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Fraudulent chargebacks - a major problem for businesses

Chargebacks are a common issue, especially in the banking sector. It happens when any purchase or payment gets reversed, and the customers get their amount back because of the initiated dispute with their card company. The idea of chargebacks builds confidence in debit/credit card security and adds an additional layer of protection. Genuine as well as fraudulent chargebacks get initiated due to multiple reasons.

As per the source of Expert Market: “Chargeback frauds are on the rise and have been increasing at the rate of 20% every year.”

What is a chargeback fraud?

Chargeback fraud is when a customer intentionally puts a disputed charge to receive a refund and still uses that product or service. There are multiple varieties of causes customers put in to dispute a purchase on their bill; these are:

  • They denied recognizing the charges on their cards
  • The purchase they made was not delivered to them
  • The amount mentioned in the statement is incorrect
  • Products or services are not appropriate as marketed
  • They have lost their information, and other fraudulent are using it
  • Initiate a return after using the services or products for a few days

Most of the chargebacks requested are for the stolen credit cards. Around 30% of the chargebacks are for this. source: Shift Processing

Types of chargeback frauds

These frauds are a severe concern and are impacting businesses worldwide. They lose money over products and services and also have to pay the chargeback fee as it is the merchants' responsibility. Another issue is that when a merchant gets too many hits in the form of chargebacks, they can lose the reliability of processing card transactions.

Here are some of the significant chargeback frauds that drastically affect businesses and create a situation of revenue loss.

  • Chargeback on criminal fraud

These are the most common frauds and occur when criminals make unauthorized purchases with the help of stolen cards or credit card numbers or by hacking the account. Understanding these frauds and taking the required actions consumes a lot of time as it comes to light when the cardholder reviews the statement and verifies the transactions as illegitimate. These chargeback scams are avoidable if merchants pay attention to their customers' payment behavior and notice all the red flags.

For instance, keep an eye on the shipping address and billing address. This will help merchants in finding out any unusual activity from your account. Sometimes, online retail sale chains order a large quantity of products to resell. But this can sometimes be a scam for chargebacks, and hence, before confirming any such order, verify it with the actual cardholder. Also, always make sure to follow the security protocols while accepting any payment through cards.

  • Chargebacks on merchant error

Merchants' error chargebacks are not that frequent nowadays due to advanced technology and constant security checkups, but these errors once lead to too many chargebacks. There are many ways through which chargebacks occur. For example,

  • When customers do not get the products for which they pay for.
  • When merchants charge the customers incorrectly or duplicate and unauthorized transactions occur.
  • When there is an error in the billing description or incorrect invoices occur.
  • When merchants don't make their return policies clear.

There is a merchant chargeback protection that is offered by many payment service providers. This came as an opportunity to resolve the complaints from consumers before they claim for a chargeback. To prevent it further, merchants need to identify the root cause of issues and then eliminate the errors in order to avoid the business from future losses and chargebacks.

  • Chargebacks on friendly fraud

Friendly fraud leads to chargebacks where customers purchase a product or a service and get it delivered but still file for a chargeback. The root cause of friendly fraud is a mismatch of expectations; consumers generally claim the chargeback when the product does not meet the description. Sometimes merchants use a different name; hence, the product charges are not displayed on the statement.

In another case, when any other family member makes an online purchase with the cards, the cardholder is unaware of it. In this scenario, there is an unknown chargeback claim request. These chargebacks are termed as friendly fraud because, unknowingly, both the customers and merchants are liable for errors.

  • Chargebacks on intentional fraud by customers

There are some small numbers of consumers that are indulged in fraudulent chargebacks. They do it to avoid paying for products they have bought. It is hard to detect fraud as customers are legitimate and have proof of transactional records. Merchants generally fail to find out the intentions behind the claim and process the chargeback.

Sometimes merchants do not track the orders from end to end and hence are not able to find out the repetitive pattern in the claims. It is a fraud that can only be detected with proper analysis.

How are businesses affected by chargebacks?

Any business that accepts credit cards as a mode of payment is liable to be affected by chargeback fraud. Regardless of enterprise size or industry area, they can still get a hit from the chargebacks. Some businesses are more vulnerable to these frauds and are often the targets of fraudulently.

