Chargeback FraudHow a Customer Protection Mechanism Is Making Merchants Victims

April 15, 2024 | 12 min read

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Chargeback Fraud

In a Nutshell

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 post, we’re digging a little deeper into chargeback fraud, including what it costs merchants and what can be done about it.

What is Chargeback Fraud? Here’s What You Need to Know to Protect Yourself in 2024

Imagine a customer makes a purchase from your online store. You ship the order, you get the money, everything’s good… for a while, at least.

Then, you receive a chargeback out of the blue. Essentially, the customer is saying that you didn’t hold up your end of the deal. That’s not the truth, but you must either prove that the original transaction was legitimate, or simply accept the loss.

This is what’s known as chargeback fraud, and unfortunately, it happens a lot. In this post, we'll be looking at what chargeback fraud is, how it affects your business, and the steps you can take to keep from being a victim.

What Is Chargeback Fraud?

Chargeback Fraud

[noun]/chahrj • bak • frôd/

Chargeback fraud occurs when a cardholder seeks a forced bank reversal of a legitimate transaction by deliberately misrepresenting the details of the sale.

In short, a chargeback is an attempt to have a payment card charge reversed by the issuing bank. This process was designed to protect consumers against both unfair mechant practices and criminals making unauthorized purchases with stolen credit card data. 

With chargeback fraud, however, the cardholder files an unwarranted chargeback. This is considered a form of first-party fraud, because the culprit is the cardholder, not an outside third party.

The term chargeback fraud is often used interchangeably with “friendly fraud” to refer to any cardholder misuse of the chargeback system. That’s not exactly accurate, though. It may seem like splitting hairs, but there is a difference between friendly fraud and deliberate chargeback fraud: intent.

Accidental vs. Deliberate Chargeback Fraud

While both types of chargeback abuse involve misusing the chargeback system, friendly fraud typically refers to cases where the misuse was an honest mistake by the consumer. For example, the cardholder may erroneously believe that chargebacks and refunds are the same thing. 

Chargeback fraud, however, usually refers to a malicious act. Chargeback fraudsters are knowingly playing the system to get reimbursed for a purchase and keep the merchandise. They understand what they are doing is wrong, but they do it anyway. 

Chargeback fraud could also refer to someone filing a claim because it seems more convenient than asking for a refund. Or, because they believe that it’s a “victimless crime.”

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.

In all of these scenarios, the customer has no valid reason for a chargeback. That means getting the bank to approve the claim will require some amount of dishonesty. For example, they might say that they never received an order, or received items that differed from what they saw on the website.

The bottom line is that, if the cardholder must resort to deception, it’s not an honest mistake: it’s fraud. If the buyer had an issue with a purchase, they should have gone to the merchant first, rather than the bank.


Chargeback fraud and friendly fraud are different things, but from the merchant’s perspective, the result is the same: time and resources lost to invalid chargeback claims.

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.

Who Pays for Chargeback Fraud?

Every chargeback you receive will cost you, both directly and in more subtle ways.

Right up front, you lose the revenue from the original sale, as well as the cost of any merchandise already shipped. But there are other costs that aren’t quite as obvious at first glance. These include:

Chargeback Fees

Chargeback Fees

Acquirer and processor chargeback fees normally range between $20 and $100 per claim. They can go much higher, though, especially if your business is considered “high risk.”

Lost Inventory

Lost Inventory

In most situations, customers won’t be obliged to return products once a chargeback has been decided in their favor. You simply lose the merchandise.

Shipping & Other Overhead Costs

Shipping & Other Overhead Costs

In the case of a chargeback, the merchant doesn’t only refund the purchase price: you’ll also have to return any shipping costs or handling fees. In the rare event that the customer returns the merchandise, you’ll have to pay for that, too.

Higher Chargeback Rate

Higher Chargeback Rate

Chargebacks you receive will count against your chargeback ratio. If that ratio exceeds thresholds allowed by the card networks, it could push your company into the high-risk category. That means higher processing costs, more fees, potential monitoring program expenses, and more.

Lost Opportunities

Lost Opportunities

Dealing with chargebacks costs you time and resources that could have been funneled into more constructive efforts, such as growing your business. Over time, these lost opportunities can add up to substantial losses in revenue.

Allocating resources, developing strategies, implementing tactics…it can all get confusing (and expensive). We can help make chargeback fraud prevention a simple, cost-effective prospect.REQUEST A DEMO

Even though it’s hard to measure, another long-term cost of chargebacks is the reputational damage to your brand. You could end up looking like a bad risk to banks and processors. At the same time, customers who have gotten away with chargeback fraud may start telling their friends that you’re an easy mark. Either way, you lose.

