What is Chargeback Fraud?

Chargeback Fraud: An Overview

As is the case with any other type of fraud, chargeback fraud involves dishonest practices. Although chargebacks are intended to protect consumers from unfair merchants and identity theft, these bank-facilitated refunds are increasingly misused by consumers.

The chargeback fraud definition is commonly used interchangeably with the friendly fraud explanation because it is perpetrated by seemingly satisfied customers. However, these “loyal” customers aren’t opposed to engaging in cyber shoplifting to steal from the merchant.

What Is Chargeback Fraud?

Chargeback fraud occurs when a customer files a chargeback on a legitimate transaction instead of following the merchant’s procedures for requesting a refund.

Well-intentioned customers may accidentally commit chargeback fraud because they are ignorant of the differences between a traditional refund and a bank-issued refund. They don’t know what chargeback fraud is and incorrectly assume a chargeback is simply an easier way to get their money back.

Other consumers are aware of the loopholes in the chargeback process and knowingly abuse this consumer protection mechanism. For example, a customer will authorize a credit card transaction and later file a fraudulent chargeback once the item has been received. In this case, chargeback fraud is committed in the hopes of getting something for free.

Common claims that chargeback fraudsters make include:

  • The purchased item or service wasn’t delivered.
  • The purchased item or service wasn’t as described (for example, counterfeit product or subpar services).
  • The merchant didn’t cancel the customer’s recurring payment when requested.
  • The original transaction wasn’t authorized.

Whether chargeback fraud is committed innocently or intentionally, the outcome is bad news for the affected business.

  • Fees are issued.
  • Revenue is lost.
  • Valuable resources are inadequately dispersed.
  • The cost of goods sold is forfeited.
  • Future profitability is denied.
  • Transaction processing fees are wasted.

Businesses that repeatedly fall victim to chargeback fraud run the risk of not only losing profits, but also losing the privilege of accepting credit cards. Merchants that have been placed on the MATCH list or have had their merchant account closed are forced to use high risk payment processing. The extra expense of a high risk account usually drives a merchant out of business.

It’s essential for merchants to know what is chargeback fraud, why it happens, and how to prevent this behavior from happening.

What is Chargeback Fraud Prevention?

The popularity of chargeback fraud is increasing and businesses are losing more revenue than ever before.

There are several things merchants can do to help prevent fraudulent activity. These DIY efforts to reduce chargeback fraud will address the ‘low hanging fruit’ – the easy-to-prevent transaction disputes that are rectifiable without professional assistance.

To get started, download our friendly fraud ebook.


35 Simple Steps to Preventing More Chargebacks

Download our FREE guide that outlines 35 step-by-step effective chargeback prevention techniques. Learn insider secrets that will reduce your risk of chargebacks, increase your profits and ensure your business's longevity.


Some tips include:

  • Notifying customers before charging them for recurring payments.
  • Ensuring the billing descriptor is easily recognizable.
  • Using delivery confirmation.
  • Keeping a well-organized paper trail of every transaction.
  • Sharing contact information.
  • Communicating regularly with customers (loyal customers are less likely to commit fraud).
  • Granting refunds and cancelations as soon as requested.
  • Being on the lookout for suspicious behavior.

Having a strong, offensive strategy to keep chargeback fraud at bay is one of the best ways that merchants can protect their revenue.

If you’d like to gain a deeper insight into chargeback fraud and learn more invaluable prevention tips, contact us today. We’d be happy to conduct a free ROI analysis, showing you how much more you could earn by properly managing chargeback fraud.

Top 5 Reasons Why Chargeback Fraud Flourishes

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Chargeback fraud was not always the threat to businesses like it is today. The chargeback fraud trend has grown in recent years for numerous reasons.

1. Online shopping has increased in popularity.

It is far easier for cardholders to commit chargeback fraud against online merchants than brick-and-mortar stores. This is because fraud detection systems for most online merchants have not been able to keep pace with the growing volume of online card-not-present transactions.

2. Chargeback regulations have not adapted to a dynamic marketplace.

While the growing number of online transactions has partially contributed to the rise of chargeback fraud, the rules governing the chargeback process have also added to the problem by remaining static. Chargebacks were devised by the payment industry before the internet changed the way people do business. Today, the rules governing chargebacks have yet to be updated to reflect a new merchant reality.

3. Customers choose the easiest, fastest, and most efficient option.

A major reason why chargeback fraud occurs is because cardholders feel that it is easier to obtain a chargeback from the bank than contact the merchant for a legitimate refund. In fact, four out of five cardholders admit to filing at least one chargeback out of convenience.

Loopholes in the chargeback system allow this behavior to continue virtually unchecked, and most cardholders do not realize the consequences their impatience has on the merchant’s ability to do business.

4. Banks are also responsible for chargeback fraud proliferation.

When a cardholder initiates a transaction dispute, the bank requires little or no evidence before submitting the chargeback to the merchant’s acquiring bank. By failing to verify the legitimacy of each chargeback, banks allow cardholders to file fraudulent chargebacks without repercussion.

5. Merchants have a limited capacity to fight back.

Once a chargeback has been filed, merchants have very little time to craft a dispute. And if the chargeback was filed fraudulently, it is the merchant’s responsibility to validate the original transaction. Evidence for this type of validation is difficult to produce, and there is nothing that merchants can do to stop the cardholder from repeating this behavior.

Understanding the chargeback fraud definition is just the tip of the iceberg. Now that you know what you’re up against, it is time to take action. Protect your business from friendly fraudsters and retain more revenue.


Prevent Chargebacks.

Fight Fraud.

Recover Revenue.

Aug 11, 2015   1730   cb911    Friendly Fraud    
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