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Fintech Guide to Chargeback Management

Fintech Guide to Chargeback Management

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If you’re setting up or running a card program, it’s only a matter of time until you run into your first chargeback scenario.

Whether you’re new to chargebacks or you’re looking for ways to improve your chargeback management process, this guide is designed to help fintech founders understand the intricacies of chargebacks and how to build a strategy to manage them effectively as they occur.

Founder TL;DR

  • A chargeback is when a bank forcibly reverses a credit or debit card charge after a customer disputes the transaction or returns the purchased item.
  • The most common reason for chargebacks is friendly fraud, which is when a cardholder disputes a purchase that they or someone in their household made.
  • Friendly fraud accounts for 61% of all chargebacks and costs businesses about $48 billion annually. About 40% of consumers who commit friendly fraud will do it again within 60 days.
  • The fintech running the card program is normally responsible for the network fees with chargebacks, the interchange reversal, and all the baggage that comes with handling those disputes.

Why are disputes and chargebacks important to fintechs

Disputes happen when a cardholder contacts their card issuer and challenges a transaction on their account. Disputes are intended to protect cardholders from fraudulent activity. A chargeback is one possible outcome of a dispute, and it results in an issuing bank forcibly reversing a credit or debit card charge after a customer successfully disputes a transaction.

From a compliance standpoint

  1. Disputes on debit and prepaid cards are regulated by the EFTA and Regulation E. This regulation is what allows consumers to challenge transaction errors (disputes) or get their money back when an investigation reveals a legitimate error or wrongdoing (chargeback). If you’re offering credit or charge cards, then disputes are regulated by the Truth in Lending Act (TILA) and Regulation Z.
  2. Failure to comply with Regulation E may carry fees and penalties, which could include, for example, $1,000 in statutory damages, class action damages of hundreds of thousands of dollars or 1% of a company’s net worth, attorneys’ fees, and other costs. Separate penalties may result from violations of TILA or Regulation Z.

Card networks also have their own policies that may limit cardholder liability. For example, Mastercard and Visa each have “zero liability” policies that mean a cardholder is not liable for any amount of any unauthorized transactions as long as the cardholder used reasonable care to protect their card and promptly reported any loss or theft.

These policies only apply to certain transactions (e.g., in store, online, ATM) and certain cards (e.g., they do not apply to business cards or unregistered prepaid cards).

From a business standpoint

In short, chargebacks are important because the fintech running the card program is normally responsible for the network fees with chargebacks, the interchange reversal, and all the baggage that comes with handling those disputes.

Friendly fraud is anything but friendly to fintechs

Chargebacks typically happen because of merchant error or fraudulent activity, which we’ll explore more in detail in the next section. But “friendly fraud” is by far the biggest culprit, which alone accounts for 61% of all chargebacks and costs merchants about $48 billion annually.

Friendly fraud happens when a cardholder disputes a purchase that they or someone in their household made. This typically happens in three ways:

  1. The cardholder looks over their statement, doesn’t recognize a purchase they made, and incorrectly believes they’re a victim of fraud.
  2. Someone in their household like a spouse or child (unauthorized user) makes a purchase and doesn’t let the cardholder know. Then the cardholder reviews the statement, sees a purchase they don’t remember making, and again believes they’re a victim of fraud.
  3. The cardholder makes a legitimate purchase and then submits a chargeback claiming that there was a problem with the transaction or they never received the item.

While this seems innocent enough, hence the use of “friendly” in the name, this type of fraud is anything but friendly. Aside from the fact they’re the main driver of chargebacks, these two stats stand out as particularly unfriendly:

  • 81% of customers freely admit to filing a chargeback simply out of convenience.
  • Roughly 40% of consumers who commit friendly fraud will do it again within 60 days.

While seemingly benign, friendly fraud not only costs your business a significant amount of money, left unattended it can incentivize the wrong behaviors among your cardholders.

Chargeback Reasons

Chargebacks occur for a variety of reasons both legitimate and fraudulent. Some of the most common include:


There are two kinds of fraudulent scenarios. In the first, someone is charged for something they never actually purchased. This is usually the result of having their card number stolen. The second is friendly fraud, which we explained in the previous section.

