Chargebacks represent a significant challenge for businesses, particularly merchants, as they navigate the complexities of modern payment ecosystems. As online transactions continue to surge, the financial and operational burdens of chargebacks-reversals of card payments initiated by customers-have escalated, with chargebacks projected to increase by 24% by 2028 according to a study by Mastercard.
For merchants, chargebacks not only result in lost revenue and hefty fees but also strain customer relationships and risk long-term penalties from payment processors. This blog post aims to educate merchants in 2025 on what chargebacks are, their impact on businesses, and actionable strategies to prevent them, empowering you to protect your bottom line and maintain strong customer trust.
What Are Chargebacks?
A chargeback is a forced refund initiated when a cardholder disputes a debit or credit card transaction, prompting the card issuer to reverse the payment back to the customer. This consumer protection mechanism safeguards against unauthorized or problematic transactions, but often leaves merchants bearing the financial burden.
Why Chargebacks Happen?
Chargebacks commonly arise due to three main issues:
Fraud: where unauthorized parties use stolen card details.
Friendly Fraud: where customers dispute legitimate charges due to confusion (e.g., unrecognized billing descriptors) or buyer's remorse.
Service Issues: such as delayed shipments, damaged goods, or dissatisfaction, where customers bypass direct merchant communication to dispute charges.
Understanding these triggers is crucial for merchants to implement effective prevention strategies.
How Do Chargebacks Happen?
The chargeback process is a structured sequence of steps initiated when a cardholder disputes a transaction, impacting merchants with potential financial and operational consequences.
Here's a clear overview of how it unfolds:
Customer Initiates Dispute: A cardholder contacts their issuing bank to dispute a charge due to reasons like dissatisfaction, genuine fraud, or unrecognized charges (friendly fraud). The issuer collects basic details about the dispute.
Issuer Evaluates Dispute: The bank assesses the dispute's validity and, if warranted, assigns a chargeback reason code (e.g., fraud, merchant error, or non-delivery) and initiates the formal chargeback process. Collaborative tools may allow the issuer to alert the merchant early, enabling direct resolution to avoid escalation.
Provisional Credit Issued: The issuer provides the customer with a temporary credit for the disputed amount, which is deducted from the merchant's account.
Card Network Notifies Acquirer: The issuer sends dispute details, including the reason code, to the card network, which forwards them to the merchant's acquiring bank.
Merchant Notification and Decision: The acquiring bank informs the merchant of the chargeback, including the reason code and response deadline. The merchant decides whether to accept the chargeback (absorbing the loss) or dispute it.
Merchant Submits Evidence: If disputing, the merchant gathers compelling evidence-such as proof of delivery, receipts, customer communications, or IP address matches-and submits a rebuttal letter and chargeback adjustment reversal request to the acquiring bank within the deadline.
Acquiring Bank Review: The acquiring bank evaluates the merchant's evidence and forwards its assessment to the issuer.
Issuer's Final Decision: The issuer reviews all evidence and decides the outcome. If the merchant's evidence is convincing, the chargeback is reversed, and funds are returned to the merchant. If not, the customer retains the credit, and the merchant incurs the loss and fees. Merchants might re-attempt to dispute in a second chargeback flow before going to arbitration, a step that is usually avoidable due to the high costs.
This process, while designed to protect consumers, can be time-consuming and costly for merchants, emphasizing the importance of proactive prevention and robust evidence collection to improve outcomes in disputes.
Why Are Chargebacks Bad?
As we pointed out, chargebacks are a costly burden for merchants, hitting both their finances and reputation hard. Each chargeback results in refunded transactions, fees of $15-$100, and operational costs that can exceed the original sale, with Mastercard estimating $74 per dispute. Beyond immediate losses, high chargeback ratios risk higher processing fees, fraud monitoring programs, or even account termination, while also straining customer relationships and eroding trust. With fraud-related chargebacks costing businesses $3.75 for every $1 lost, according to The True Cost of Fraud report by LexisNexis, with dispute winning rates that are often below 10%, chargebacks in 2025 remain a critical challenge, demanding proactive prevention to safeguard profitability and sustainability. That is why there are automated payments intelligence tools like IXOPAY's that can help you monitor spikes in transaction processing patterns that might lead to fraud or chargebacks, before it is too late.
