What is Chargebacks? Everything You Need to Know as a Merchant

Chargebacks are one of the biggest financial threats to high-risk businesses such as online casinos, forex platforms, adult entertainment, and other industries that deal with frequent online transactions. If not managed properly, chargebacks can lead to revenue losses, higher processing fees, and even account terminations from payment processors.

As a merchant operating in a high-risk industry, understanding what chargebacks are, why they happen, and how to prevent them is crucial to protecting your business. In this guide, we will explain everything you need to know about chargebacks, their impact on high-risk merchants, and the best strategies to reduce them.

What is a Chargeback?

A chargeback is a payment reversal initiated by a cardholder through their bank or credit card issuer. Unlike a refund, which a merchant willingly processes, a chargeback is a forced reversal of funds that occurs when a customer disputes a transaction.

Chargebacks are designed to protect consumers from fraud and unauthorized transactions. However, in high-risk industries, they are often abused, leading to financial and reputational damage for merchants.

How Chargebacks Work: The Process Explained

The chargeback process involves multiple parties, including the customer, the merchant, the issuing bank, the acquiring bank, and the payment processor. Here’s how it works:

1. Transaction Occurs: A customer makes a purchase using their credit or debit card.
2. Dispute Initiation: The customer disputes the transaction by contacting their card issuer.
3. Investigation: The bank reviews the dispute and temporarily reverses the transaction.
4. Merchant Response: The merchant is notified and has a chance to provide evidence (e.g., receipts, proof of delivery, transaction logs).
5. Resolution: The bank decides in favor of either the merchant or the customer. If the merchant loses, the payment remains reversed.

For high-risk merchants, losing too many chargeback disputes can lead to higher processing fees, account restrictions, or even merchant account termination.

Why Are Chargebacks a Bigger Problem in High-Risk Industries?

Certain industries experience a higher volume of chargebacks due to various risk factors. High-risk businesses such as iGaming, forex trading, adult entertainment, and subscription-based services face unique challenges, including:

1. High Fraud Risk

• Online casinos and forex platforms deal with fraudulent players who attempt to exploit systems for financial gain.
• Stolen credit card use and identity theft contribute to unauthorized chargebacks.

2. Friendly Fraud (Chargeback Fraud)

• A customer makes a legitimate transaction but later claims they did not authorize it to get a refund.
• Some players in online gambling or forex trading dispute losing bets or investments, leading to chargebacks.

3. Subscription and Recurring Payments

• Adult entertainment sites and subscription-based services experience chargebacks when users forget about automatic renewals or claim they did not sign up.

4. Poor Customer Understanding

• Customers may not recognize the merchant’s billing descriptor on their bank statement and mistakenly dispute the transaction.

5. Regulatory and Compliance Risks

• Strict regulations in gambling and financial trading can lead to chargebacks when transactions violate customer protection laws.

Due to these risks, merchants in high-risk industries must be proactive in preventing chargebacks to protect their business.

Top Chargeback Reason Codes for High-Risk Merchants

Chargeback reason codes indicate why a dispute was filed. The most common chargeback reasons in high-risk businesses include:

1. Fraudulent Transactions (Reason Code: 10.4, 10.5 - Visa, 4837 - Mastercard)

Occurs when a customer claims their card was used without authorization.

2. Product/Service Not as Described (Reason Code: 13.3 - Visa, 4853 - Mastercard)

Customers dispute transactions, stating that the service was unsatisfactory or did not match expectations (common in online gambling and forex).

3. Subscription Cancellations (Reason Code: 13.2 - Visa, 4840 - Mastercard)

Many chargebacks happen when customers claim they canceled a subscription, but the charge still went through.

4. Duplicate Transactions (Reason Code: 12.6 - Visa, 4834 - Mastercard)

Happens when a technical error results in multiple charges for a single transaction.

5. Processing Errors (Reason Code: 12.5 - Visa, 4831 - Mastercard)

Chargebacks occur due to payment gateway failures, incorrect amounts, or transaction processing mistakes.

Knowing these reason codes can help merchants build a stronger defense against chargebacks.

How to Prevent Chargebacks in High-Risk Businesses

Chargebacks can be reduced but not eliminated entirely. However, merchants can use these strategies to minimize disputes and protect their revenue.

1. Use a High-Risk Payment Processor

• Partner with a payment processor that specializes in high-risk industries.
• A good PSP provides chargeback prevention tools, smart transaction routing, and better fraud detection.

2. Implement 3D Secure Authentication (3DS2)

• 3DS2 adds an extra layer of security, requiring customers to verify their identity during checkout.
• This reduces fraud-related chargebacks.

3. Optimize Billing Descriptors

• Ensure your business name appears clearly on customer bank statements to avoid confusion.
• Use recognizable billing descriptors, especially for adult and gaming-related transactions.

4. Use Real-Time Fraud Detection Tools

• AI-powered fraud prevention analyzes transaction patterns to detect suspicious activity.
• Blacklist fraudulent customers and implement risk management measures.

5. Offer Clear Refund and Cancellation Policies

• Display refund, cancellation, and dispute policies on your website.
• Make it easy for customers to request refunds directly instead of filing chargebacks.

6. Monitor Chargeback Ratios and Maintain Compliance

• Keep your chargeback ratio below 1% to avoid penalties from payment processors.
• Use chargeback alerts from providers like Ethoca and Verifi to resolve disputes before they escalate.

7. Automate Customer Support for Fast Resolution

• A dedicated 24/7 support team can resolve customer complaints before they turn into chargebacks.
• Offer live chat, email, and phone support for better dispute resolution.

By implementing these strategies, merchants in high-risk industries can significantly reduce chargeback risks and protect their business from financial losses.

Conclusion

For high-risk merchants, chargebacks are a constant challenge, but they can be controlled. Understanding the causes, prevention strategies, and dispute processes is essential to protecting revenue and maintaining a strong payment processing relationship.

By working with a high-risk payment processor, implementing fraud prevention tools, and maintaining excellent customer support, businesses can reduce chargebacks and improve overall payment success rates.

High-risk industries will always face a higher chargeback rate, but proactive risk management can help merchants stay compliant, minimize losses, and optimize their payment operations.