You already have your hands full dealing with ecommerce fraud. You’re constantly balancing the need to deliver a frictionless customer experience to make a sale with the need to block card-not-present (CNP) fraud at the point of purchase. Throw in the growing problem of chargebacks, and it adds a deeper layer of complexity.

A survey of online merchants revealed that 2.8 and 2.4 percent of online orders from mid-market companies and small to midsize businesses respectively resulted in chargebacks. Riskified’s research with industry advisors Paladin Fraud found that, more worryingly, merchants knowingly let revenue slip away, with more than 73% saying that 20% or more of their chargebacks are first-party fraud (fraudulent chargebacks by customers, aka “chargeback fraud”).

As stated in Riskified’s research, chargeback fraud is commonly referred to as “first-party fraud.” You may also see it described as “friendly fraud,” “liar buyer,” or “first-party misuse.” No matter the terminology, this type of fraud happens when a cardholder intentionally disputes a transaction under false pretenses, in order to obtain a refund while keeping the goods or services. This can occur due to error, if the cardholder forgets they made the purchase or doesn’t recognize it on their billing statement. However, illegitimate actors also intentionally abuse the chargeback mechanism, claiming the transaction was unauthorized or the goods were never received/defective in order to defraud the merchant. This is also often linked to refund abuse – a common MO of professional fraudsters involves filing a false refund claim, and if it isn’t accepted, escalating to a chargeback.

Before we examine chargeback fraud more closely, let’s first delve deeper into what a chargeback is. 

Chargebacks are a mechanism that allows consumers to dispute a transaction and request a reversal of funds through their issuing bank, typically when they believe a transaction was fraudulent, unauthorized, or the goods or services were not provided or failed to meet their expectations. The cardholder requests the chargeback from the card issuer who then issues the refund (such as Visa, Mastercard, and American Express) rather than a retailer. The issuer then recoups the chargeback amount from the retailer and accesses a fee for processing the dispute claim.

Commons reasons for a chargeback

Though there are many valid reasons to dispute a charge, chargebacks – especially chargeback fraud – can pose significant financial and operational challenges for ecommerce merchants, as they not only result in lost revenue but also involve additional fees and the potential for penalties if chargeback rates become too high.

Chargebacks can happen for dozens of reasons. Here are a few common cases:

1. The customer experienced a merchant error, such as a charge for the incorrect amount, shipping and handling errors, or the customer received damaged or missing goods.
2. The customer fell victim to a fraud attack. Upon noticing an unknown charge on their credit card, they filed a dispute to receive the stolen money back.
3. The cardholder made a legitimate purchase but intentionally disputes a transaction under false pretenses, to obtain a refund while keeping the goods or services. This is chargeback fraud.

How does chargeback fraud happen?

Chargebacks exist to protect consumers, but some people push the limits of this protection or unknowingly commit chargeback fraud. This accounts for about 50 percent of chargebacks, according to Riskified data. 

Customers may commit chargeback fraud or a variety of different reasons. Sometimes, they don’t recognize a past transaction, or they regret a purchase. Other times, a family member uses a card without the cardholder’s knowledge. However, illegitimate actors also intentionally abuse the chargeback mechanism, claiming the transaction was unauthorized or the goods were never received/defective in order to defraud the merchant. This is also often linked to refund abuse – a common MO of professional fraudsters involves filing a false refund claim, and if it isn’t accepted, escalating to a chargeback.

Fraud tactics like account takeovers (ATOs) happen before checkout and typical CNP fraud happens at checkout, whereas chargeback fraud occurs post-checkout. For that reason, traditional anti-fraud measures intended to catch your classic fraudsters aren’t as effective. The fact that most cases of chargeback fraud can be traced to otherwise legitimate customers makes the situation even more delicate.

Merchants have the best recourse for chargeback fraud by providing sufficient and compelling evidence to dispute the chargeback, a process known as chargeback representment. Successfully contesting a chargeback can help merchants recover lost funds and protect their reputations. The dispute process takes time and money to investigate and gather the required information to file the dispute. 

How do you tackle the chaos of chargebacks?

Read new research on chargeback challenges and what you can do about them. 

Learn more

Impact on ecommerce businesses

Chargeback fraud could have a variety of short and long-term consequences for merchants. In the short term, merchants have to repay every chargeback that occurs, cutting into their profits. They also have to pay costly penalties for the issuer to process the customer’s claim. 

Double refund chargebacks are also a concern, occurring when the customer files a chargeback and asks for a refund from the merchant at the same time. Sometimes merchants will process the refund before even knowing about the chargeback, and end up refunding the same item twice. 

In the long term, when merchants exceed a chargeback ratio set by the card issuer, the issuer may place them in an excessive chargeback program that comes with heavy fines. They may also be forced to switch to a high-risk merchant account with higher processing fees. In rare cases, a credit card issuer might choose to terminate their merchant account altogether.

How can merchants prevent chargeback fraud?

The nature of chargeback fraud coming from legitimate customers makes it tough to prevent. You may find it hard to know what or when to dispute a chargeback. In many cases, merchants don’t want to deal with the rigorous chargeback dispute process so they let many illegitimate chargebacks slide by. However, not disputing fraudulent chargebacks makes it easy for repeat offenders to target your business. 

Most merchants don’t have the time, resources, or expertise to conduct in-house dispute resolution. Instead, merchants can rely on technology to make data-based decisions to automate chargeback disputes.

A chargeback guarantee solution is the first step. It allows merchants to keep fraudsters out while accepting more orders from loyal customers without the risk of costly chargebacks. This way, you can take one more thing off your team’s plate – and spend more of your valuable time on the things that grow your business.

Next steps

Far too many merchants ignore chargeback fraud because of the time, expense, and headache it takes to go through the chargeback representment process. But winning back lost revenue means growth for your business. Read the latest research with responses from more than 300 chargeback managers to learn how you can effectively dispute chargebacks and recover lost revenue – without the headache. 

Friendly fraud and its not-so-friendly impact on merchants