A chargeback occurs when a cardholder disputes a transaction on their account. When this happens, the bank that issued the credit card investigates the matter on behalf of the cardholder. Upon discovery of a fraudulent transaction, the issuing bank returns the funds to the cardholder. If a merchant cannot prove that the transaction is legit, the processor will charge a fee (chargeback fee) and subtract the amount of the transaction in question from the merchant’s bank account.

Whenever a customer files a chargeback claim, they need to explain to their credit card company why they are doing so. These reasons are known as chargeback codes. There are four main chargeback codes: quality, clerical, technical, and fraud.

Quality covers things like receiving substandard or faulty products. It also covers cases where the customer never received their purchased item.

Clerical chargebacks include duplicate billings, over-excessive service charges, and non-issued refunds.

Technical chargebacks may be filed if the customer doesn’t have enough credit remaining on their card for the purchase to go through, or if there was a processing error during the transaction.

Lastly, and most common of all, fraud chargebacks apply when someone else made a purchase using the customer’s card. As you can likely already guess, these chargebacks are the most common because they are very difficult to disprove. Quality chargebacks are also fairly common, although these are slightly easier to dispute in many cases.

The chargeback threshold is the percentage (either in the amount of transactions or overall revenue) that your customers might ‘charge back’ before the merchant account is red-flagged for closure.

Most merchant accounts are set up on the condition that your chargeback ratio does not exceed 0.9%. If you go over this amount, then you could well have your account automatically terminated.