Chargeback vs Dispute: What’s the Difference Between Dispute and Chargeback?

Understanding customer transactions is among the most convoluted parts of running a business - especially given all the different terms that get thrown around.

Representment, pre-arbitration, chargeback, dispute…what does it all mean? Today, we’ll narrow our focus on two terms in particular that are commonly used interchangeably, although they are not the exact same things: chargeback vs dispute.

Technically all chargebacks are the result of a dispute - but not all disputes lead to chargebacks. A dispute is a cardholder’s first attempt to resolve an issue they’re having. This can be fraud, dissatisfaction with goods/services received, or anything in between. On the other hand, a chargeback is the process that begins if a merchant chooses to fight the dispute.

You can learn more about the difference between dispute and chargeback terminology below along with the chargeback process as a whole. After all, merchants need to equip themselves with insights and tools to prevent and fight these issues head-on, protecting against lost revenue and damaged reputation.

Here at Disputifier, we can handle all this on your behalf through an automated chargeback prevention solution that stops 95% of disputes and increases your win rate by nearly 70%. Learn how it works today!

Chargeback vs Dispute: What’s the Difference Between Dispute and Chargeback?

Let’s make one thing clear right away - although they are used interchangeably, no, disputes and chargebacks are not the same thing. 

The confusion arises because both terms involve a customer questioning a transaction and seeking a resolution. However, they differ significantly in their processes and implications for merchants.

To show you where they have their differences, we are going to walk you through the chargeback process step-by-step below, starting with the initial opening of a dispute.

Disputes

A dispute starts when a customer questions a transaction. They may contact their bank or the merchant directly to express their concerns. This could be due to unauthorized charges, undelivered goods, or dissatisfaction with the received product or service.

The goal at this stage is to resolve the issue amicably. The merchant has an opportunity to address the customer's concerns, provide refunds, replacements, or additional support to rectify the problem. 

There are a number of reasons a customer may dispute a transaction, including:

  • Fraudulent Transactions: The cardholder did not authorize the transaction. Someone else used their card to ship an item to their own address and the cardholder caught it in their card statement.
  • Product/Service Issues: The customer is unhappy with the quality, description, or delivery of the product/service. Or, perhaps they never even received the product - this is unfortunately quite common with the current state of the delivery industry post-COVID-19.
  • Billing Errors: The customer was charged the wrong amount or billed multiple times. It could also be that they canceled (or thought they canceled) a recurring subscription that was still billed.

Whatever the case, they are looking to have the funds returned to their account in a timely manner. This is your chance as a merchant to retain customer trust if you agree the customer was wronged in one way or another and provide a refund, resend the goods, or make it right in some other way.

If not, the dispute then escalates into a full-blown chargeback.

Chargebacks

If a dispute is not resolved to the customer’s satisfaction before the chargeback deadline, the process escalates. This is the point at which the cardholder’s bank will reverse the transaction, returning the funds and pulling them from your account.

The issuing bank investigates the claim, and if they find it valid, they initiate the chargeback against the merchant’s acquiring bank. There are a lot of moving pieces here as far as what it means for merchants: 

  • Loss of Revenue: The transaction amount is debited from your account. Most of the time, you’ve already fulfilled an order or delivered a service - which means you’re out those costs as well.
  • Additional Fees: Chargeback fees are imposed by the payment processor. These aren’t much at first, but a higher chargeback ratio leads to higher fees.
  • Resource Allocation: Time and resources are diverted to gather evidence and manage the chargeback process. Fortunately, our solution helps you avoid all this - more on how Disputifer fits into your chargeback management process later on.
  • Customer Trust: Frequent chargebacks can erode trust and damage your reputation.
  • Bank Relationships: High chargeback ratios can strain relationships with acquiring banks and payment processors, potentially leading to higher fees or account termination.

We’ll walk you through the next steps that come after a chargeback is opened - but, what’s the difference between a dispute vs chargeback?

Key Differences Between Chargeback and Dispute

You can probably start to see some of the difference between chargeback and dispute at this point. One of these is the level of communication. You’re no longer attempting to solve the issue with the cardholder at this point - instead, you’re dealing with their financial institution.

The financial implications are also much different. With a dispute, you can offer a simple return which still recovers the inventory - you are only out the cost of shipping. 

But with chargebacks, you’re out the cost of shipping, cost of goods sold (or services rendered), and additional fees. Should the chargeback escalate to arbitration (which we’ll discuss in a moment), you could end up paying hundreds of dollars if you lose.

Finally, the process of dealing with a chargeback is more complex than a simple dispute. You’ll have to gather compelling evidence and create what is known as a representment package in order to remedy the issue. On the other hand, a simple email to your customer can be all it takes to resolve disputes.

That being said, let’s look at what happens after a chargeback is opened and what you can do to fight the issue head-on.

Representment

When the issuing bank finds the customer’s claim valid, you have a chance to present your side of the story - this is known as representment. 

Gather all relevant documentation, such as transaction records, proof of delivery, and communications with the customer. Your goal is to show the transaction was legitimate and that you fulfilled your obligations.

You’ll then submit all this information to your acquiring bank, which will forward it to the issuing bank to review the case and decide whether to uphold or reverse the chargeback.

Pre-Arbitration

Now, what happens if you lose a chargeback the first time around? The process then moves on to pre-arbitration. This is where both parties have another chance to resolve the issue before it escalates further. 

