If you’ve ever disputed a charge on your credit card and successfully gotten a refund, you’ve used the chargeback process. Think of chargebacks as mechanisms designed to protect customers from unauthorized or fraudulent transactions. It spares customers from the trouble of contacting the merchant for a refund. Instead, they can approach their bank directly and request a reversal of the transaction. While this system ensures fair consumer protection, it has also led to unintended consequences for businesses in the context of Chargeback Fraud.
Chargebacks can be costly and frustrating to handle for merchants. Every disputed transaction not only results in lost revenue but also comes with added fees and the potential for increased scrutiny from payment processors.
Studies suggest total chargeback costs worldwide are expected to reach $54.5 billion.
Worse, not all chargebacks are legitimate - some are a result of chargeback fraud, where customers exploit the system to get a refund while keeping the purchased goods or services.
What is Chargeback Fraud?
Chargeback fraud, sometimes called friendly fraud, happens when a customer wrongfully disputes a legitimate transaction to get their money back while keeping the product or service. Unlike a traditional fraud instance where the customer’s credit card is stolen or used without authorization, a friendly chargeback fraud is committed by the cardholder themselves.
Let’s understand this better with an example.
Imagine a customer orders an expensive pair of headphones online. They receive the product, use it for a while, and then claim they never got the delivery. Instead of contacting the merchant for a refund or resolution, they file a chargeback request with their bank.
If the bank sides with the customer, the merchant loses both the product and the revenue. Since banks tend to prioritize cardholder protection, many merchants struggle to fight these disputes effectively.
How Does Chargeback Fraud Work?
Chargeback fraud typically follows a linear sequence of events, often making it hard for businesses to detect until it’s too late. Here are the common steps involved:
- Customer makes a purchase – A customer buys a product or service using their credit or debit card.
- Transaction is completed – The merchant processes the payment, and the order is fulfilled.
- Customer files chargeback Request – Instead of requesting a refund from the business, the customer disputes the charge with their bank, often claiming one of the following:
- The product was never received.
- The transaction was unauthorized.
- The item was defective, but the merchant didn’t resolve the issue.
- Bank initiates investigation – The card-issuing bank reviews the claim, typically siding with the customer unless the merchant provides strong evidence.
- Bank reverses funds – If the bank rules in favor of the customer, the disputed amount is withdrawn from the merchant’s account and refunded to the customer.
- Merchant loses revenue & pays fees – When the fund is reversed, it not only causes revenue loss for the business, but they may also face additional chargeback fees and penalties from their payment processor.
Types of Chargeback Fraud
Chargeback Fraud is not a single fraud instance, but there are different types of chargeback fraud with several forms to it. Con customers continue to improvise their deception that keep on increasing the many forms of this fraud.
Item Not Received Fraud
This is the classical chargeback fraud type and is staged by the customer who claims they never received the product or service, even though it was delivered. This is typically common in e-commerce, where proving delivery of products or services can be challenging.
Unauthorized Transaction Fraud
A cardholder falsely claims they didn’t make the purchase, suggesting their card was used without permission. In reality, they (or someone in their household) made the purchase but they don’t want to pay for it.
Item Significantly Not as Described
The customer disputes the charge claiming the service was subpar or not as expected, even if they used it fully. Instead of requesting a refund through the merchant, they exploit the chargeback system.
Billing Errors
A customer signs up for a subscription but later disputes the charges, claiming they never agreed to ongoing payments. This is common with streaming services, software, or memberships.
Returns Policy Abuse
A customer buys a product, requests a chargeback, and never returns the item, effectively keeping both their money and the merchandise. This is often seen with high-ticket items like electronics or fashion.
Merchant Error
Some customers take advantage of genuine merchant mistakes like a duplicate charge or delayed refund by filing a chargeback instead of resolving it directly with the business. Even after the mistake is corrected, they still keep the chargeback refund.
How to Prevent Chargeback Fraud?
While chargeback fraud is a growing challenge, businesses can take proactive steps to minimize losses and protect their revenue. Here are some key strategies to prevent chargeback fraud.
Provide Clear and Accurate Product Descriptions
“Item not significantly as described” is one of the common chargeback fraud types. However, not all customers are at fault at all. Many disputes arise because buyers feel misled about what they purchased.
To prevent this, businesses must ensure their product descriptions are as detailed as possible, depict a true picture of the product capabilities, and are not misleading in any way.
Further, high-quality images, and wherever possible, videos must be provided to help give buyers gauge a realistic view of the product. When buyers receive exactly what they expect, they are far less likely to dispute the charge.
