Chargeback Fraud: What it is and How to Prevent it

A credit card chargeback is a process in which a card owner can reclaim money directly from the issuer after disputing a purchase charge; every ecommerce merchant has experienced the challenges that come with it. While this process is in place to protect consumers against fraud, it can also be abused by bad actors.

A chargeback filed for a purchase that was carried out by the cardholder is considered chargeback fraud. When a merchant suspects that the chargeback process was abused, they can choose to fight it. That said, fighting a chargeback comes with an assortment of problems, including time-consuming processes and some steep processing fees. Sometimes merchants decide that the cons outweigh the pros, and choose to pay out the chargeback. 

Ecommerce merchants must constantly balance their need to block card-not-present (CNP) fraud with their need to deliver a frictionless checkout journey and approve as many good orders as possible. Chargeback abuse adds another layer of complexity, as it occurs outside the shopping journey, and only after the transaction is completed.

But before we get into chargeback fraud, let’s first delve deeper into what a chargeback is. 

What is a chargeback?

A chargeback is a reversal of a credit card payment that’s issued directly from the bank. Unlike a refund, a chargeback lets the customer bypass the retailer and get their money back straight from the issuer. The bank then takes money from the retailer rather than the customer having to deal with it. 

A chargeback can follow one of two scenarios:

1. The customer fell victim to a fraud attack, noticed an unknown charge on their credit card, and filed to receive the stolen money back
2. The customer made a legitimate purchase, but still decided to file for a chargeback

There are many reasons why a customer might fraudulently request a chargeback, essentially claiming they didn’t place the order. 

Chargeback Abuse and Friendly Fraud

Commonly referred to as friendly fraud, chargeback abuse accounts for about 50% of chargebacks according to Riskified data. Customers may commit friendly fraud for a variety of different reasons – in some cases individuals fail to recognize a transaction they made in the past, or they might recognize the purchase but experience buyer’s remorse Other times, a family member uses a card without the card-holder’s knowledge.  

While fraud like account takeovers (ATO’s) happen before checkout and typical CNP fraud happens at checkout, friendly fraud occurs post-checkout. For that reason, anti-fraud measures intended to catch fraudsters in their tracks don’t necessarily help in the case of chargeback abuse. The fact that most cases of chargeback abuse could be traced to otherwise legitimate customers makes the situation even more delicate. 

The only way for businesses to deal with chargeback fraud after the fact is through chargeback disputes. This means disputing each fraudulent chargeback that comes along with sufficient and compelling evidence to prove that a customer did, in fact, authorize a purchase. But like many things in business, the dispute process takes up time and money in investigating and gathering information. 

How does this affect 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 – so they lose the cost of the product and the revenue, plus they’re forced to pay penalties for the process as well as operational costs. 

Double refund chargebacks are also a concern, occurring when the customer files a chargeback and asks for a refund at the same time. Sometimes merchants will process the refund before even being made aware of the chargeback, and end up paying twice. This can be avoided with a purchase return authorization, which adds an authorization step from the acquirer to the refund process. 

In the long term, when chargeback rates increase to a certain point, a merchant’s credit card network may place them in an excessive chargeback program that comes with heavy fines, and they may be forced to switch to a high-risk merchant account with high processing fees. In rare cases, a credit card provider might choose to terminate a merchant’s account. 

How can merchants prevent chargeback fraud?

Legitimate and loyal customers play a major role in how merchants deal with chargeback fraud. Because chargeback abuse concerns legitimate customers performing fraud with their own credit cards, merchants can’t be sure when, or what, to dispute. The chargeback dispute process is labor and resource intensive, so if and when merchants do notice fraudulent chargebacks, the cons of disputing often outweigh the pros, making them leave well enough alone. Problem is, that disputing fraudulent chargebacks goes a long way toward discouraging abusers. By choosing not to dispute, a merchant is paving the way to repeat abusers.

Most merchants do not have the time, resources, or expertise to make in-house dispute resolution the most cost-effective or efficient choice. Instead, merchants should rely on data-based decisions for chargeback fraud prevention. A chargeback guarantee solution is the first step, allowing merchants to accept more orders, keeping fraudsters out and loyal customers coming back without the risk of costly chargebacks. Implementing an automated chargeback dispute process can help merchants to maximize profit recovery while reducing operational complexity and resource drain.