What is a Chargeback?
A Chargeback is a payment reversal initiated by a customer’s issuing bank (or card issuer) after the customer disputes a credit or debit card charge. It represents a forced clawback of funds previously collected and often recognized as revenue by the recurring-revenue company.
For recurring-revenue companies, chargebacks create operational interruption and accounting complexity: cash is withdrawn without notice, fees are assessed, and any revenue previously recognized must be reversed under ASC 606 / IFRS 15. High chargeback activity also signals elevated customer dissatisfaction and increases a company’s risk profile with processors.
In short, a chargeback turns a settled transaction into a financial liability that requires precise reconciliation across payments, AR, and revenue accounting.
Chargeback vs. Refund: Critical Differences
| Factor | Refund | Chargeback |
|---|---|---|
| Initiated by | Business | Customer's bank |
| Merchant control | Full control | No control until response phase |
| Timeline | 3-7 days | 45-90+ days |
| Cost to merchant | Transaction amount only | Transaction amount + $20-$100 fee |
| Impact on reputation | None | Damages merchant standing with processors |
| Chargeback ratio impact | No | Yes—counts toward threshold |
| Documentation required | Minimal | Extensive evidence package |
Why Chargebacks Are Significant
Chargebacks are a major concern for controllers and financial operations teams because their cost extends far beyond the disputed transaction amount:
- Revenue Reversal & ASC 606: A chargeback reverses previously recognized revenue, requiring adjustments in the AR subledger, the revenue schedule, and the GL. This is a form of variable consideration and must be accounted for correctly to maintain ASC 606 compliance.
- Non-Refundable Fees: The merchant incurs a non-refundable dispute fee for every chargeback initiated, regardless of the outcome.
- Increased Processing Costs: A high chargeback rate (typically exceeding 1% of transactions) can result in fines, increased transaction fees, or even placement in the card network’s high-risk monitoring program.
- Fraud & Abuse Signal: They indicate weak fraud detection, poor communication, or potential “friendly fraud” (a customer misrepresenting a legitimate purchase).
The 8 Common Types of Chargebacks
Chargebacks are categorized by their core reason code, which dictates the required evidence for response:
Type 1: Fraud or unauthorized use: Customer claims the transaction was not approved.
Type 2: Transaction not recognized: Billing descriptor unclear or customer does not recall the merchant.
Type 3: Goods/services not received: Customer believes the subscription was not provisioned or access unavailable.
Type 4: Services not as described: Customer asserts service quality, uptime, or entitlement mismatch.
Type 5: Billing errors: Duplicate charges, incorrect amounts, or unapproved renewals.
Type 6: Subscription cancellation: Customer claims they canceled but were still billed.
Type 7: Technical failures: Payment processing errors or delays creating duplicate or stale transactions.
Type 8: Unprocessed credits: Business promised a refund or credit but did not issue it.
How Chargebacks Work: The End-to-End Process
Chargebacks follow a regulated, multi-step process involving the customer, issuing bank, card network, merchant acquirer, and business:
Step 1: Customer Initiates Dispute: The cardholder contacts their bank and claims the charge is invalid.
Step 2: Issuer Reviews the Claim: Bank assesses initial validity and issues a provisional credit to the customer.
Step 3: Chargeback Filed: Card network notifies the acquiring bank → Business receives a chargeback notification.
Step 4: Business Responds with Evidence: Business submits “compelling evidence,” such as: Contract or order form, Login or usage logs, Cancellation history, Communication records etc.
Step 5: Issuer Investigation: Bank reviews evidence and determines whether to uphold or reverse the chargeback.
Step 6: Final Decision
- If Upheld: Customer keeps provisional credit; business permanently loses funds + pays chargeback fee.
- Reversed: Funds return to business; chargeback closed.
Typical resolution timeline: 45–90 days depending on network (Visa, Mastercard) and dispute complexity.
Common Chargeback Challenges
Recurring-revenue businesses face recurring pain points:
- Ambiguous cancellations or renewal workflows → customers dispute instead of contacting support.
- Unclear billing descriptors → customers don’t recognize charges.
- Lack of usage visibility → customers believe they didn’t use the service.
- Slow refund handling → customers escalate a legitimate issue to their bank.
- Fragmented systems → billing, payment processors, and GL do not reconcile.
- Manual evidence gathering → slows response time and increases win-rate risk.
How Ordway Reduces Chargeback Risk
Ordway minimizes chargeback exposure by tightening billing clarity, evidence automation, and revenue reconciliation:
- Clear Billing & Renewal Automation: Accurate invoices, renewal notifications, and transparent descriptors reduce customer confusion. (preventing chargebacks)
- Usage & Contract Evidence On Demand: Ordway links every payment to contract terms, usage logs, and billing rules, enabling instant evidence packages for dispute response.
- Automated Refunds & Credits: Refunds issued quickly within Ordway reduce the likelihood of customers escalating issues to their bank.
- Real-Time Payment Reconciliation: Ordway syncs processor payouts and reversals to AR and the GL, preventing mismatches and missed revenue reversals.
- ASC 606-Aligned Revenue Reversals: Chargeback-driven revenue reversals flow automatically into Ordway’s revenue subledger, ensuring accurate recognition and audit readiness.
Ordway turns an otherwise chaotic, cross-system process into a controlled, auditable workflow.
Example: Chargeback for a Recurring Subscription
A customer disputes a $200 monthly subscription charge, claiming they canceled last cycle.
Step 1: Customer initiates dispute → issuer provides provisional credit.
Step 2: Merchant receives chargeback notification through acquirer.
Step 3: Ordway surfaces:
- Cancellation history
- Contract terms
- Login records
- Billing schedule
Step 4: Finance submits evidence showing no cancellation request.
Step 5: Issuer reverses the chargeback → funds returned to business.
All adjustments, timelines, and evidence are logged in Ordway’s audit trail.
Failure Point
Deferred revenue is often overlooked during chargeback handling. If a chargeback is not tied back to the original contract and revenue schedule, the ledger quickly falls out of sync. This creates audit issues, misstated ARR, and gaps between cash, AR, and revenue. Until everything is reconciled, revenue that was previously recognized is not actually safe.
Takeaway
Chargebacks are unavoidable in recurring-revenue businesses—but their financial impact can be controlled. Companies that automate billing clarity, refund timeliness, and evidence collection dramatically reduce chargeback frequency and improve win rates. With Ordway, the entire chargeback lifecycle becomes transparent, auditable, and synced to revenue and AR systems, protecting both cash flow and financial integrity.
Next to Know
Learn what a chargeback is, how it works in SaaS billing, and how it affects revenue recognition, reconciliation, and audit readiness.
Understand what a dispute means in SaaS billing, how it affects AR and revenue recognition, and why automated dispute management reduces financial risk and customer churn.
