Prevent Chargeback Scams

June 2, 2021 | 12 min read

Prevent Chargeback Scams

Top Tips to Prevent Chargeback Scams & Stop Customer Dispute Abuse

Chargeback scams hurt everyone. Consumers, banks, merchants—all parties in the credit card process pay the price for chargeback abuse. Dealing with legitimate disputes is hard enough; fraudsters manipulating the system only makes the problem worse.

That’s just what is happening, though: both crooks and customers are taking advantage of loopholes in the system to force illegitimate claims. This leads to higher prices for consumers and more work for financial institutions. Merchants pay the highest price, though, in the form of lost merchandise, forfeited shipping costs, and additional fines and fees.

Merchants are now finding themselves victims of a system designed for consumer protection. In this post, we’ll look at some common chargeback scams and how fraudsters perpetuate them. We’ll also offer some tips as to how you can mitigate your risk.

Chargeback Abuse: Intentional vs. Accidental

A chargeback scam is an attempt by a cardholder to bypass your normal policies and go directly to their bank for an unwarranted refund. As we mentioned above, chargebacks were originally created as a consumer protection method; they ensured cardholders were not held accountable for transactions they didn’t authorize or charged for items they did not receive. While the chargeback process still serves in this capacity, we all must admit that times have changed.

There’s a decent chance that most of your chargebacks are caused by seemingly legitimate customers, rather than criminals. This is a phenomenon called “friendly fraud,” which is estimated between 60-80% of all chargeback cases. The problem is that friendly fraud is frustratingly difficult to identify and prevent.

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Of course, friendly fraud is not always deliberate. There are many instances in which the customer unknowingly starts the chargeback process. They may also genuinely believe that a chargeback is in order and request a dispute.

Some industry insiders attempt to differentiate between accidental friendly fraud and intentional chargeback scams (sometimes referred to as “cyber shoplifting”). However, the distinction is largely academic: both result from cardholder actions that lead to an unwarranted chargeback.

That said, this post is about ways to prevent chargeback scams, and the word “scam” implies an intentional act. So, while most of the scenarios below can happen accidentally, we’ll mostly be talking about them as willful instances of chargeback abuse.

6 Common Chargeback Scams to Know

Technology made it easier than ever for customers to take advantage of the chargeback system at merchants’ expense. Here are a few common schemes for which to keep an eye out.

Chargeback Scam #1

THE SCAM: The buyer receives an item, but then calls the bank to claim it never arrived.

HOW IT’S DONE: A cardholder purchases an item from you but uses a shipping address that’s wrong or doesn’t exist. The carrier can’t deliver the order and marks it undeliverable.

Before returning the item to you, however, the shipper may call the customer, who at that point provides the correct address. The package is successfully delivered…but that doesn’t stop the cardholder from calling the bank and claiming they did not receive the order.

Another variation on this scam involves a practice called “porch theft.” A scammer uses stolen cardholder information to have a product shipped to a neighbor’s house, then watches for the order to arrive. The package is quickly retrieved from the neighbor’s porch, after which the cardholder calls the bank to report the fraud.

Chargeback Scam #2

THE SCAM: The buyer claims merchandise was not as described, or the wrong item was sent.

HOW IT’S DONE: A cardholder purchases an item from you, but subsequently calls the bank and claims the order is either completely wrong or that it doesn’t match the description given prior to ordering.

It’s hard to prove you shipped the correct item, and that it reflected the customer’s expectations. If the order were wrong, the customer is supposed to have called you before contacting the bank. Unfortunately, this doesn’t always happen. The issuer, wanting to keep their customer happy, may simply go along with the claim.

It can be hard to disprove the claim if the cardholder is deliberately trying to scam you. You’re basically trying to prove a negative, in that you need evidence that you didn’t disappoint the buyer.

Chargeback Scam #3

THE SCAM: The buyer files a chargeback, not understanding the difference between chargebacks and refunds.

HOW IT’S DONE: Returns are a simple idea. The cardholder makes a purchase, then later decides to either exchange it for something else or take a refund. It’s not the ideal situation for you, but it serves its purpose.

The problem is that cardholders may believe it’s easier to simply call the bank and say the purchase was fraudulent. They get a “no-hassle” refund and get to keep the merchandise. Win-win, right?

Not for you. With a chargeback, you lose the revenue from the initial sale, plus interchange fees, shipping fees, and other return costs. On top of that, however, you also lose the actual merchandise, and you’re forced to pay chargeback fees to cover the cost of chargeback administration.

The problem arises because customers don’t know the difference between chargebacks and returns. Many believe that getting a refund from the bank is the same thing as getting one from a retailer. Over 80% of shoppers admit to having filed a chargeback strictly out of convenience. That might not be malicious theft, but it is friendly fraud all the same.

Chargeback Scam #4

THE SCAM: The buyer engages in cyber shoplifting by purchasing an item with the intent to file a chargeback later.

HOW IT’S DONE: As we mentioned, buyers often file friendly fraud chargebacks as a misunderstanding. Sometimes, though, they know exactly what they’re doing, and use the chargeback process to try and get something for free.

The motivation is no different from credit card fraud. In either case, you have someone who wants to deliberately abuse the process to steal from you. Here, though, it can be harder to identify because whatever claim the cardholder makes, you can’t really gauge their motivation.

There’s not necessarily a way to prove that a cardholder intended beforehand to file a chargeback. At worst, they may be able to play it off as a simple misunderstanding.