Use Tracking and Delivery Confirmation
Order shipping is a complex process and has several loose links which fraudsters can take advantage of to commit the “Item Not Received" fraud. The best way to prevent this fraud is by using trackable shipping methods and sharing tracking details with customers.
Electronics, luxury goods, and other expensive products are often targeted by fraudsters, so confirming that someone at the correct address received the package can help prevent false claims. For such high-value items, requiring a physical signature or seeking a photo proof of receipt upon delivery adds an extra layer of security.
Offer Multi-Channel Customer Support
Most chargeback disputes and frauds could be avoided if businesses provided faster and more effective ways for customers to seek help. A no-brainer way to embellish customer support would be to offer multiple support channels, such as phone, email, live chat, and social media. This ensures that customers can reach out in a way that is convenient for them and close all possible ways of chargeback frauds.
Implement Fraud Detection Tools
One of the more sophisticated tactics fraudsters use to commit chargeback fraud is location spoofing. It is carried out by manipulating their digital footprint and by using other identity and location spoofing tools to hide their real location.
From VPNs to proxy servers a variety of tools are used to make it appear as if transactions are originating from legitimate regions when, actually, they could be operating from a high-risk and flagged locations.
Behavioral analysis is another powerful tool in detecting location spoofing. AI-powered fraud detection systems can draw patterns of customer shopping behaviour and flag unusual activities.
For example, If a customer who typically makes small purchases suddenly initiates a series of high-value transactions from a masked IP, the system can trigger additional security checks.
By combining IP tracking, device fingerprinting, AI-powered behavioral monitoring, and additional authentication layers, businesses can significantly reduce location spoofing attempts and prevent fraudulent chargebacks before they happen.
Keep Detailed Transaction Records
When disputing a chargeback, the strength of a business’s evidence can make or break the case. Keeping detailed transaction records of the purchase will help prove its legitimacy and leave little room for the customer to deny it.
Additionally, customer communication logs like emails, shopping logs, or even call recordings, if any, can demonstrate the buyer’s involvement in the purchase. Further, for online orders, storing IP addresses and device information can help confirm that the transaction was made by the legitimate cardholder.
Fighting Chargeback Fraud with Reliable Intelligence from Bureau
Chargeback fraud is a growing problem, but businesses don’t have to be defenseless. By enhancing transaction security, improving customer service, and keeping thorough records, companies can significantly reduce the risk of fraud and its financial impact. While no method is foolproof, a combination of the above-discussed strategies will help businesses protect their bottom line and maintain a strong reputation with payment processors.
Businesses need to approach chargeback fraud with a multilateral approach. Transactional parameters don't give you the complete picture. Account Takeovers are on the rise and, therefore, you need reliable intelligence to determine exactly when a good user turns bad.
This is where Bureau comes in.
Bureau is a single platform that combines intelligence of traditional identity data (Govt DB checks, OCR, Liveness, and more) and alternative data sources to give businesses complete picture. Our Alternative Data Sources comprises of:
- Device Intelligence (99.7% persistent fingerprint with risk profiling against 90+ risk signals like location spoofing),
- Behavioral Biometrics (instantly spot behavior anomalies helping you differentiate between a fraudster and your user)
- Complete Digital Footprint (Social Presence with Phone Number & Social Intelligence)
- Neural Network (Shared intelligence to help you keep your ecosytem fraudster-free)
Using fused intelligence from all these signals, businesses can equip themselves with actionable intelligence against chargeback fraud by flagging potential fraudulent transactions.
Frequently Asked Questions
Is chargeback fraud illegal?
Yes, chargeback fraud is illegal across the world. In most cases, chargeback fraud can be classified as theft or wire fraud, and merchants can take legal action against repeat offenders.
Why is friendly fraud growing so much?
One major factor is the rise of e-commerce, where buyers don’t physically interact with sellers, making it easier to claim a transaction was unauthorized or that an item never arrived.
Second, frictionless checkout experiences such as one-click purchases and stored payment details lead to accidental purchases that later get disputed.
Third, customers have become more aware of chargebacks and, in some cases, abuse them as a way to bypass refund policies.
What are chargeback reason codes?
Chargeback reason codes are specific codes assigned by credit card networks to explain why a chargeback was filed. These codes help businesses understand the nature of disputes and respond accordingly.
- Fraud-related: Example – Visa 10.4 (Other Fraud – Card Absent Environment) for unauthorized online transactions.
- Customer disputes: Example – Mastercard 4853 (Defective/Not as Described) for claims that a product didn’t meet expectations.
- Processing errors: Covers issues like duplicate charges or incorrect amounts.
Authorization issues: Disputes due to missing or invalid transaction authorization.
