August 03, 2023


Customers can dispute charges to their credit card or digital wallet (e.g. PayPal) for various reasons, such as unauthorized transactions or non-performance. If the dispute is upheld, the funds are returned to the customer automatically by the payment provider and deducted from the merchant’s account. This is different from a traditional refund where the customer and merchant resolve the matter directly.

Disputes can be both legitimate and illegitimate. Merchants can choose whether to accept a dispute (and issue a refund) or challenge the dispute by providing supporting evidence that the dispute is illegitimate.

Disputes and chargebacks are related concepts, and are sometimes used interchangeably. The terminology is also complicated by the fact that Visa refers to disputes as chargebacks, unlike other credit card schemes who draw a distinction between the terms.

In general:

  • Dispute refers to the first step in the process that can lead to a chargeback, i.e. when a customer disputes a charge as being illegitimate. 
  • A chargeback is made if the customer’s dispute is upheld and the customer’s funds are returned to their account.

A legitimate dispute is a dispute arising from fraud, or where the merchant failed to fulfill their obligations towards the customers, e.g. the goods never arrived or were materially different from their description; or where the service was not performed. They may also be filed in cases where the amount invoiced is incorrect (e.g. double billing), or where a refund was promised by the merchant but was never received by the customer.

An illegitimate dispute is a dispute arising for another reason and not covered by the policies of the card scheme or digital wallet. These are cases where the cardholder or account holder authorized the payment and received the goods or services, but nonetheless decides to dispute the charges. This is often referred to as “friendly fraud”.

Friendly fraud refers to the process where a customer makes a purchase but then files a dispute afterwards, despite receiving the goods or services and despite having made the purchase themselves. In this case, no fraud has been committed - the cardholder or account holder initiated the transaction themselves, rather than the card having been stolen or their account being used by a third party. This can happen for several reasons, including: 

  • The customer forgetting or not recognising the purchase on their account statement. The latter can happen if the company listed on the account is not easily identifiable by the customer, e.g. with the charge being listed with a holding company as the recipient of the funds, where the name of the holding company bears no resemblance to the merchant the customer purchased the goods or services from.
  • Buyer’s remorse, where the customer regrets making the purchase and therefore decides to open a dispute to reclaim their funds.
  • Purchases made with the express intention of filing a dispute at a later date.
  • The customer did not cancel a subscription in time, and wants to avoid paying for a service they no longer want.

These types of disputes are illegitimate, and referred to as “friendly fraud”.

The actual dispute process differs depending on the card scheme or digital wallet (e.g. PayPal). More detailed information on the dispute process for each can be found on their websites. However, they all follow similar principles.

Once a customer raises a dispute claim, merchants are given the ability to challenge the claim and to provide supporting evidence that the claim is illegitimate. Using a reputable logistics service that requires the customer to sign for receipt of the goods can be used to provide evidence that the goods were actually delivered, for example.

Merchants can also choose to accept the customer’s claims, or elect not to respond at all. In these cases, the customer’s claim will be upheld and the funds returned to the customer.

Merchants should ensure that they are using a fraud and risk management tool to catch illegitimate transactions early in the checkout process.

Good customer service can reduce the number of disputes filed with the credit card schemes or digital wallet providers. Customers will often contact a merchant directly prior to filing a dispute claim, and if the merchant is able to resolve the matter before a dispute is filed, the customer has no need to file a claim and no chargeback will be initiated. This can help keep merchants in good standing with the card schemes and digital wallet providers.

Using 3DS (3-Domain Secure) shifts the liability from the merchant to the card issuer. This means that the liability for chargebacks is now borne by the card issuer. 3DS requires customers to complete an additional verification step with the card issuer and is mandatory for certain transactions as part of PSD2 in Europe, though low value transactions can be exempted from 3DS. This extra verification step makes actual fraud far less likely, although it can degrade the customer experience.