Chargeback FraudHow a Customer Protection Mechanism Is Making Merchants Victims

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.”

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.

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:

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:

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:

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:

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.