Customer dissatisfaction

A customer purchases something and isn’t happy with it. In many cases the customer will submit a chargeback without ever contacting the merchant, however the card issuer that is processing the dispute can request the cardholder attempt to resolve the issue directly with the merchant prior to opening a claim on their behalf.

Shipping problems

Shipping introduces all sorts of third-party risks. It’s estimated that 26% of chargebacks happen because the product never arrived.

Unrecognizable business name

If the business name listed on the transaction, e.g. CATWASH201, isn’t the same as the business e.g. Fine Feline Grooming Service, customers may not recognize the transaction and assume it’s fraudulent.

Failure to cancel subscription

A customer signs up for a free introductory period, forgets to cancel their subscription, and requests a chargeback when the first transaction shows up.

( is a great way to manage subscriptions. Read the Wirecutter review.)

Chargeback Codes

Every chargeback reason has an associated reason code, which banks use to categorize the reason for a chargeback.

Here are some of the more common ones that fintechs run into:

Chargeback reason codes that fintechs commonly encountered

For a more comprehensive view of reason codes, check out this Chargebacks911 reason guide.

How the chargeback management process works

an overview of the chargeback management process from beginning to end

Stage 1: First Chargeback

Timeframe: Under card network rules, a cardholder has up to 120 calendar days from the settlement date to initiate a chargeback (depending on the chargeback reason code).

The usual period that card networks will accept chargeback disputes is up to 120 days from the date of the settlement for the charge.

The company that submits the dispute to the Issuer has to pay the Issuer a flat fee for processing the dispute. This fee is paid regardless of the outcome of the dispute.

The Card Issuer submits the chargeback claim to the card network in order to reverse a payment made to a merchant, aka the Acquirer**. If the First Chargeback is successfully submitted to the card network, a provisional (temporary) credit is issued to the Issuer.

After 45 days if there is no Second Presentment (explained below), the credit becomes permanent and the Issuer provides the funds to the customer.

If the card is a debit or prepaid card: There are certain dispute categories that Regulation E requires provisional credit be provided to the cardholder within 10 business days of receiving a written dispute from their customer. Here’s more detail on the Electronic Funds Transfer Act (EFTA) and Regulation E.

* A card issuer offers payment cards to consumers on behalf of card networks such as Visa, MasterCard, or American Express.

** An acquirer is a financial institution that processes credit and debit card transactions for a company or merchant.

Stage 2: Second Presentment

Timeframe: 45 calendar days from the date the First Chargeback is submitted to the Acquirer’s queue.

The Second Presentment occurs when the Acquirer rebuts the Issuer’s First Chargeback claim and asserts that the charge was valid by presenting the charge for a second time.

The Acquirer has 45 calendar days to submit the Second Presentment.

If the Acquirer does not submit within that time period, the case is closed by the card network in favor of the Issuer. If/once the card network receives a Second Presentment, the provisional credit provided to the Issuer at First Chargeback is reversed. This will appear as a debit on the Issuer’s account.

The disputed funds are with the Acquirer. After 45 days, if there is no pre-arbitration, the credit becomes permanent and the funds stay with the Acquirer.

Stage 3: Pre-Arbitration

Timeframe: 45 calendar days from the date of the Second Presentment to the Issuer.

Pre-arbitration allows the Issuer to contest the dispute for one more round. If the Issuer believes that the Acquirer failed to provide compelling evidence to prove that they had not committed the error presented at the First Chargeback, the Issuer can move the case to pre-arbitration in order to make a case as to why their cardholder should be refunded.

For example, if a case is filed under “No Cardholder Authorization” and the Acquirer provided a shipping address that doesn't match the billing address, the Issuer would submit a pre-arbitration that highlights the discrepancy as evidence of the chargeback claim.

  • The Issuer has 45 calendar days from the date they received the Second Presentment to submit a pre-arbitration filing.
  • If the Issuer does not submit within that time period, the case is closed by the network in favor of the Acquirer.
  • There is no money movement at this stage because the disputed funds remain with the Acquirer.

Stage 4: Pre-Arbitration response

Timeframe: 45 calendar days from the date the Issuer’s pre-arbitration filing is submitted.