What Types Of Businesses Are Most Vulnerable to Chargeback Fraud?

Any merchant that accepts credit card payments is open to multiple types of card fraud, including chargeback fraud. That said, some industries and business types are more at-risk than others. Verticals and sales models that are most susceptible to chargeback fraud include:

eCommerce Retailers

Online buyers are considerably harder to validate, and the merchant never has physical access to the card used. This increases the chances a fraudster will be able to bypass detection.

Digital Goods & Software Sellers

Delivery confirmation might help you prove a physical item was delivered or accessed. That doesn’t always work with software, online courses, or other digital downloads, though.

Recurring Payments & Subscriptions

With subscription-based businesses (streaming services, memberships, etc.), subscribers may use chargebacks to cancel services. They could then dispute multiple transactions at once.

High-Ticket Sellers

Fraudsters love to target retailers selling high-priced merchandise. Filing a chargeback on one 75” 4K television is easier and more profitable than filing dozens of claims on low-value items.

Travel & Hospitality

Chargebacks on hotel stays, car rentals, and airline tickets are hard to disprove. If a cardholder says a hotel booking did not reflect what was promised, for example, how can you prove they’re wrong? 

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 Aren't Reliable

Banks assign a pre-defined reason code to each chargeback based on whatever explanation the consumer provides for filing the dispute. If merchants take every reason code at face value, then they’d never suspect that their customers are behaving dishonestly.

Cardholder Misunderstanding

Cardholders 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.

Obsolete Chargeback Regulations

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

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. Thus, fraudsters are flourishing without consistent due diligence for all cardholder claims.

Merchants Lack the Resources 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.

How to Prevent Chargeback Fraud

Chargeback fraud will always be a risk, as long as the chargeback process exists. The good news is that there are a number of tactics merchants can use to protect themselves, though.

You can avoid many of these chargebacks with simple adjustments to policy and procedures. We recommend that you:

Use Anti-Fraud Tools

Use Anti-Fraud Tools

Advanced payment tools like CVV verification, AVS, geolocation, and 3-D Secure 2.0 can help you validate buyers before authorization occurs.

Optimize the Customer Experience

Optimize the Customer Experience

Top-notch customer service and easy access gives you an opportunity to address concerns so cardholders don’t feel they need to file a chargeback.

Employ Data-Based Protection

Employ Data-Based Protection

Network tools such as Order Insight and Consumer Clarity can often block chargebacks at the initial point of inquiry.

Simplify Return & Refund Policies

Simplify Return & Refund Policies

Creating and displaying clear, concise refund and return policies can make it harder for fraudsters to claim they know what they were getting into.

Employ Fraud Scoring

Employ Fraud Scoring

Using fraud scoring tools and blacklists can help you identify bad actors and repeat offenders and block their transactions.

Get Help in the Fight Against Chargeback Fraud

While all this can help, preventing chargeback fraud really requires a two-fold strategy. You must prevent chargebacks whenever possible, and fight back in other cases whenever appropriate.

Effective chargeback management can help businesses dispute fraudulent chargebacks and recover lost revenue. Merchants should track chargeback data, analyze the reasons for chargebacks, and represent those that are fraudulent or unwarranted.

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. Contact us to learn how much you could be saving today.


How do you fight chargeback fraud?

Like any other illegitimate chargeback, claims stemming from chargeback fraud can be challenged through the representment process. Due to the time and effort involved — as well as the statistically low chances of success — preventing the chargebacks from happening is almost always the better option.

Who pays for chargeback fraud?

The merchant is held liable for the acceptance of any fraudulent order and the cardholder's issuing bank will collect the customer's refund from the merchant should a cardholder request a chargeback.

What is the cause of chargeback fraud?

Chargeback fraud comes from cardholders who fraudulently attempt to obtain an unwarranted, bank-forced refund while at the same time retaining the purchased items.

What is the chargeback rate for fraud?

The financial services industry faces an average chargeback rate of 0.55%, primarily driven by fraudulent activities, unauthorized transactions, or disputes related to billing errors.

What is an example of chargeback fraud?

A consumer makes an online purchase, then calls the bank and claims the item was never delivered. The goal is to get the bank to force a full refund for the transaction, while the fraudster enjoys full use of the undamaged merchandise.

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