Key Insights
- Chargebacks are costly for community financial institutions requiring significant time and resources to investigate and resolve disputes.
- Small businesses face direct revenue losses each time a payment dispute escalates to a formal chargeback.
- Fraud prevention tools, cardholder education, and real-time dispute alerts can meaningfully reduce chargeback volume.
In any dispute, the urge to escalate can be overpowering: summon a referee, document the grievance, demand a ruling. Yet the most effective first move is often far less dramatic - make the two parties feel heard. Research compiled by Worldmetrics finds that feeling heard is the strongest predictor of satisfaction with a resolved conflict, while active listening can materially improve resolution outcomes. In other words, many disputes do not begin as irreconcilable conflicts; they begin as unanswered questions.
That lesson applies to a surprisingly expensive kind of everyday conflict: the unfamiliar line item on a cardholder’s statement. A customer sees a charge they do not recognize, taps “dispute” in a banking app, and a process involving the issuer, merchant, card network, and customer quickly begins. But in a meaningful share of cases, the dispute may have been resolved more simply by helping the customer identify the merchant, contact it directly, or receive a prompt refund or replacement.
With Get Smart About Credit Day coming up on October 15, it’s a timely opportunity to look at one particularly costly type of credit card dispute: chargebacks.
The Cost of Chargebacks
Chargebacks are a communication and workflow challenge for community financial institutions (CFIs). Most have built strong defenses against genuine credit card fraud, but they don't always make it just as easy for customers and merchants to resolve chargeback issues.
The conundrum of credit card chargebacks is growing. Americans love credit card payments, averaging 16 of them every month. Millions of those payments go wrong in one way or another, with Datos Insights predicting that there will be 324 million chargebacks globally by 2028, a 24% increase over current numbers, and that those chargebacks will grow from a value of $33.79B in 2025 to $41.69B in 2028.
That’s an expensive and time-consuming problem for banks, who pay about $10 to sort through and manage each chargeback. Each dispute requires an average 2.5 phone calls to resolve, so banks employ one staffer for every $13K to $14K in annual chargebacks. Customer retention is also at stake, as half of bank customers say they would change banks to get the ability to manage merchant disputes through an online banking app.
How Can CFIs Help Reduce Chargebacks?
According to Mastercard’s 2025 chargebacks research, merchants identify 45% of their chargebacks as fraudulent, while 38% are classified as non-fraud disputes. CFIs can use different approaches to prevent both of these categories of chargeback.
Anti-Fraud Protections with Specialized Tools
One way to reduce chargebacks is by partnering with Visa, Mastercard, and other assorted third-party providers who offer tools for identifying and managing fraudulent disputes. Keep in mind, though, that these solutions have costs and take time and energy to integrate with bank operations.
Community financial institutions can reduce fraudulent chargeback attempts by strengthening controls before a dispute occurs. Three areas deserve particular attention:
- Two-factor authentication. It is basic, but still effective. Requiring an additional verification step (such as a one-time code, biometric check or app approval) can help confirm that the person making a purchase is the authorized cardholder. CFIs can apply step-up authentication for higher-risk activity, such as a large online purchase, a new device, a password reset, or an unusual transaction location. The goal is to add friction only when risk is elevated, rather than burdening every transaction.
- Real-time fraud monitoring. Fraud-detection tools can review a payment as it occurs, looking at factors such as transaction size, merchant type, location, device data, customer spending patterns and transaction velocity. AI and machine learning can help identify unusual combinations of activity that static rules may miss. Based on a transaction’s risk level, the institution might approve it, request additional verification, alert the cardholder or block the transaction. The key is calibration: overly aggressive controls can create false declines and frustrate legitimate customers.
- Tokenization. Tokenization replaces the actual card number with a unique digital token used for a specific merchant, device or payment channel. If a token is compromised, it generally has limited value outside its intended use, making stolen data less useful to fraudsters. This can be particularly valuable for mobile wallets, e-commerce and stored-card payments. CFIs do not need to build tokenization capabilities themselves, but they should confirm that their processors, card platforms, and digital-wallet partners support network tokens and related lifecycle management.
These measures are most effective against unauthorized-payment fraud. They will not necessarily prevent “friendly fraud” or deliberate first-party misuse, where a cardholder disputes a purchase they actually made. For those cases, clear merchant descriptors, transaction alerts, responsive customer service and disciplined dispute investigations remain essential.
Nudge Customers to Talk with Merchants
The digital economy runs in part on customers’ confidence that they can rely on banks to resolve any issue, and apps make it easy to file a dispute. About 74% of customers go directly to their financial institutions when they don’t recognize a purchase. In many instances, however, an unfamiliar charge may be resolved without a formal dispute if the customer can identify the transaction or address the issue directly with the merchant.
- Encourage merchant customers to use a name that customers will recognize on their bank statements. According to a Mastercard report, nearly half of customers have disputed a charge they later realized was legitimate. Sometimes the problem is a memory lapse, but in many cases a business is using the name of an underlying incorporation that doesn’t register as one where the customer has done business.
- Offer in-app tools to help cardholders recognize purchases and manage subscriptions. Customers appreciate a convenient place to cancel or pause purchases.
- Ask customers to talk with the merchant involved before they file a dispute. Your banking app and customer service agents should both counsel customers to go to the merchant first.
- When a customer files a dispute, notify the merchant in near real time. That gives the merchant a chance to answer a question or provide a refund or replacement product, resolving the problem and saving everyone involved the cost of a chargeback.
"This is not just a bank problem; it's not just a merchant problem; it's not just a consumer problem," says Suzanne Sando, a lead analyst in the fraud management practice at Javelin Strategy & Research. "Everybody has a stake in this to help reduce the chargeback volume and mitigate chargeback fraud." Reducing chargebacks isn’t solely about processing disputes more efficiently; it’s about giving cardholders and merchants opportunities to resolve questions before they become disputes.