At this stage, the issuing bank and acquiring bank communicate to see if the dispute can be settled based on the existing evidence and any additional information provided.

It’s important to note that pre-arbitration can also be opened by the cardholder in question if they are unhappy with the outcome of the dispute. 

Either way, you should look to see if there was anything you left out in your initial representment that could sway the outcome in your favor here.

Arbitration

If pre-arbitration fails to resolve the dispute, it moves to arbitration. This is a more formal process where the card network (like Visa or MasterCard) steps in as an arbitrator. Both you and the customer’s bank will submit any last bits of evidence, and the card network will make a final decision. 

When we say final, we mean final - there is no next step after arbitration. Whoever loses here is on the hook for hundreds of dollars in fees associated with the process, which means you need to strongly consider if it’s worth going forward or not.

How Can You Prevent Disputes From Becoming Chargebacks?

Hopefully, you have a solid understanding of the difference between chargeback and dispute at this point. Now, it’s a matter of figuring out:

  1. How to avoid disputes in the first place
  2. How to prevent disputes from turning into chargebacks

Preventing Disputes in the First Place

Let’s face it - some customers are just difficult, if not downright fraudulent. There’s nothing you can do to avoid these people in your business. However, there is a lot you can do to avoid disputes in general, such as:

  • Transparent Policies: Return, refund, and cancellation policies should be clearly stated and easily accessible on your website. If nothing else, this will at least help as part of your representment package later on if things escalate. 
  • Detailed Product Descriptions: Accurate and detailed product descriptions, including images and specifications, reduce the likelihood of customers feeling misled about what they are buying. Don’t overpromise and underdeliver.
  • Regular Updates: Keep customers informed about the status of their orders, especially if there are any delays associated with backorders or delivery issues. Many customers open a dispute simply because they do not know where their order is.
  • Responsive Support: Offer multiple channels for customers to contact you if they have a problem, such as phone, email, and live chat. Fast responses to inquiries and complaints show customers you value their business.
  • Fraud Prevention Tools: These tools can help identify suspicious transactions and reduce the risk of fraudulent disputes by automatically refunding orders before a customer has a chance to see them on their statement.

Resolving Disputes Before They Escalate to Chargebacks

Even with these tactics, though, you won’t avoid all disputes - so let’s talk about what you can do to prevent them from spiraling into chargebacks.

  • Immediate Action: Don’t ignore a dispute hoping the customer will just go away - address it immediately. The faster you respond, the higher the chance of resolving the issue before it escalates.
  • Offer Solutions: Be flexible and willing to do whatever it takes to satisfy the customer. This might include refunds, exchanges, or other compensations that can resolve the dispute amicably.
  • Maintain Records: Order confirmations, shipping details, and customer communications can help show the customer they are mistaken in their grievance. Even if they don’t agree and then choose to escalate, chances are the financial institutions will side with you. 
  • Evidence of Delivery: Always use trackable shipping methods and require delivery confirmation for high-value items. Having proof of delivery will help you win a chargeback if it comes to that point.

Ultimately, solid customer service is your first line of defense when disputes arise. But your best bet is to invest in the help of a chargeback company that handles all this on your behalf so that you can focus your attention where it matters most.

Of all the best chargeback companies you have at your disposal, Disputifier is the #1 choice. Learn why below!

Disputifier Helps Prevent Disputes in the First Place and Actively Fights Chargebacks on Your Behalf

Whether you want to reduce the occurrence of disputes or need help fighting chargebacks with more precision, our solution is the most effective, efficient choice. It’s 100% automated so you don’t have to do anything after the initial setup.

Through the use of Verifi and Ethoca chargeback alerts, fraud scanning, and order tracking technology, you can avoid up to 95% of disputes in the first place. We’ve integrated fail-safes to prevent false positives too, so you don’t have to worry about rejecting legitimate orders.

In the event a chargeback does make its way through our screeners, we get to work right away formulating a custom response on your behalf, all on autopilot. This rebuttal package is based on hundreds of data points to give you the best chance possible. 

So, how often do merchants win chargebacks? The industry average for low-risk businesses is around 30%, while high-risk businesses are lucky to win 20% of the time. However, Disputifier helps you win up to 70% of chargebacks without you having to lift a finger!

It’s a performance-based solution where you only pay when you win, too. We guarantee a 5x ROI, and we’re so confident you’ll see value in Disputifer that you can try it free for 7 days. Or, you can schedule a demo now to learn more about how it works. Get started as we wrap up our guide to dispute vs chargeback.

Final Thoughts on Chargeback vs Dispute

Understanding the difference between chargeback and dispute terminology is the first step in managing these challenges in your business. As you now know, disputes are the initial stage where customers raise concerns, while chargebacks are formal processes involving banks.

Both are important, as you have the opportunity to resolve a dispute amicably with the cardholder before it escalates to a chargeback - at which point you lose control, have more financial consequences, and could risk your reputation as well.

Learn more about how to win a chargeback as a merchant in our blog, including sending a chargeback email to customer, what happens if you don’t respond to dispute, or whether or not chargeback insurance is worth it.

Otherwise, there’s only one thing left for you to do here today as we close out this guide on the chargeback vs dispute topic: try Disputifier risk-free!

Not only can you avoid most disputes in the first place, but any chargebacks that do get opened will be addressed with speed and precision. So, elevate your chargeback defense with Disputifier today!

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