Credit Card Dispute FraudWhat Happens When Cardholders Abuse Chargebacks? Here is What’s at Stake.

December 16, 2022 | 15 min read

Credit Card Dispute Fraud

In a Nutshell

When cardholders are victims of fraud or merchant abuse, they can turn to the chargeback process to recover their funds. But what happens when consumers are the ones abusing that system by filing false chargeback claims or credit card disputes? This article will explain everything you need to know about dispute fraud, from what it is to why it’s getting worse, and the 8 consequences merchants might face for ignoring it.

8 Consequences of Dispute Fraud, Plus How to Fight Back & Recover Revenue

“Credit card dispute fraud.” It’s what happens when an important consumer protection mechanism is twisted into a tool to commit fraud rather than prevent it.

Dispute fraud is often referred to as friendly fraud, third-party fraud, or even as “cyber shoplifting,” depending on the circumstances. It costs merchants billions of dollars every year. But, how do buyers get away with it? What’s the impact on your business and how do you make it stop?

In the wrong place? We Have Tips for Consumers, too

Are you a cardholder looking for information about how to dispute a fraudulent transaction? We’ve got you covered. Check out our article explaining how to dispute a charge, including tips for making a strong case to the bank.

Learn how to dispute a fraudulent transaction

What is Credit Card Dispute Fraud?

Dispute Fraud

[noun]/dis • pyo͞ot • frôd/

Dispute fraud occurs when a customer accidentally or deliberately files a chargeback on a legitimate transaction, instead of trying to first obtain a refund from the merchant.

When a customer makes a credit card purchase, that individual is guaranteed a certain level of protection under federal law. In the US, the 1974 Fair Credit Billing Act guarantees cardholders a means to dispute their billing via a chargeback. Similar legislation exists in other markets to offer the same level of protection.

The goal of the chargeback system is to give consumers a way to recover their money in case of fraud or merchant abuse. The customer could contact the issuing bank and explain the situation, and the bank would then draw back the funds and return them to the customer’s account. Unfortunately, though, more and more cardholders are using chargebacks as a channel for engaging in credit card dispute fraud.

Credit card dispute fraud is a pretty broad concept. It can be deliberate; for example, a cardholder may complete a purchase with the premeditated intent to file a chargeback. In this case, the buyer knowingly steals goods or services, using a chargeback as a way to get something for free. However, dispute fraud could also be the result of buyer’s remorse, miscommunication, or poorly-defined merchant policies.

Stop disputes. Recover revenue. Get started today.REQUEST A DEMO

Of course, the end result is the same, regardless of the buyer’s intent: you lose sales revenue and the cost of any goods or services. You’ll also pay extra fees while your overhead increases. Worst of all, you could lose your ability to process payment cards altogether if your chargeback ratio exceeds acceptable levels on any card network.

Learn more about friendly fraud

The Rising Cost of Dispute Fraud

This isn’t a new problem. We’ve observed significant increases in the cost of chargebacks year over year. Most of that increase is attributed to dispute fraud.

Chargebacks cost the industry $39.5 billion in 2018, and total losses are expected to rise to $80.5 billion in 2023. This will hit merchants the hardest, as they will bear nearly two-thirds of those losses. When you factor in the ancillary costs connected to a long-term increase in chargebacks, the total will actually climb much higher. 

These costs could cause further complications like false declines, increased transaction friction, lower conversion rates, return fraud, and more..

With all these different threat sources considered, the total financial impact of chargebacks could be well over $150 billion every single year. And, as card-not-present transactions become the norm for the digital marketplace, costs will only continue creeping upward.

Chargeback regulations simply haven’t kept pace with changes coming to the market. The chargeback process was developed before the arrival of eCommerce and was intended for a card-present space. The existing procedures and regulations can’t keep pace with new developments. That’s the main reason why dispute fraud has become the number one fraud threat facing merchants over the last decade.

Consequences of Dispute Fraud: You Can’t Ignore These 8 Loss Sources

Despite what many consumers might believe, dispute fraud isn’t a victimless crime.

Its pitfalls aren’t just reserved for you as a merchant, either. Everyone involved in a dispute loses in the long run. This includes the cardholder who filed the illegitimate dispute in the first place.

For one thing, disputes take a lot longer than traditional refunds. It can often take weeks — or even months — to resolve a dispute and settle the funds. Also, depending on whether or not you choose to respond, the dispute could wind up costing the consumer even more money. 

In the end, though, merchants have the most to lose as a result of dispute fraud. You lose the revenue generated by the sale, but the consequences extend far beyond that. In the next sections, we’ll run down all the many ways your business can suffer due to dispute fraud.

#1 | The Cardholder Keeps any Merchandise Shipped

Much of the time, when a cardholder is awarded a forced refund by their bank, they are not likely to spend the money to ship those items back to you. So, aside from losing the funds from the original transaction when credit card dispute fraud is committed, you also lose any goods or products shipped.

