What is a chargeback? Causes, thresholds, and ways to avoid them.

The dreaded chargeback is one of the most insidious parts of running a business that accepts credit cards. A customer, for whatever reason, signals to their bank or card network asking them not to honor the purchase they made, but instead to reclaim the money from the merchant. Maybe it’s for good reason, and maybe it’s not. Either way, the cost of a chargeback to the merchant is so much more than just a refund.

What is a chargeback? 

A chargeback is when a consumer instructs their bank or card network not to honor a purchase made on their account.

Unlike a refund, which is generally processed by the merchant, a chargeback is imposed by the card network, meaning that the merchant cannot reclaim a purchased item. Once the merchant is informed that a chargeback has been initiated, the funds from the transaction are reclaimed. If they so desire, the merchant can initiate a dispute with the card network; however, on average they only have a 20% to 30% chance of winning.

The merchant is generally charged a chargeback fee, likely in the $20 range. To make matters worse, the processing fees charged by the merchant’s payment service provider (PSP) are retained, so the costs start to mount immediately. Should the merchant choose to dispute the chargeback, they must pay a fee (generally in the $15 to $50 range) to do so.

These chargeback fees are generally non-refundable, so even if the dispute is successful the merchant is going to be out of pocket.

Consumers generally have 60 days from the date of the statement to dispute a credit card charge, and subsequently initiate a chargeback. Merchants will typically have 20-45 days from the date of notification to submit a rebuttal.

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Why do chargebacks happen? 

Given the devastation a string of chargebacks can have on merchants, you might think they would guard heavily against them—and for the most part you’d be right!

While there are certainly unscrupulous actors who sell non-existent products, worthless services, or hard-to-cancel subscriptions, the reality is that the vast majority of chargebacks come from:

• Actual fraud. A customer may have their credit card stolen and used without their permission. When they discover an array of charges they don’t recognize, rather than calling all the sellers who were duped, the customer simply calls their card issuer and asks them to nullify the sales. The good news is that this is becoming less prevalent, as most banks can now detect unusual activity quickly and pause cards until they validate the sale.
• Friendly fraud. Customers may decide either to try and get something for free, or that they cannot be bothered to go through a refund process, and simply call their card issuer and request a chargeback. This, also, is becoming slightly less frequent, as the card networks track chargebacks from each account, and will apply extra scrutiny to an unusual volume of chargebacks coming from a single account.
• Having a poor customer experience. Merchants who make it difficult for customers to request refunds are taking the risk that customers will lose patience in going through the proper channels and simply opt to raise a chargeback.
• Processing or billing error. When a customer is accidentally charged the wrong amount, or more than once, they may suspect fraud and raise a chargeback.

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What is the chargeback ratio threshold? 

The chargeback ratio threshold is the maximum dispute rate a merchant can sustain before a card network places them in a monitoring program. Penalties escalate the longer the merchant remains non-compliant.

The chargeback ratio is calculated monthly and is expressed as a percentage: divide the number of chargebacks by the number of transactions.

Thresholds differ by network.

• Visa has the Visa Acquirer Monitoring Program (VAMP). In April of 2026 the VAMP threshold dropped from 2.2% globally, to 1.5% for North America, the EU, and Asia.
• Mastercard’s Excessive Chargeback Program (ECP) operates on two tiers, ECM having 1.5%-2.99% with 100-299 chargebacks, and HECM having 3%+ with 300+ chargebacks. The count and ratio must be met to trigger enrollment.

Card network thresholds are the floor, not the ceiling. Most PSPs set their own internal limits, and are quite strict—often being lower than the card networks’. Keeping a chargeback ratio below 0.3% is recommended as a best practice.

Despite chargebacks not directly impacting a business’ credit score, every downstream provider from the merchant tracks the ratio of chargebacks to sales. Going above the defined range imposes penalties, starting at extra fees, progressing to holdbacks (i.e. the merchant has to wait to receive the funds from transactions they have completed), and account closure.

When an account is closed, PSPs will generally hold onto funds for at least 30 days in anticipation of additional chargebacks, meaning the merchant not only cannot complete new transactions, but the revenue they earned while the account was open is not delivered to them.

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How can a merchant avoid chargebacks? 

There are concrete steps merchants can take to control the amount of chargebacks their account sees, including:

• Clear communication and processes. Customers should be able to clearly see what they’re buying and for how much. They should receive well-designed receipts, as well as clear vendor identification on their credit card statements, and similarly foolproof instructions for seeking refunds. When customers want to communicate with the merchant, there should be a clear way for them to do so, with easy access to support. By simplifying the process of interacting, the merchant measurably reduces the risk a customer will opt for a chargeback when dissatisfied with their purchase.
• Fraud prevention tools and processes. Merchants need to protect against fraud by implementing their own processes and by using third party services that scan for patterns of misuse.
• Operate with multiple processors. When doing business worldwide, the chances of customers mistaking valid transactions for fraudulent ones decreases when the processing happens in-country.

How to reduce the impact of chargebacks? 

Some chargebacks are inevitable. Indeed, there’s an argument that a zero chargeback rate represents an over-rotation to disallowing too many transactions. However, the chargeback ratio needs to remain below the levels required by the card networks themselves, as well as the (often different) levels enforced by PSPs.

Some of the ways merchants limit the impact of chargebacks include:

• Product variety. Because chargeback rates are based on a percentage of deals, rather than a percentage of revenue, it can be extremely useful to include low-price, high-satisfaction items in a merchant’s inventory: those high-volume/low-chargeback items can help offset any chargebacks for lower-volume items.
• Multi-processor management. A sophisticated decision engine can redirect higher-quality transactions to PSPs where chargeback ratios are sneaking upward, while pushing more marginal deals to PSPs where the ratio is still low. In this way merchants can ensure they avoid triggering penalties beyond unit chargeback fees.
• Keep impeccable records. While the cost of disputing low-value chargebacks can be an impediment, merchants with high-ticket offerings should keep great records so they can successfully dispute incorrect chargebacks.

Merchants today cannot afford to put all their eggs in one PSP basket: one unfortunate run of chargebacks can cause that single provider to impose penalties, up to and including account closure, leaving the merchant taking a loss.

For protection, many merchants will maintain relationships with multiple PSPs to balance their chargebacks and transaction volume should a PSP close their account. Critical to enabling multiple PSPs is adding a programmable payments vault to the payment stack.

The vault is reliable protection against chargebacks and a solution that eliminates a single point of failure.

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