Chargeback Fraud

January 19, 2022 | 10 min read

There’s Nothing Friendly About Chargeback Fraud!

There’s no denying that eCommerce is swiftly taking over most markets. Once upon a time, a shopper had to get dressed, fill up their gas tank, battle traffic, and fight crowds at the mall to pay for goods and services. Nowadays, that same shopper can have products ordered, fulfilled, and delivered to their own homes on the same day (clothing optional).

As shopping goes, it’s no wonder why eCommerce is becoming the preferred method. It simply doesn’t get much easier than using ‘one click’ to buy and receive items.

But, while eCommerce holds a lot of promise, it’s also much more susceptible to abuse. We're talking about criminal activity, as well as other fast-growing threats like chargeback fraud.

In this article, we’ll explain what chargeback fraud is, how it affects your business, and how chargeback fraudsters avoid detection and prevention. We’ll also explore what you can do to prevent and fight it.

What is Chargeback Fraud?

Chargeback Fraud

[noun]/* chahrj • bak • frôd/

Chargeback fraud occurs when cardholders dispute a transaction with the bank instead of contacting the merchant for a refund. This can cover unintentional “friendly” fraud, as well as deliberate abuse of the chargeback process.

Chargeback fraud, also referred to as first-party fraud, is not a monolith. It encompasses a lot of different scenarios. Essentially, any occasion in which a cardholder might misrepresent the details of a dispute to their issuing bank can constitute chargeback fraud.

Of course, not all of these disputes are malicious in nature. ‘Friendly fraud’ is often used as a blanket term for both intentional and unintentional abuse, though there is a difference between the two. We outlined the question of friendly fraud vs. chargeback fraud below:

Examples of Unintentional Chargeback Fraud

The cardholder simply did not understand the process.

The cardholder experienced buyer’s remorse; they regret the purchase, but don’t want to contact the merchant.

A family member made the purchase, but the primary cardholder either didn't know or didn’t want to honor the charges.

The cardholder didn’t recognize the charge on their billing statement or forgot about making the purchase.

The cardholder didn’t qualify for a traditional refund (for example, the time limit had passed).

Examples of Deliberate Chargeback Fraud

The cardholder’s original intention was to get something free.

The cardholder failed to return an item, choosing to keep the merchandise and
initiate a dispute instead.

The cardholder initiated a dispute for valid reasons, but then realized the process was simple, and decided to keep the item.

Cardholder didn’t like the goods, but their items were not in any way defective or marketed in a misleading manner.

Cardholder ordered the same item multiple times with the intent to file a chargeback and "warehouse" the stolen goods.

There’s no such thing as “foolproof” fraud prevention technology. The only real solution is a dynamic, multilayer approach.


There are two key points to understand here. First, the two forms of chargeback fraud are very hard to distinguish from one another. Second, both forms will result in the same damage to your business, regardless of the cardholder’s intention.

Is Chargeback Fraud Illegal?

Strictly speaking, it's kind of a ‘gray area’.

Banks and card networks were required by law to create the chargeback process. However, the process itself is governed by card network policies; not the law. While there have been cases in which cardholders were charged with wire fraud as a result of chargeback abuse, such cases are exceedingly rare.

Tracking chargeback fraudsters across state lines would require cooperation from banks, card networks, and multiple local and federal law enforcement agencies. Depending on the circumstances, the Federal Bureau of Investigation (FBI) may even need to get involved. In most cases, the amount disputed simply doesn’t justify the resources necessary to investigate the fraud.

Merchants can take cardholders to civil court over chargeback fraud. Although again, it's very unlikely to happen, as the cost to do so probably won’t be worth the effort.

Why is Chargeback Fraud Hard to Identify?

A growing body of statistics back up the idea that chargeback fraud is a problem. So why isn't something being done to stop this epidemic? There are five key reasons why buyers continue to get away with fraudulent chargebacks:

Reason codes don't accurately reflect the reason for the dispute

Reason codes don't accurately reflect the reason for the dispute

To file a chargeback, the cardholder must make a claim—in the case of fraud, a false claim—against a transaction. Banks assign a pre-defined reason code based on whatever explanation the consumer provides for filing the dispute.

Some merchants simply accept the assigned reason code as the truth. They do nothing to try and identify the actual cause of the chargeback. Unfortunately, this leaves them with no effective defense against chargeback fraud. Fraudulent chargebacks are usually filed by seemingly satisfied cardholders. Merchants don't suspect that their customers are behaving dishonestly.

Worse, failing to challenge these illegitimate claims practically guarantees they will continue. Without the experience or expertise to recognize chargeback fraud, merchants won't enact any measures to prevent them. As a result, businesses lose revenue, give away merchandise, and pay steep chargeback fees.

Much of this could be reduced or even prevented if merchants knew what they were really up against. To do that, however, they would need a way to determine the true rationale behind the reason code.

Cardholders might think a chargeback is easier than a return

Cardholders might think a chargeback is easier than a return

A consumer survey conducted by Chargebacks911 found that 81% of cardholders have filed at least one chargeback out of convenience. Rather than contact the merchant, they decided it was easier and faster to simply call the bank.