The bank generally doesn’t require proof that the cardholder even made arrangements to return those items before they issue a provisional refund. Odds are good that the cardholder will only need to provide evidence that they attempted to reach out to you (at most). Plus, without a strict methodology, even this simple requirement is murky at best. 

This is still an issue if you provide services rather than products. The end result is essentially the same; you provide a service, but lose the funds earned from that service. In effect, you worked to provide a service for which you haven’t been paid! 

#2 | You Pay an Additional Chargeback Fee

On top of the revenue lost, and the cost of the goods or services provided, you get hit with an additional fee.

There is typically a chargeback fee assessed by your acquiring bank, regardless if the chargeback is legitimate or not. Chargeback fees normally range between $20 and $100 per claim. They can go much higher, though, especially if your business is considered “high-risk.”

Specific amounts depend on the acquirer, which bases its calculations on a range of factors. These can include your chargeback history, the products or services involved in the transaction, your merchant category code, etc.

Keep in mind that the final price tag is not necessarily the same for each chargeback, either. The banks have leeway to impose higher fees at their discretion. So, if you see one dispute per month, the bank may charge you a fee at a certain rate. But, if you get 100 chargebacks per month, you may have to pay a higher per-chargeback fee.

#3 | You Pay Unnecessary Overhead for Shipping,  Fulfillment, etc.

Another thing to consider here is that the product or item isn’t the only thing you stand to lose in a case of dispute fraud. Any shipping costs are going to be lost as well. The same goes for any fulfillment or production costs.

Here’s a little experiment. Ask yourself: How much does it cost to bring your top-selling product to your customer?

If you lose a sale to dispute fraud, you are out the cost of that item, as well as shipping fees, handling fees, listing fees, website fees, and any other fees accrued in the sale of that product. Then, there’s the cost of labor involved in picking, packing, and shipping the goods.

If you run a brick-and-mortar shop, or require lots of warehouse space to hold and fulfill orders, this can get extremely costly pretty quickly.

#4 | Transaction Processing Fees Go to Waste

Credit card transactions aren’t free. You probably already know that you’re assessed a fee for every credit card and debit card transaction you process. These charges are called interchange fees, and they go to pay for the maintenance of the payments infrastructure used by banks and card networks.

Interchange fees may be charged in addition to any fees tacked on by the merchant’s processor or merchant services provider. They are subject to change based on market conditions and fluctuations, and are constantly updated by each network. That said, interchange fees typically fall between these ranges, as dictated by the card brand:

Card BrandAverage Low RangeAverage High Rate
Visa1.15% + $0.052.40% + $0.10
Mastercard1.15% + $0.052.50% + $0.10
Discover1.35% + $0.052.40% + $0.10
American Express1.43% + $0.103.30% + $0.10

#5 | Fighting Invalid Claims Takes Additional Time & Money

Suppose you get a chargeback notification, and realize right away that the chargeback is a case of dispute fraud. You resolve to fight back and try to clear your name through the representment process. That’s a great idea…but that process isn’t free, either.

Chargeback representment is a strictly-regulated process for fighting an invalid payment card chargeback. It involves submitting evidence to the bank, proving that a transaction was valid and that the cardholder’s claim should be overturned.

This process is extremely time-consuming and costly. The fees and processing times depend on each network, but don’t be surprised if you end up paying double, or even triple the cost of the original transaction. This is why so many merchants choose not to fight back unless the item cost is considered worth the expense; they just write it off as a “cost of doing business.”

Also, remember that it can take up to six months to fully resolve one illegitimate chargeback if the cardholder is prepared to fight back too. The costs could just keep growing and growing.

Need help eliminating dispute fraud? We've got you covered.REQUEST A DEMO

#6 | It Hurts Your Chargeback-to-Transaction Ratio

Your chargeback rate is a figure that gauges the total sales you process each month with the number of chargebacks the business received during the period in question. Each card brand calculates merchants’ chargeback ratios differently, but essentially, the figure is the result of a simple equation:

A high chargeback rate is never a good look. It can make banks more hesitant to do business with you. Also, the card networks impose hard limits on the number of chargebacks you’re allowed to receive each month as a portion of your total transactions. As we’ll see in the next sections, there can be serious consequences for breaching those limits.

If your monthly chargeback ratio rests anywhere near 1% of overall transactions, then it’s already dangerously high. Your bank may be about to get involved any day.

#7 | Your Bank Account Could be Frozen or Canceled

Being considered a “high-risk” business by a bank or processor isn’t great. It’s especially frustrating when many of the chargebacks that earned you that designation could be cases of dispute fraud that aren’t your fault. Regardless of the source, though, if your chargeback ratio climbs above the threshold set by the card network (see above), then banks and networks could take a variety of actions against you.

