Chargebacks are primarily a means of consumer protection; most often, they are initiated by consumers after fraudulent or erroneous charges, for example when they used their credit card to pay for a certain product but it was never delivered to them.
A demand is then made by the credit card provider for a retailer to make good on the loss on the fraudulent or disputed transaction, reversing said payment or money transfer after it was authorized.
The chargeback does not occur automatically nor instantaneously — the consumer must first successfully dispute the original charge and the final settlement can take up to several days.
Other potential reasons for initiating chargebacks include clerical errors like an accidental duplicate charge or technical issues that lead to mistaken charges. The threat of a possible chargeback incentivizes merchants to provide quality goods and services and be extra careful when charging their customers.
Additionally, chargebacks provide a measure of protection in cases of identity theft — when a person’s credit card is used without their knowledge or authorization with malicious intent.
On the flip side, consumers may also engage in chargeback fraud — deliberately trying to initiate a chargeback on a charge that they know was legitimate.
The impossibility of chargeback fraud in decentralized cryptocurrencies — where transactions are permanently recorded on the blockchain and are irreversible — is one of the key advantages offered to merchants if they choose to accept crypto payments.