Pre-arbitration is the last chance for the merchant and issuing bank to settle a chargeback. This is usually requested by the customer’s issuing bank, but the acquiring bank can also request it if the merchant does not agree with the results of the initial dispute.

This is usually the final stage of the chargeback process involving the Issuer and the Acquirer. If both parties do not come to an agreement at this stage, the Issuer may bring the case to arbitration, where the outcome of the case would be determined by arbitrators for the card network.

  • The Acquirer has 45 days to respond to the pre-arbitration filing from the opposing party.
  • If the Acquirer accepts, the disputed funds are transferred back to the Issuer.
  • If the Acquirer rejects, the disputed funds are credited to the acquirer.
  • If the Issuer does not submit within that time period, the case is closed by the network in favor of the Acquirer.

Stage 5: Arbitration

In the case the issuing and acquiring banks have been unable to settle on an outcome, arbitration places the dispute decision and final say in the hands of an impartial third party – the card network.

While arbitration can be beneficial to merchants if they win, it’s also important to note that it comes with significant fees for the losing party because they have to cover the dispute costs for the winning party.

  • If a dispute moves to arbitration, the final decision on the case is made by arbitrators for the card network.
  • Most Issuers and Acquirers try to avoid arbitration because the card network imposes a fee of $500 or more per case, regardless of the disputed amount, on top of other dispute-related fees imposed by the network.
  • In addition, the party that loses is responsible for paying the legal costs of the winner.
  • Arbitration is rarely used because the costs are high, the outcome is uncertain, and the process is opaque.

What a successful chargeback program looks like

To build a successful chargeback program, you need a few key components:


A chargeback dispute that moves to the Second Presentment stage generally results in the disputed funds being with the Acquirer, not the fintech company. That can create balance sheet challenges. To minimize this situation, chargeback filings should happen fast, ideally at the beginning of the time window. And you should never miss a window because you will automatically lose the dispute.

Cardholder Experience

The fintech company should have a trained support team that can manage the cardholder experience. A disappointed customer is a churn risk and may file complaints with regulators or try to bring a class action lawsuit. But a customer who feels that the fintech has been clear and informative during the process can become an advocate for the brand.

Internal Controls

Good internal processes can help fintech companies avoid unnecessary chargebacks. Conduct regular checks for fraud and create a checklist of things to look for when evaluating a charge. This could include things like confirming that the billing address matches the one on file or whether the IP address matches the IP recorded at sign up. Having clear internal controls will ensure that you invest your time and resources in the chargebacks that matter.

Chargeback observations from the field

Here are some notes from what we’ve seen for consumer use cases.

  • About 7 basis points (bps) of transactions tend to be chargebacks.
  • Of these, about 3bps are over $35 and 4bps are under $35.
  • Of those under $35, the average transaction value is $10.

For any transaction valued lower than what it costs to dispute a chargeback, you may be better off reimbursing your customer than fighting it. For example, if it costs $35 to file a chargeback dispute with your provider, then you’re better off reimbursing a $10 transaction than fighting.

Said another way, if a transaction is valued higher than what it costs to dispute a chargeback, you might as well fight it. For example, if you’re considering reimbursing a $200 transaction, you might be better off paying the $35 to file a chargeback dispute with your provider.

Questions to ask when evaluating an issuer processor

A well-managed chargeback program can be a strategic business advantage for a fintech company. And when you’re starting to build your card program, you may not be in a position to build a full chargeback program internally.

This is where a Card Issuer can help, but it’s important to ask the right questions because Issuers may structure their chargeback support programs in different ways.

Here are the most important questions to ask when you’re evaluating a Card Issuer’s chargeback support.

  • What is your chargeback recovery rate? The industry average runs around 65% to 70%, but at Lithic we’ve been able to deliver upwards of 90%.
  • What is your median case resolution time? A chargeback dispute can be a lengthy process especially if you’re using the full amount of time provided at each stage. Our average is 45 days.
  • What is your SLA for filing at each stage? There’s no value in sitting on a chargeback filing. Lithic has a 2-day SLA.

Contact us if you want to learn more about how Lithic handles chargeback disputes or talk about card issuing.