Getting Ahead of Chargeback Fraud as a Business

Chargeback fraud ultimately leads to financial damage for both merchants and consumers. In this article, we breakdown what Chargeback fraud is and how to prevent it.

With the growing trend of businesses moving online, there is increasing difficulty in understanding the intentions behind every online purchase, as well as handling transaction disputes and other issues to ensure a seamless exchange of value between businesses and their customers.

To fully understand chargeback fraud, let’s do a walkthrough of what chargeback really means.

A chargeback is a transaction reversal process in which a customer disputes a charge on their transactions and requests the value be reversed to them. It is a dispute resolution mechanism used by traditional finance and financial technology companies to help consumers contest transactions that they believe are fraudulent or unauthorized.

So how does chargeback work in principle?

When a chargeback is initiated, the issuer of the transaction method (usually banks, payment processors, or financial institutions) will investigate the claim, and if found to be valid, will reverse the transaction and return the funds to the customer's account. While chargebacks can provide a valuable form of fraud protection for consumers, they can also be costly and time-consuming for merchants who may incur fees and penalties for disputed transactions. In many cases, businesses still bear the brunt, even when they are the victims.

What then is chargeback fraud? It is the misuse of the chargeback process by customers to get a refund for a legitimate transaction that they did in fact authorized, but without a valid reason to do so.

Such a customer files a dispute with their issuing bank claiming that the transaction was fraudulent or unauthorized, resulting in the reversal of the transferred funds. This type of fraud can be intentional or unintentional, but the deed has been done, and businesses suffer the loss of revenue, fees imposed by the bank, and damage to their business reputation.

Chargeback fraud has come a long way.

Imagine you are a business owner who is nearing the end of your busy season and reviewing your store's performance. As you are going through your inbox, you come across an email notifying you that a customer has disputed a charge on a transaction, claiming they never made the purchase. Upon further investigation, you realize that you have fallen victim to chargeback fraud. Despite the holiday rush being everything you had hoped for, with high-value transaction volumes and prospects of a great fiscal year, you have now been hit with a chargeback claim.

Although you may have sufficient evidence to prove the invalidity of a chargeback request to your acquiring bank, it can still be emotionally distressing when the request is accepted without valid grounds. This raises the question of the time and effort expended in the back-and-forth process. What happens to the valuable time lost during this ordeal?

Chargeback fraud is a real threat that can happen to any business, and so must be treated with care, and of course, in a transparent manner.

Image credit: iStockphoto

Forms of Chargeback Fraud

According to a report by Chargebacks911 in 2022, approximately two-thirds of merchants reported a rise in friendly chargebacks over the last three years, with an average increase of 28%, particularly post-COVID.

In this blog, we will explore the forms of chargeback fraud and how to protect your business from it.

  1. Friendly Fraud: One primary chargeback fraud type is friendly fraud which happens when a customer disputes a transaction, despite having received the purchased goods or services. The customer may allege that they did not authorize the purchase, that the product was defective, or that they never received it.
    Friendly fraud often occurs due to confusion, forgetfulness, or an effort to receive a refund without returning the item.
  2. Identity Theft: In such situations, the fraudster acquires credit card information illegally to conduct unauthorized transactions. The actual cardholder may not detect the theft until they receive their monthly statement, and by then, the fraudster would have already obtained the purchased goods or services.
  3. Merchant Error: Another prevalent cause of chargeback fraud is merchant error, which arises when a merchant commits an error during the transaction process, such as charging the wrong amount or not delivering the promised goods or services. This could result in a chargeback when the customer disputes the transaction.

    To avert merchant error, it is crucial to establish unambiguous policies and procedures for transaction processing and to train employees adequately on handling transactions. This can significantly benefit your business and reduce valuable time spent handling chargebacks and transaction disputes.
  4. Cybercrime: Cybercrime is a growing concern for businesses of all sizes. Cybercriminals employ various methods, including phishing scams, malware, and hacking, to steal credit card information. With this information, they can conduct unauthorized transactions or sell it on the dark web.