Ways to Prevent Chargebacks in 2025
To reduce chargebacks in 2025, merchants can implement the following proactive strategies to bolster security, streamline operations, and enhance customer experience:
Strengthen Payment Security: Use 3D Secure to verify customer identities and leverage payment provider fraud detection tools to identify and block suspicious transactions, minimizing fraudulent chargebacks.
Simplify Returns and Cancellations: Clearly display return, refund, and cancellation policies at checkout or on receipts to ensure transparency, reducing disputes over unrecognized charges or canceled orders.
Manage Shipping Expectations: Provide timely order confirmations, tracking updates, and proactive notifications about delays or out-of-stock items to prevent "non-delivery" chargebacks.
Enhance Customer Service: Ensure contact details are easily accessible and train staff to resolve inquiries promptly, preventing escalations to chargebacks.
Use Clear Billing Descriptors: Include recognizable trading names and location details on statements to avoid confusion-driven friendly fraud disputes.
Delay Billing Until Shipment: Charge cards only after goods are shipped to align transactions with delivery, reducing "non-receipt" disputes.
Collect Transaction Evidence: Retain proof like signed delivery receipts, IP addresses, or customer communications to strengthen defenses against unwarranted chargebacks.
Promptly Cancel Recurring Transactions: Confirm cancellations in writing with clear effective dates to avoid disputes from forgotten subscriptions.
Update Expired Cards: Use services like Account Updater to refresh expired card details, preventing chargebacks from failed payments.
Partner with Payment Providers: Leverage predictive fraud detection and real-time data from payment providers to combat emerging fraud patterns while maintaining a seamless customer experience.
Use Tools Such as AI Payments Intelligence: Leverage solutions like IXOPAY for effective dispute management, monitoring, and pattern analysis. IXOPAY's AI-powered dashboards track chargeback trends, dispute reasons, and win ratios, providing automated insights to identify and address patterns early, reducing dispute rates and enhancing compliance.
Technology's Role in Chargeback Prevention
In 2025, advanced technology plays a pivotal role in reducing chargebacks by enabling proactive fraud prevention and streamlined dispute management. AI-powered fraud detection and transaction monitoring leverage machine learning to analyze vast datasets, identifying suspicious patterns-like unusual transaction sizes or IP mismatches-instantly, preventing fraudulent chargebacks before they occur. Pre-chargeback alerts notify merchants of potential disputes early, allowing them to issue refunds or resolve issues directly with customers, avoiding costly formal chargebacks. IXOPAY's solutions enhance these efforts with its payment analytics dashboards and observability platform, providing unified, real-time insights into payment trends and chargeback patterns to optimize strategies. Additionally, IXOPAY's pre-chargeback alerts with Ethoca and Verifi enable merchants to act swiftly, reducing chargeback ratios and maintaining compliance with card network standards, ultimately safeguarding revenue and operational efficiency.
Wrapping Up
Chargebacks pose a significant challenge for merchants, draining revenue through refunds, fees, and operational costs while risking reputational damage and strained customer relationships. However, with proactive strategies like robust payment security, clear communication, and advanced technology, merchants can significantly reduce their chargeback rates in 2025.
By leveraging tools like AI-driven fraud detection and pre-chargeback alerts, businesses can stay ahead of disputes and protect their bottom line. Take control of your chargeback management today with IXOPAY'S payments intelligence and observability solution alongside its pre-chargeback alerts feature, empowering you to minimize losses, enhance compliance, and maintain strong customer trust.
