What is chargeback fraud

The guide to winning the battle against chargeback fraud



Chargebacks continue to be a concern for businesses worldwide. Out of the chargebacks businesses face, 80% are estimated to be fraud-related. First-party fraud, also known as friendly fraud, involves genuine transactions mistakenly or intentionally challenged by cardholders.

Article at a glance:

  • What chargebacks and chargeback fraud are and who is impacted
  • The impact of chargeback fraud
  • How to reduce chargebacks and prevent chargeback fraud

The latest projections at Mastercard average the total global chargeback cost across merchants, acquirers and issuers at $117.46 billion. Specifically, studies suggest that the average chargeback costs $3.60 for every dollar lost when accounting for all additional expenses, such as chargeback fees, administrative fees and overhead costs that include shipping and fulfillment.

How can you stop opportunistic fraudsters from taking advantage of your chargeback system and avoid these high costs?

Before we discuss key tactics to employ for chargeback fraud prevention, let’s examine what we mean when we discuss chargebacks and chargeback fraud.

What are chargebacks?

Chargebacks are a form of transaction reversal that occurs when a consumer disputes a charge with their bank or credit card issuer. There are plenty of legitimate reasons to file a chargeback. For example, a customer may not be satisfied with a product or service, or they may never have received the product or service. Either way, an error was made and when a chargeback is filed a refund of the disputed amount is returned to the customer and deducted from the business in question.

What is chargeback fraud?

Chargeback fraud occurs when a customer abuses the chargeback system, disputing a perfectly legitimate transaction for financial gain. There are several types of chargeback fraud, including:

  • Friendly fraud: This occurs when a customer disputes a legitimate purchase, claiming an unauthorized charge, the purchase wasn’t as advertised or not recognizing the charge.
  • Subscription fraud: This occurs when a recurring charge is disputed after the service has been used for an extended period. The user may claim the charge was never authorized or the subscription was canceled but continued to be charged.
  • True fraud: This type of chargeback falls under the identity theft umbrella, where a customer’s card or information is stolen, or a fraudster uses a synthetic identity for fraudulent activities.
chargeback prevention

Who is impacted by chargeback fraud?

Chargeback fraud can impact any size business, regardless of industry. Those businesses deemed particularly vulnerable are often subscription-based, online retailers or service providers and, naturally, those selling luxury, high-value goods and services.

What is the impact of chargeback fraud?

Naturally, any chargeback dispute that ends in a business having to pay back a customer (or, unwittingly, a fraudster) and lose merchandise has a significant financial impact on the business in question. While the initial hit to revenue is bad enough, the operational costs associated with chargeback fraud can prove very expensive for businesses – especially small- to medium-sized operators – who end up dedicating significant time and resources to investigating a chargeback. Time spent seeking evidence to dispute a claim is time spent away from nurturing and growing a business.

Finally, beyond the immediate financial impact of chargeback fraud to a business, is the reputational damage incurred should frequent chargebacks occur. Naturally, should a brand become associated with fraud, via negative reviews and word-of-mouth, credibility and trust are lost. Say goodbye to a loyal customer base and future sales!

How to help reduce chargebacks as a whole

Given the negative consequences of chargeback fraud, it is important that businesses protect themselves and take preventative measures. Naturally, reducing chargebacks is a step in the right direction. Below, we outline five steps to take to achieve this goal.

  1. Offer exceptional customer service

It’s simple, really. The better your customer service, the better the chances your customer will come to you in the event of a problem, instead of their credit card issuer or bank. Make sure your customer service team is easy to reach, ideally on multiple channels. Should a chargeback be warranted, it’s much better if your team initiates it themselves instead of incurring the additional costs and potential penalties from issuers and processors.

  1. Define your return and refund policy

The best way to counter a customer’s claim to a chargeback is to clearly state in your return policy, or terms and conditions, that one simply isn’t warranted. Of course, this doesn’t mean initiating a no-return policy. Instead, make it easy for the customer to return the product and swap it for credit or a different product. If necessary, even enable simple refunds because, at the end of the day, a refund is better for your business than a chargeback.

  1. Spend time on product descriptions

The clearer your product description (include images and consider videos!) the less likely your customer will cite confusion and seek a chargeback for a product that wasn’t “as described.”

  1. Be sure your real name shows up on credit card statements

This seems obvious, but one of the most common dispute charges is related to a customer not recognizing the name of your company when they study their credit card statement. Sometimes the business name doesn’t appear at all! Therefore, it’s worth being sure the name of your actual business is clearly visible in the billing description.

Services such as Consumer Clarity for consumer banking apps help prevent chargebacks by providing detailed transaction information, including the company name and logo, directly inside the consumer’s banking application.  

  1. Be sure trials and subscriptions state terms clearly

When businesses that sell memberships and subscriptions offer a free trial, many set up automatic billing immediately following the trial period. This can lead to unnecessary chargebacks. Consider offering your customers the chance to opt into your business instead of automatically billing them. Sure, you will see an increase in customer drop-offs, but they were only in it for the free trial anyway. Save yourself the headache – and the cost – of chargeback disputes.

Following the above will go a long way in minimizing the risk of chargebacks ever occurring. However, when it comes to preventing chargeback fraud, it’s necessary to take an antifraud approach.

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How to prevent chargeback fraud

When it comes to implementing a best-in-class chargeback fraud prevention strategy, we recommend adopting a layered approach to weed out bad actors and fraudulent transactions.

The Identity Engine assists in helping businesses stop fraudsters in their tracks at both onboarding and transaction. Built around the five core identity attributes of name, email, address, phone and IP, the Identity Engine leverages machine-learning predictions help to prevent chargebacks in the first place.

By validating who a customer is and assessing how their identity information is being used in digital interactions, the insights from the Identity Engine enable businesses to not only improve their approval rates by verifying more legitimate interactions, but also reduce chargebacks by declining more fraudulent transactions, providing accurate risk decisions pre-, post- and during payment authentication. Ultimately, by preventing bad actors from ever creating an account and transacting, a business can indirectly reduce chargeback fraud risk.

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