A chargeback is a forced reversal of a credit or debit card transaction, typically initiated by the cardholder’s issuing bank. When a customer disputes a charge  whether due to suspected fraud, non-delivery of goods, or dissatisfaction  their bank may refund the money to the cardholder and debit the amount from the merchant’s account.

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Chargebacks can arise for both legitimate reasons (e.g., unauthorized card use, billing errors, or failure to deliver) and illegitimate ones (e.g., "friendly fraud," where a customer disputes a valid charge). For acquirers and payment providers, chargebacks are a critical risk signal. A high volume of disputes may indicate operational issues, poor customer service, or even fraudulent merchant behavior.

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Card networks closely monitor each merchant’s chargeback activity. Excessive chargebacks  commonly defined as over 1% of total transactions  can result in financial penalties, enrollment in remediation programs (such as Visa’s VDMP or Mastercard’s ECP), or termination of processing privileges. For instance, a merchant with 500 transactions and 10 chargebacks in a month has a 2% chargeback ratio, well above the acceptable threshold.

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Effectively managing chargebacks is essential for preserving a merchant’s credibility and processing access. Tactics include improving fulfillment, offering responsive customer support, using clear billing descriptors, and implementing fraud prevention tools. For payment providers, chargebacks are not just a financial concern; they're a vital part of ongoing merchant risk management.

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