Terms of Service & Chargebacks

In fiction, we love to see it when a character’s words come back to haunt them in an ironic way. As merchants, this is not a situation you want to find yourself in, and yet it can happen any time you fail to uphold your own terms of service with a customer.

Often, this provides justification for them to file a chargeback. On the other hand, sometimes your terms of service can help you avoid chargebacks or even fight them after they’ve already been filed. How can a merchant’s terms and conditions cause, prevent, or be used to fight chargebacks?

New call-to-actionEvery sale is an agreement between a merchant and a customer, which means there are always terms and conditions. Sometimes it’s nothing more than an unstated “no refunds” policy for small, informal purchases, but when merchants start offering returns and exchanges, ongoing support, subscription services, and other add-ons, the terms and conditions can get quite complex very quickly and it becomes necessary to put them down in writing.

Without getting these things in writing—and being able to prove that the cardholder had every opportunity to read and consider them before making their purchase—merchants are extremely vulnerable to cardholders’ claims that they were cheated, misled, or defrauded in the event of an acrimonious dispute. At the same time, these agreements can box merchants in when unscrupulous cardholders find ways to exploit loopholes in, for example, a generous refund policy.

One of the most important things a merchant can do for their own self-protection is come up with terms and service agreements that protect them from unreasonable disputes, false claims, and other opportunistic threats.

What Types of Chargebacks Do Terms of Service Affect?

Chargebacks related to breaches of the merchant’s terms of service or sales agreement are typically categorized as “Consumer Disputes” given that they cover situations where the merchant and the cardholder are stuck in an unresolved disagreement. The card networks each have reason codes associated with the following scenarios:

Canceled Merchandise/Services

The cardholder returned merchandise or canceled an order or subscription with the merchant, but never received a refund.

If your terms of service indicate that a refund is due under these circumstances, and the cardholder meets the required conditions, they will be entitled to a chargeback if you refuse to issue a refund or delay it excessively.

Credit Not Processed

The customer believes they are entitled to a refund but have not received one within a reasonable timeframe. If the refund is due, per the merchant’s own words or policies, then the cardholder will be granted a chargeback.

Cancelled Recurring Transaction

Subscription services often include policies regarding when a customer needs to cancel their membership in order to avoid the next billing. Some merchants may offer prorated refunds when subscribers cancel in the middle of a billing cycle. If a cardholder submits a valid cancellation request and is billed in error afterward, they are entitled to a chargeback to recover their funds.

How Can Terms of Service Be Used to Prevent Chargebacks?

One of the most important functions of a purchase agreement is to define when and under what circumstances a customer can obtain a refund for unsatisfactory goods or services.

Manage Chargeback In-House Or OutshoreMerchants must take care to draft return and refund policies that make sense for their industry and customer base. When policies are too rigid, cardholders will resort to chargebacks to obtain the refunds they feel they deserve.

We recommend a flexible refund policy on the grounds that a refund is always less costly than a chargeback, but if you’re too generous you may find yourself targeted by fraudsters.

Customers who actually understand what they’re agreeing to are more likely to follow the correct procedures for resolving their issues. With that in mind, it’s a good idea to do the following with your terms of service and any other policies your customers need to agree to:

  • Publish it on your website where they’re sure to see it, like on the checkout page
  • Make it easy to find on your website for later reference
  • Email them a copy of it
  • Print it on their physical receipts
  • Make them sign it (or click a checkbox online) before they can finalize their purchase

And of course, always follow through on the agreements you make with customers—but if you need to bend your own rules in order to make someone happy and avoid a dispute, do so at your discretion.

How Can Terms of Service Be Used to Fight Chargebacks?

It’s not at all uncommon for friendly fraud to show up in chargebacks from the “Consumer Disputes” category. In many of these cases, the cardholder will claim that they were never shown the terms and conditions and did not agree to them, or that they were altered after the fact.

You can represent these chargebacks and send along, as evidence, proof that your terms and conditions were published, readily visible, and unchanged from the time of sale.

Even better is if you obtained actual proof (such as a physical or digital signature) that the cardholder read and agreed to the terms prior to the transaction. This is especially important for recurring billing merchants, as regulations have recently tightened around these particular transactions in response to the volume of disputes card networks were seeing.


Coming up with the right language for purchase agreements requires a deep knowledge of your business and customers, and sometimes professional legal input. However, the only real way to know how these things are impacting your chargeback ratio is to analyze the data. If you’re seeing reason codes associated with the “Consumer Disputes” category, it tells you there’s something wrong: either your terms and conditions need updating or you’re not following them like you should.

Valid chargebacks of this type should be considered merchant error chargebacks, and it’s important to identify and address those as quickly as possible because you have a greater ability to fix them compared to fraud and friendly fraud chargebacks. Once you’ve made your internal operations as chargeback-proof as possible, you can focus more resources on dealing with the ones that come from outside attackers.

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