses the payment by issuing a chargeback, and the retailer loses the shoes and the money, even if the order was shipped.
Chargebacks happen for a variety of reasons — not just missing items. Customers may dispute charges due to fraud, billing errors, damaged products, canceled subscriptions, or when they can’t reach the merchant to resolve an issue.
4 Types of Chargebacks
To know how to stop chargebacks — and prevent them from hurting your business — you need to understand what causes them. Here are the four most common types:
1. Merchant Error Chargebacks
These chargebacks happen when a merchant makes a mistake, like billing a customer incorrectly or failing to ship a product on time. Merchant errors are often avoidable with better attention to detail, but they still account for many chargeback cases.
2. Criminal Fraud Chargebacks
Fraudulent chargebacks occur when someone uses a stolen credit or debit card to make a purchase. Once the actual cardholder notices the charge, they dispute it with their card’s issuer, resulting in a chargeback. Fraud detection and prevention tools are critical to reducing these types of chargebacks.
3. Friendly Fraud Chargebacks
Despite the name, friendly fraud isn’t all that friendly. These chargebacks happen when a legitimate customer makes a purchase and then claims they didn’t authorize the transaction or never received the items (like in the running shoe example above). It can happen if the cardholder forgets about a purchase, misremembers details, or simply takes advantage of the chargeback process. Friendly fraud chargebacks are often the hardest type to prevent.
4. Product or Service Issue Chargebacks
These chargebacks stem from dissatisfaction — the customer receives a damaged or faulty product, or the item or service doesn’t meet their expectations. Clear communication, strong quality control, and a solid return policy can help prevent these disputes.
10 Tips for Preventing and Reducing Chargebacks
By taking a few simple steps, you reduce or even avoid chargebacks. Here are 10 practical tips to help protect your business:
1. Analyze Common Reason Codes and Chargeback Patterns
Every chargeback includes a reason code that explains why the dispute occurred. Reviewing these codes can help you identify trends and address the root causes of recurring chargebacks. For example, if you’re consistently receiving regular chargebacks for undelivered goods, it may be time to evaluate your shipping provider or fulfillment process.
2. Implement Accurate Transaction Processing
Make sure your transaction processing is consistent and accurate. Double-check billing details and ensure each transaction matches the customer’s original order.
3. Deploy a Secure Payment Processing Infrastructure
Use secure payment processing systems with encryption and fraud detection tools. These systems help protect both your business and your customers from fraudulent transactions.
4. Establish Clear Return and Refund Policies
Return and refund policies should be clear and easy for customers to understand. When expectations are transparent, customers know what to expect, and they’re less likely to resort to chargebacks if they’re dissatisfied with a purchase.
5. Keep an Updated and Accurate Online Inventory
If a customer buys an item that’s actually out of stock and you don’t notify them or issue a prompt refund, they may dispute the charge when they realize their order can’t be fulfilled. Ensuring that inventory is current helps prevent chargebacks by avoiding failed transactions.
6. Set Realistic Shipping Timelines
Unrealistic delivery promises can lead to customer frustration and chargebacks. To maintain trust and avoid disputes, set honest shipping expectations, provide tracking details, and keep customers informed of any delays.
7. Set Up an Automated Chargeback Solution
Automated chargeback management tools help you quickly track, manage, and respond to disputes. These systems can flag suspicious transactions and give you real-time visibility into chargeback cases.Automation tools like EDI can also help minimize chargeback risks by validating order and payment data throughout the fulfillment process.
8. Improve Your Customer Experience and Service
Exceptional customer service at every stage — before, during, and after a purchase — can help prevent chargebacks. Respond to concerns quickly before they escalate into disputes.
9. Set Clear and Reliable Communication Channels with Customers
Make it easy for customers to contact you when something goes wrong. Clear, accessible communication channels give you a chance to resolve issues early — before they lead to chargebacks.
10. Delay Billing
Consider billing only after goods are shipped or services are delivered. Charging too early can create confusion — especially if customers don’t see immediate fulfillment — which may lead them to dispute the charge. Billing after fulfillment gives them time to review their purchase and reduces the risk of premature disputes and chargebacks.
