Chargeback vs Dispute: A Comprehensive Guide for Merchants

In 2023, 2.8% of online orders for mid-market companies worldwide resulted in chargebacks, while the rate was slightly lower at 2.4% for small and midsize businesses. If you're a merchant, these figures might not surprise you. Chargebacks are a common challenge, and it's likely that you want to avoid them at all costs.

Understanding the differences between chargebacks and disputes is crucial for managing your business effectively. While both processes involve a customer questioning a charge placed on their card, the similarities end there.

Disputes represent a direct communication channel between merchants and customers, offering an opportunity for resolution. Chargebacks, on the other hand, are complex processes involving banks or card networks that can significantly impact your business through fees and penalties.

In this guide, we'll explore the differences between chargebacks and disputes, provide strategies for managing them, and introduce how open banking can help you eliminate chargebacks.

Understanding the Basics

What is a Dispute?

A dispute arises when a customer questions a transaction on their statement due to dissatisfaction with a product or service or other concerns. This process often involves banks or card networks, as it is initiated by the customer through their issuing bank rather than directly with the merchant.

Several reasons can lead a shopper to ask for a dispute:

• When the quality or functionality of a product or service is defective
• The product doesn't fit the customer
• The item doesn't match with its description
• If an order is cancelled before shipment or if the delivery fails to arrive
• Instances where a customer is overcharged or charged incorrectly
• The customer bought the wrong item

What is a Chargeback?

A chargeback happens when a cardholder, rather than approaching the merchant, seeks a refund directly with their bank or card issuer. If a chargeback is approved, merchants may lose the transaction amount and incur additional fees and penalties imposed by credit card networks such as Visa or Mastercard.

Common reasons for a chargeback include:

• The customer denies making the transaction, claiming it was a fraud
• The purchased product or service was not delivered
• The received product or service differs significantly from its advertisement
• The customer was charged multiple times for the same item
• The merchant fails to provide the refund on time

Key Differences Between Disputes and Chargebacks

The Dispute & Chargeback Lifecycle

How Disputes Turn into Chargebacks

When a customer raises a dispute, the merchant is given an opportunity to respond and rectify the issue, be it through providing additional information, issuing a refund, or offering a replacement. If this response resolves the customer's concerns, the dispute is closed without further action.

However, if the merchant's response does not satisfy the customer, or if the merchant fails to respond in a timely manner, the bank may escalate the dispute to a chargeback.

Timeline Considerations

Time is critical in this process, and each major card network maintains distinct policies and timelines.

To help merchants navigate these varying requirements, here's a detailed comparison of how each major card network handles chargeback response times:

Timeline data sourced from card network merchant guidelines as of January 2025.

Response timelines may also vary based on:

• The nature of the dispute (fraud claims vs. quality issues)
• The merchant's country of operation
• The transaction type (card-present vs. card-not-present)
• Whether the purchase involved digital goods or services

Understanding and complying with these network-specific timelines is crucial for effective dispute management. Missing these deadlines typically results in automatic loss of the dispute, regardless of merit.

Valid vs Invalid Claims

Valid Reasons for Chargebacks

• Unauthorised transactions
• Fraudulent charges
• Non-receipt of goods or services
• Items don't match with their description
• Items which never arrived
• The merchant failed to provide a refund

Invalid Reasons for Chargebacks

• Customer regret or forgetting about a purchase
• Misunderstanding of the product or service
• Attempting to bypass merchant refund policies
• No recognition of the merchant's billing descriptor
• Disagreement with the refund process time

Merchant Response Guide

When to Contest a Chargeback

Upon receiving a chargeback, you can:

1. Accept the chargeback resulting in the loss of sales revenue, the merchandise or service provided, and associated costs
2. Contest the chargeback if you are convinced it is not legitimate, accepting all the charges above plus the dispute rate

Evidence Gathering Process

When disputing an unjustified chargeback, compiling strong evidence is crucial. For example, if the customer is claiming that the purchase didn't arrive, all evidence of delivery confirmation is necessary to reverse the chargeback.

Relevant transaction proofs and documents include:

• Receipts
• Tracking numbers and proof of delivery
• All forms of communication with the customer (emails, messages, etc)
• If possible, a copy of your return policy
• Descriptions and screenshots of the item or service as they appear on your website

Additionally, draft a rebuttal letter that concisely summarises the situation and the documentation provided. This letter should clearly articulate your defence and how the evidence proves that the chargeback is based on an invalid reason.

Submission and Monitoring

Once you have all the necessary documents ready, send the evidence to your acquiring bank or payment processor who oversees the process. Maintain copies of all correspondence and documents submitted.

After submitting the dispute, follow up on the chargeback status and be prepared to escalate if necessary. Escalation may include providing additional evidence if the initial dispute does not resolve in your favour.

Prevention Strategies

Transparent Communication

Keep customers informed at every stage of their purchase journey. Send confirmation emails, tracking details, and follow-ups to ensure they know what to expect. A responsive customer support team can help address concerns before they escalate into disputes and chargebacks.

Fraud Prevention Tools

Utilise tools that can detect suspicious transactions in real-time such as Address Verification Service (AVS). Advanced AI models can predict potential risk levels in real time and block suspicious transactions, reducing chargebacks and fraud attempts without compromising authorisation rates.

Transaction Verification

Send order confirmations and shipping notifications to keep customers always informed. Use delivery methods that require a signature to confirm receipt, particularly for high-value items.

Customer Identification Methods

To avoid fraud possibilities, implement robust customer verification that goes beyond Card Verification Value (CVV). Modern banking technology offers seamless Know Your Customer (KYC) procedures that can verify customer identity instantly without requiring additional documents or selfies.

Eliminating Chargebacks with Open Banking

Benefits of Open Banking Payments

Open banking payments provide significant advantages by bypassing traditional card networks, substantially reducing fraud risk through direct bank authentication. Key benefits include:

• No interchange fees or chargeback penalties
• Direct authorisation of payments by customers
• Enhanced fraud prevention through strong customer authentication
• Secure, hassle-free customer verification

Implementation with Noda

If you're ready to adopt open banking payments, Noda provides a quick and straightforward onboarding process. You can set up your account and begin accepting payments in a matter of days. By integrating Noda's open banking solutions, merchants can protect their revenue, enhance customer trust, and streamline their payment processes.

Core benefits and features include:

• 90% acceptance rate
• Coverage across 2,000+ banks in the UK, Europe, Brazil, and Canada
• Near-instant settlement
• Direct bank integration
• End-to-end encryption
• Regulatory compliance across markets

Noda's open banking technology offers seamless Know Your Customer (KYC) procedures through Open-Banking Payee Identification. This verifies customer identity instantly without additional documentation or selfies, reducing fraud risks and enhancing payment security.

Additionally, Noda's AI Model predicts risk levels in real time and block suspicious transactions, reducing chargebacks and fraud attempts without compromising authorisation rates.

Choosing Noda isn't just about choosing a great payment provider, it’s about opening the door to a solution that adds real value to your business, from reducing chargebacks to helping you grow your revenue.