In today's busy society, consumers naturally gravitate towards the easiest and fastest option available. Many don't realize that a refund and a chargeback are not the same thing. They have no clue about the extra burden they are putting on merchants, and they don’t realize that their actions constitute chargeback fraud.

Chargeback regulations are largely obsolete

Chargeback regulations are largely obsolete

Chargeback regulations were developed in a pre-internet era. They were never designed to accommodate today's fast-paced, computer-driven marketplace.

Purchasing options and technologies change rapidly, and fraud tactics constantly adapt in response. Chargeback processing regulations, however, have not evolved at a corresponding pace. In many cases, they have not evolved at all.

Strategies of the past, no matter how effective they were at the time, can’t address problems of the future. The imbalance between stagnant chargeback processes and innovative sales tactics is making the problem worse.

Banks are unable (or unwilling) to perform due diligence

Banks are unable (or unwilling) to perform due diligence

Like any other business, banks are interested in appeasing their customers. So, when cardholders file chargebacks, banks tend to automatically assume the customer is right. It's good for public relations, but unfair to merchants.

As chargeback fraud has increased, so has the speed at which chargebacks need to be processed. Banks admit they are often understaffed in this area. This frequently results in chargeback claims not being fully investigated prior to sign-off.

Fraudsters are flourishing without consistent due diligence for all cardholder claims. Unfortunately, merchants are bearing the chargeback costs.

Merchants lack the resources (or will) to fight back

Merchants lack the resources (or will) to fight back

Managing chargeback fraud is a difficult task. Do-it-yourself risk mitigation requires a large investment, yet statistically offers minimal chance of success. Faced with that, even merchants who suspect they are losing to chargeback fraud can begin to feel that the ends don't justify the means. They assume chargeback fraud is simply an unfortunate "cost of doing business."

Ignoring fraudulent chargebacks can cause problems far beyond simple revenue loss. Failing to fight back can have severe, long-term repercussions. It can do irreparable damage to a business' sustainability. It also sends the message to customers that they can abuse the process and face zero chargeback fraud consequences.

Can I Prevent Chargeback Fraud?

To some degree, yes.

Many cardholders are unaware that they are technically committing fraud by filing chargebacks to avoid paying for goods and services. From the cardholder’s perspective, there’s no clear difference between returns and chargebacks. In some cases, banks may even file disputes without the customer’s knowledge.

Misunderstandings like this represent the majority of chargebacks. They are not indicative of malicious intent. The good news is that you can avoid many of these chargebacks with simple adjustments to policy and procedures. We recommend:

  • Using Anti-fraud Tools: You should employ advanced payment tools like CVV verification, AVS, proxy piercing, geolocation, and 3-D Secure 2.0. This will help prevent criminal fraud, and instill confidence among legitimate buyers.
  • Optimizing the Customer Experience: We’ve identified more than 100 simple missteps in customer service, user experience, policies, and logistics that could lead to chargebacks while offering no antifraud benefits. Eliminating these errors can help you avoid many chargebacks.
  • Embracing Secure Technologies: Mobile wallets like Apple Pay offer two-factor security. Accepting and encouraging these alternate payment methods can make for more secure, reliable card-not-present transactions.
  • Employing Blacklists and Fraud Scoring: Identifying bad actors can prevent repeat offences. Also, using fraud scoring tools can help you identify which transactions are most likely to be fraudulent, meaning more accurate decisioning and fewer false declines.

To prevent chargeback fraud, you really need a two-fold strategy. You must prevent chargebacks whenever possible, and fight back in other cases whenever appropriate.

Fighting Back Against Chargeback Fraud

Implementing the tools above will certainly help limit the amount of true fraud and chargebacks your business experiences each month… but it only scratches the surface.

Intentional chargeback fraud (also known as cyber shoplifting) doesn’t really lend any opportunities to address real issues with your product or services. In these instances, your business was purposefully defrauded. When that happens, your only course of action is the representment process.

Representment is a complex, time-consuming process. However, it’s necessary on many levels. Contesting false cardholder claims can:

  • Let you recover revenue that would otherwise be lost to fraudulent claims.
  • Help preserve and protect your reputation with both customers and banks.
  • Help contribute to industry-wide change.

Chargeback fraud is cyclical. If you don’t fight chargeback fraud, you end up reinforcing it:

Fighting back is important. Every chargeback case that you win will put money back into your pocket. But, even if you win a dispute, you’re still responsible for the chargeback fees assessed by your bank, which are usually non-refundable. That’s why, even though fighting chargeback fraud is important, it’s always better to prevent chargebacks whenever possible.

Get Help in the Fight Against Chargeback Fraud

Allocating resources, developing strategies…it can be a confusing and expensive process. The good news is that there are experts available who can make chargeback fraud prevention a simple, cost-effective prospect.

Chargebacks911® can help you develop and implement a comprehensive fraud prevention strategy. With over a decade of success in the chargebacks and payments space, we’re uniquely placed to help you manage chargeback fraud and eliminate long-term risk. Learn how much you could be saving today.

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