9 Chargeback Protection Tools
Several tools can help protect your business from chargebacks by detecting fraud, validating transactions, and improving communication. Here are some of the most effective options:
1. Fraud Detection and Prevention
Fraud detection tools use algorithms and machine learning to identify suspicious activity before processing. By flagging potential fraud early, they help stop fraudulent transactions before they result in chargebacks.
2. Address Verification Services (AVS)
AVS compares the billing address provided during checkout with the one on file with the cardholder’s issuing bank. If the addresses don't match, the transaction may be flagged for review, which will help prevent unauthorized use.
3. Card Security Code Verification (CVV)
Requiring customers to enter the CVV (card verification value) helps confirm that the buyer has physical access to the card, reducing the risk of stolen card fraud.
4. Identity Verification Tools
Some payment processors offer identity verification features — such as two-factor authentication or document checks — to confirm the buyer’s identity before completing the transaction. This adds another layer of protection against fraudulent chargebacks.
5. Negative Lists
Negative lists are internal or shared databases of customers or IP addresses associated with past fraud or chargebacks. By screening against these lists, you can block high-risk transactions before they’re processed.
6. Credit Card Order Validators
Order validators confirm that the card being used is active and valid and hasn’t been reported stolen. While primarily used to prevent fraud, they also help reduce chargebacks by blocking unauthorized or high-risk transactions before processing.
7. Prevention Alerts
Prevention alert systems notify merchants when a cardholder initiates a dispute or when a transaction looks suspicious. This gives you a window of time to issue a refund or resolve the issue before the customer files a formal chargeback.
8. Rapid Dispute Resolution (RDR)
RDR solutions allow merchants to automatically accept certain disputes before they become chargebacks. By settling disputes early, merchants can better maintain their chargeback ratio and reduce associated fees.
9. Electronic Data Interchange (EDI) Integration
Integrating EDI into your supply chain and payment workflows gives you real-time visibility into order status and transaction validation. It’s one of the most proactive ways to minimize miscommunications and processing errors that lead to disputes and chargebacks.
Talk to an EDI Expert
If you’re dealing with chargebacks related to EDI transactions, a modern cloud-based EDI solution can help. It streamlines your logistics and supply chain workflows, giving you better control and visibility across every transaction. Features like prevalidation and real-time tracking help prevent chargebacks as a merchant by catching errors early. With cloud-based EDI, you can reduce chargeback risk, improve payment processing accuracy, and deliver a more reliable customer experience.
Connect with an EDI expert to learn how to integrate a chargeback prevention strategy that works for you.
FAQs
What’s Electronic Data Interchange (EDI), and How Does It Help Reduce Chargebacks?
Electronic Data Interchange (EDI) is a system that lets businesses exchange documents and transaction data — like purchase orders, invoices, and shipping updates — in a standardized digital format. By automating this data flow between partners, EDI reduces manual entry errors such as incorrect shipping details, mismatched invoices, or processing delays. This improved accuracy and speed lowers the risk of disputes and chargebacks.
How Does EDI Benefit My Supply Chain and Reduce Transaction Issues?
EDI keeps your supply chain aligned and up to date across systems. It helps prevent delays and discrepancies in orders, deliveries, and billing — all common triggers for customer frustration and chargebacks. When customers receive the correct product on time and are billed accurately, they’re less likely to dispute a transaction.
What Are EDI Payments, and How Are They Different from ACH or EFT?
EDI payments include standardized emittance data along with the payment itself, which helps match transactions to invoices. Unlike standard ACH or EFT transfers, EDI payments reduce reconciliation errors and minimize disputes caused by payment mismatches.
How Can EDI Validation Tools Help Reduce Chargebacks?
Cloud-based EDI systems prevalidate transactions before they’re sent, ensuring that product codes, pricing, and delivery information are accurate and in a standard format. This reduces the risk of chargebacks caused by product or service discrepancies, fulfillment errors, or compliance issues.