    To safeguard your business and clients from cybercrime, it is critical to implement robust security measures such as strong passwords, encryption, and other protective measures for your payment processing system. It is also essential to educate your customers on the importance of protecting their information online.

How to Prevent Chargeback Fraud

You might be wondering, what can businesses do to manage chargebacks? How can they prevent chargeback fraud? And as a business owner, how can you protect yourself from chargeback fraud? We've got you covered. Here are a few best practices that businesses like yours can use to prevent chargeback fraud.

  1. Maintain Transparency in Transaction Disputes and Refund Policies: Merchants must clearly communicate their policies on returns, refunds, cancellations, and chargebacks. These policies should be easily accessible, easy to understand, and presented during checkout and on the merchant's website.

    The policies should outline the conditions under which chargebacks are accepted, which can help prevent friendly fraud and set clear expectations for customers. Improving customer service alongside these policies can reduce the likelihood of disputes.
  2. Keep the Lines of Communication Open: To prevent chargebacks, merchants should stay in touch with their customers and address their concerns promptly. Communication channels like email and chatbots can be used to reach out to customers and mitigate issues before they escalate.

    Automate responses where you can to minimize time wasted, educate employees and customers about chargeback fraud, and be exhaustive when making your case with the customer to avoid ambiguity.
  3. Setup Authentication and Verification Measures: To prevent fraudulent transactions, merchants can implement authentication and verification measures such as requiring additional customer information like billing address verification. They can also partner with financial institutions that have proper fraud detection processes to identify suspicious transactions with Bloc’s embedded finance infrastructure that can verify customer identities, monitor transactions for suspicious activities, and maintain accurate transaction records.

    As a business, it is important to keep detailed documentation and evidence of all transactions, including order confirmation emails, shipping and delivery confirmation, and customer service interactions.
  4. Transparent Business Names: Showing your real business name can prevent chargeback fraud. Customers recognize legitimate purchases when they see a recognizable and legitimate business name on their card statements or receipts. This increases transparency and builds trust.

    If customers see an unfamiliar or vague business name on their statements, they may dispute the charge as fraudulent, even if it is a legitimate purchase. This could result in friendly fraud, causing financial losses for the business. Notify your customers if there are any changes to your business name.
  5. Educate Your Customers on Digital Security: Chargeback fraud can also be prevented by educating customers on digital security. This involves educating customers on how to identify and avoid phishing scams, the importance of strong passwords, and how to keep their personal information secure. Merchants should provide clear guidelines on best practices for digital security and ensure that their customers are aware of the risks associated with using cards online.

    Additionally, encryption and other security measures should also be implemented to safeguard the payment processing system. Merchants should use secure payment gateways that comply with industry security standards to protect sensitive customer data, such as credit card numbers and personal identification information. This can include implementing multi-factor authentication, data encryption, and other fraud prevention tools.
  6. Chargeback Management: Merchants should monitor their chargeback ratios to keep them within acceptable limits. This ratio is the number of chargebacks a merchant receives compared to the total number of transactions they process. Payment processors and acquiring banks use this ratio to assess risk.

    To avoid negative consequences, merchants should aim for a chargeback-to-transaction ratio of less than 1%. Ratios above 1% can result in penalties or account termination. Merchants should monitor and track chargeback patterns to identify areas of improvement.

Image credit: iStockphoto


Chargeback fraud is a serious issue that can cause financial damage to merchants and consumers. It's important to stay vigilant and take steps to prevent it. By staying informed and implementing prevention strategies, merchants can protect themselves and minimize their risk.

Preventing chargeback fraud requires vigilance, technology, policies, and procedures. Unfortunately, chargeback fraud is unlikely to disappear completely as businesses cannot wave a magic wand and simply say ‘chargeback be gone’.

However, it can be effectively managed by implementing preventive measures and by taking a proactive approach, businesses can reduce financial losses and protect customer trust.

Chioma Amah