For instance, businesses that provide luxury goods and services or travel accommodation providers get chargeback claims based on the fact that customers are not satisfied with their services. Fraudulent actors get the opportunity to utilize the services and then file for a fraud chargeback claim. In some instances where businesses run over online transactions, it gets even harder to verify the authenticity. In such scenarios, frauds dispute the charges and obtain their refunds, and digital software providers are often claimed by it.

Subscription-based businesses have a higher risk of chargeback claims. People sometimes forget that they have subscribed for a service, and when recurring charges are applied to their cards, they claim for chargebacks. In other cases, customers are more likely to ask for a chargeback when they find an unauthorized subscription in their name.

Ways to protect your business from these frauds

Chargeback frauds are avoidable if businesses get more proactive toward the protection of their hard-earned revenue. One can protect their business against these fraudulent attacks with precautions and manageable ways. Let's look at 5 effective ways of defense against such fraud claims:

  • Be updated with the new codes of chargebacks

Chargeback codes are not permanent and keep on changing. Different card networks have a new set of chargeback reason codes. These are generally a category that indicates the reasons for which consumers can raise a dispute and request refunds. In an ever-changing environment, it gets critical for merchants to be updated with the new chargeback codes and get themselves to advocate for something amiss.

In this way, merchants can know when the applied charges are fraudulent and can cross-dispute the customers, potentially overturning the chargebacks. Also, if we look at it the other way, these codes help you identify the recurring pattern and build the required solutions for your business.

  • Keep track of card-based transactions

When you want to dispute a chargeback, the transaction signature and receipts are evidence. Such records should be kept for the long run, but with the growing volume of transactions on e-commerce, it became hard to keep these physical records. In this condition, businesses opt for technical solutions to keep track of all these, especially card-based transactions.

The essential data needed to keep the payment secure are the date and time of the transaction, its amount, and the IP address from where it has been done. With this, businesses can verify the chargeback in a dispute and act accordingly.

  • Update the business with the technology that protects from chargebacks

Visa and Mastercard are the most used facilities for card payments, and they use various authentication methods for security, like 3 Domain Secure. The overall chargeback liability shifts towards the card issuer rather than the merchants. These technologies minimize the risk of liability for businesses.

When businesses invest in fraud protection technology, they can identify potential chargeback frauds before they occur. You can also analyze the high-risk transactions and curate custom rules for them or partner up with fraud protection services to reduce the risk of disputes from overall fraud.

  • Make sure to have a trained team with your payment processor

Payment processors have compliance protocols, and when the team understands it, they are ready to spot suspected activity as it will happen. A well-trained transaction team, with or without cards, can stop fraud without it being in transactions.

A Secure payment processor like Speed ensures that the businesses associated with them feel secure and their teams are well-learned about the protocols and can identify the risks when they see them. When the teams working are well learned with the guidelines, there are fewer chances of chargebacks due to merchant fraud.

  • Be attentive to customer service issues

Most of the consumers initiate any kind of chargebacks just because their issues have not been heard by the merchants prior. They can make things convenient for consumers if their problems get resolved directly. Friendly frauds are getting a hike, and it is a critical time to eliminate fraud opportunities.

Merchants can effectively do that by providing well-functioning customer support, where they can reach out for their concerns over product quality, services, delays in deliveries, and return policies. If these issues get solved on time, then there are many such customers who do not file for chargebacks.

Chargeback fraud: A severe concern for merchants

With the constant increment in the digital marketplace, there have been a lot of transactions happening, making the chargeback fraud risk even more concerning. Every year, merchants lose a specific percentage of their revenue to the chargebacks, which impacts their yearly profits. Merchants must make a resolution judgment on disputes; this can be done through protocol process training, indulging in open communication lines, getting fraud protection tech, or reducing the volatile transactions to control the potential threat.

As e-commerce is gaining speed and diversifying its branches, fraudulent actors are also coming up with varied motives and methods of chargebacks. Every business or merchant needs to prevent this; for that, they must adapt and implement solutions accordingly. Also, future proof of the transaction lines involves new technology and regulations.



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Amy Lane

Amy Lane



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01 Jun 2023



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