The bank may hit you with higher fees for processing, or added financial penalties per additional chargebacks. Also, if you can’t get your chargeback rate down, the card network might require you to participate in an excessive chargeback program. This would involve substantial per-chargeback fees, plus regular reviews that might cost tens of thousands of dollars.

If the problem persists, your bank might freeze, or even terminate your merchant account. If this happens, you’d suddenly be unable to conduct basic business functions like processing cards, paying vendors, or transferring funds. 

#8 | You Could be Added to the MATCH List

Being added to the MATCH List (formerly known as “the Terminated Merchant File”) happens if you’ve had an account terminated by a bank for noncompliance with risk management standards. It indicates that your business poses an above-average risk for acquirers. Most read the MATCH List as a warning sign, saying “Stay away from this merchant!”

This designation likely means that you will lose processing services altogether, and be blacklisted from obtaining a new account. In short: you’ll be unable to process conventional credit card transactions for five full years. Few businesses could survive this.

You do have the option to seek out a processor that specializes in high-risk merchant accounts. However, you’ll definitely pay more for the privilege to offset the added risk. High-risk processing prices vary from provider to provider, but are generally quite steep in comparison to traditional processing fees.

Scary stuff… right?

Obviously, the best thing you can do against the threat of dispute fraud is to avoid the situation altogether. That may not always be an option, of course; if that’s the case, then fighting back through representment will at least help you recover funds and discourage additional dispute fraud attacks.

This is why it is so incredibly important to have a multi-tiered chargeback prevention plan in place at all times. 

How to Prevent Credit Card Dispute Fraud

Cardholders want convenience. If they perceive credit card dispute fraud as the fastest and easiest way to get what they want…that’s the way they’ll go. The best solution to stop this kind of abuse is to prevent credit card dispute fraud before it happens.

There are several steps you can take to help minimize credit card dispute fraud incidents, including:

  • Notifying customers before charging for recurring payments
  • Making sure your billing descriptor is easily recognizable
  • Using delivery confirmation
  • Keeping a well-organized paper trail of every transaction
  • Communicating regularly with customers
  • Granting refunds and cancelations as soon as requested
  • Being on the lookout for any type of suspicious behavior

These practices can go a long way toward preventing unnecessary disputes. Of course, this still won’t cover all chargeback triggers connected to threats like cyber shoplifting. There’s no way to effectively prevent cyber shoplifting, as the entire premise is based on the buyer’s intent to file a chargeback before making a purchase.

We’re not saying there’s nothing you can do about credit card dispute fraud. In fact, you have several options for recovering revenue and protecting your bottom line. First, you can engage the fraudster through representment. This is a process that lets you literally “re-present” the charge, along with compelling evidence and documentation, to try and recover your sale and stop the chargeback.

Learn more about representment

Of course, that's just a stop-gap measure. What you really need is a strategy to contend with these threats as post-transactional factors and prevent them wherever possible.

The Best Solution is Comprehensive

You may not be able to prevent these buyers from engaging in chargeback abuse… but you can stop them from succeeding.

The process is not easy, though. End-to-end chargeback management is complicated and time-consuming, and you’re required to operate within a very limited timeframe. You must also stay up-to-date on changes to dense industry regulations, with hundreds of pages outlining chargeback procedures for each card brand. In most cases, your best option is to seek professional outside help.

Chargebacks911® offers the industry’s only comprehensive chargeback mitigation solution. Our experts can precisely diagnose your chargeback sources and deploy the necessary tools and strategies to resolve the problem. We offer services aimed at:

  • Identifying simple errors and procedural oversights
  • Eliminating risk posed by criminal fraud
  • Deploying alerts to identify and prevent disputes
  • Engaging in tactical representment to recover funds from friendly fraud and cyber shoplifting

Our services are backed by a 100% ROI guarantee: if you don’t save money, you don’t pay.

You can make credit card dispute fraud a thing of the past with Chargebacks911 at your side. Ready to see how much you could save? Click the link below and get started today.

FAQs

What is dispute fraud?

Dispute fraud occurs when a customer accidentally or deliberately files a chargeback on a legitimate transaction, instead of trying to first obtain a refund from the merchant.

Does disputing a charge affect the merchant?

Credit card disputes aren’t good for anyone… especially merchants. When all the losses are tabulated at the end of each dispute, the merchant likely pays something near 100-200% of every disputed transaction in fees and lost revenue due to overhead costs and shipping and handling charges. Ultimately, merchants bear the majority of the burden for acts of dispute fraud.

How do you win a fraudulent dispute?

The absolute best way to win against fraud is to avoid it in the first place with smart best practices and effective chargeback management. Failing that, whenever a merchant is the victim of dispute fraud – and can prove it– the merchant should fight back through representment as often as possible to keep their chargeback ratio below 1%.

We’ll run the numbers; You’ll see the savings.
Please share a few details and we'll connect with you!
Over 18,000 companies recovered revenue with products from Chargebacks911
Close Form
Embed code has been copied to clipboard