Chargeback Scam #5

THE SCAM: Running out of patience and disputing a charge before the goods arrive.

HOW IT’S DONE: When should an order arrive? If you don’t tell your customers when an order is filled, when it is shipped, and a range of dates between which it is expected to arrive, they can easily get impatient and file a chargeback.

The relevance of this was demonstrated during the COVID-19 pandemic. A dramatic increase in eCommerce, coupled with a lack of manpower, meant orders were delayed for weeks. It was easy for uninformed customers to assume the merchant had simply taken their money and to contact the bank.

Of course, scammers could also set up this situation deliberately, filing a chargeback while still expecting the order to arrive. The scam also works in reverse: the fraudster tracks a product they had returned to you, then files a chargeback just before you receive the item, claiming the return was not processed. If you actually process the refund, the scammer may end up with a double refund.

Chargeback Scam #6

THE SCAM: Claiming a subscription was cancelled.

HOW IT’S DONE: With a recurring payments (subscription) business model, you can create a more predictable cash flow, while customers enjoy the convenience of automatic billing.

It can work well…at least until your customer claims you billed their credit card after they canceled the service. Perhaps they meant to cancel and didn’t, or they actually believed the subscription had been canceled. The result is the same either way.

In a typical example, a fraudster uses an online service for several months, then contacts the bank and files a chargeback for the full amount paid, saying the service should have been canceled.

Recurring billing scams for physical items work similarly: the cardholder waits for the shipment to arrive, then claims the subscription had been canceled. The scammer gets the merchandise and a refund, while you simply get burned.

Keep in mind that, for the most part, these people are not professional criminals. They’re your customers. Some of them might be deliberately stealing from you by abusing the chargeback process. In most cases, though, it’s best to presume good faith on the part of the buyer.

Can I Prevent Chargeback Scams?

There is no single “one-size-fits-all” method to stop all chargeback scams. However, there are several basic best practices you can implement to keep from being a victim:

Identify Cyber Shoplifting Red Flags

  • Confirm orders where the “Bill To” address is different than the “Ship To” address.
  • Double-check addresses against online directories or previous orders if needed.
  • Verify with repeat customers if an order deviates from the norm.
  • If a buyer seems suspicious, search for a social media presence to confirm the identity.
  • Allow shoppers to create accounts to validate their identity.

Check Your Marketing Techniques

  • Be sure all products and services have accurate and detailed descriptions.
  • Be honest about the quality of the products or the services’ capabilities; state where the item was manufactured and the materials used.
  • Never sell imitation merchandise as authentic; i.e. imitation designer goods.
  • Use clear, up-to-date photos and/or video clips.

Provide Outstanding Customer Service

  • To avoid chargebacks being filed out of convenience, be sure it’s as easy as possible to ask for and receive a refund.
  • Prominently display your contact information on websites, in emails, and on marketing materials.
  • Promptly answer phone calls, reply to emails, and respond to social media inquiries.
  • Consider providing 24/7 customer service.

Keep Your Customers in the Loop

  • Send a confirmation email after every transaction; this tells customers what to expect, but also creates an electronic “paper trail.”
  • Update the customer when the order has been logged, when it has left the warehouse, and at other milestones in the shipping process.
  • If an item is unavailable or had to be back-ordered, inform the customer as quickly as possible.
  • Let the customer know when the order is actually en route; include the tracking number and reiterate the estimated delivery date.

Finally, we also recommend you engage all friendly fraud through the representment process.

If a customer scams you on a $40 item, it may not seem worth it to challenge the chargeback. But banks can assume that, if you don’t fight back, then you must really be responsible. Only by disputing all friendly fraud chargebacks can you improve your reputation with issuing banks.

Professional Help Is Your Best Bet

While most fraud cases these days come from friendly fraud, there is still a percentage that originates from criminal enterprises. There are numerous ways criminals can pose as a customer to make unauthorized purchases. In most instances, the fraudster is long gone by the time the crime is discovered.

While implementing the above processes can help you curb chargeback scams, they’re only the tip of the chargeback iceberg. To gain any real control over chargebacks requires a comprehensive management strategy that attacks the problem at the source, using both prevention techniques and dedicated representation.

If you need to prevent chargeback scams while getting back to the business of running your company, contact Chargebacks911® today. Our experts can take chargeback management off your plate, allowing you to reallocate staff, increase efficiency, and grow your revenue stream.


What are chargeback scams?

Chargeback scams occur when customers subvert the chargeback process to acquire goods or services at the merchant’s expense.

How do chargeback scams work?

There are many tactics buyers can employ. Generally, though, a chargeback scam involves the buyer making an illegitimate claim about a transaction, then filing a chargeback to recoup the funds.

Are chargeback fraud and friendly fraud the same thing?

They’re two sides of the same coin, commonly used interchangeably. Some differentiate between malicious friendly fraud and accidental friendly fraud, but they’re both customer-based, and require similar prevention techniques.

Can I prevent chargeback scams?

Most customer chargeback scams happen post-transaction, which makes them hard to prevent. Your best bet is to be aware of suspicious activity, keep detailed records, and provide excellent customer service.

What happens if you lie about a chargeback?

If a cardholder if found to have lied about a chargeback, they could end up being charged a fee by the issuing bank. If the situation is severe enough, the bank may consider the cardholder a liability and cancel their account. This would hurt the cardholder’s credit rating, and make it harder to get another account.

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