Glossary

What is a chargeback in lending and payment processing?

A chargeback is a forced reversal of a completed payment transaction, initiated by a cardholder through their bank or card network when they dispute a charge. For MCA funders, chargebacks in a merchant's processing history signal revenue instability and customer disputes — both underwriting risk signals. High chargeback rates can also result in processor termination, which directly threatens an MCA's repayment stream.

Why chargebacks matter in MCA underwriting

MCA funders purchasing a percentage of future card receivables have a direct stake in the stability of a merchant's processing relationship. A merchant with a high chargeback rate faces processor penalties — and at a certain threshold, processor termination, which eliminates the card sales stream the advance is being repaid from. Reviewing chargeback history is standard in MCA underwriting for merchant-processing-based products.

Even for ACH-based MCAs not directly tied to card processing, chargebacks in a merchant's processing history are a signal of business health issues: customer disputes, product or service quality problems, or fraud exposure — all of which can translate to revenue declines and repayment risk.

Chargebacks as a fraud signal

In some fraud scenarios, a merchant may generate artificial sales through self-swipes or coordinated transactions, then dispute those transactions as chargebacks — receiving both the advance proceeds and the chargeback refunds. Underwriters reviewing merchants with unusual sales patterns or spikes in volume should consider whether chargebacks are part of the picture. Cross-referencing processor statements and bank statements can surface this pattern.

FAQ

Chargeback — common questions

What chargeback rate is a red flag in underwriting?

Card networks generally define excessive chargeback ratios as above 1% of monthly transactions (Visa) or above certain absolute thresholds. For underwriting, any chargeback rate trending upward or above industry norms warrants investigation. The specific threshold that triggers a decline or escalation is a lender's credit policy decision.

Do ACH-based MCAs have chargeback risk?

ACH transactions have their own return/dispute mechanism (ACH returns) separate from card chargebacks. High ACH return rates — particularly unauthorized or insufficient-funds returns — are a direct repayment risk signal for ACH-based MCA products.

Merchant cash advance (MCA) NSF Holdback rate

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