4 minutes

Chargeback Fraud 101: What Businesses Need to Know

Written by
Don Hamilton
Published on
January 15, 2024


Chargebacks are time-consuming and costly. Many merchants view chargebacks as a necessary cost of doing business.

But failing to fight chargebacks costs the merchant in revenue, reputation, and possibly the loss of the business itself.

This list is a step towards recognising and preventing chargeback fraud.

Understanding and Definition

Definition of Chargeback Fraud

A fraudulent chargeback occurs when a cardholder purchases and receives the merchandise or service but falsely claims they never got what they ordered. They may also claim that the product or service was not delivered as described.

Additional false claims can include:

  • Duplicate Transactions
  • Quality Complaints
  • Regretful Purchases
  • Account Hacking Claims
  • Friendly Fraud via Confusion

Impact on Revenue

Businesses can lose over five per cent of their revenue due to chargeback fraud. Sales are reversed, and substantial fees and fines for excessive chargebacks add up quickly.

High-risk industries

Industries like electronics, digital goods, and luxury items are at high risk of chargeback fraud. The nature of these businesses makes fraud more likely.

Other industries prone to fraud risk are:

  • Gaming and online betting
  • Travel and hospitality
  • Subscription services
  • Adult entertainment

Consumer Protection

Consumer rights are protected through the chargeback system. These rights help ensure against merchant fraud and error. However, these rights can be abused through cardholder fraud, also known as friendly fraud.

Friendly Fraud

Friendly fraud means a cardholder purchases and receives their goods but later files a fraudulent dispute for various reasons.

Reasons often given are:

  • Unrecognised transactions
  • Buyer’s remorse
  • Transaction confusion
  • Refund anticipation
  • Accidental chargebacks
  • Shipping delays

Preventive Measures

Actively engaging in chargeback preventive measures helps eliminate the chances of getting a chargeback in the first place. Prevention is the best way to overcome chargebacks.

Real-Time Detection

Using a service like ours, interjects an intelligent, automated system between the cardholder and a potential dispute.

By detecting possibly fraudulent activity during the transaction, you are given control over how the fraud is handled. You choose whether to immediately refund a customer in advance of a likely chargeback scenario, report the cardholder, or take other appropriate actions.

Transaction Records

You are bolstering your defences against future chargeback disputes by keeping meticulous transaction records. In the event of a dispute, you’ll need these records to prove to the bank or card network that you have delivered the purchase and that the customer approved it.

Delivery Confirmation

Beyond the transaction records, you’ll require proof that your product or service was delivered successfully to where the cardholder indicated.

You can use:

  • Signature confirmation
  • Tracking numbers
  • Photo evidence
  • Delivery confirmation or emails
  • Electronic delivery confirmation
  • Return receipts

Clear Product Descriptions

Making sure the cardholder understands what they’re purchasing is key to eliminating misunderstandings.

Card Verification Tools

Industry-wide card verification methods are vital to ensuring that card information is correct.

Important tools:

CVV (Card Verification Value) is the three- or four-digit number on the back of the card.

AVS (Address Verification System) compares the cardholder’s billing address with the credit card issuer’s information on file.

EMV (Europay, MasterCard, and Visa) Chip Technology: Primarily used for in-person transactions. EMV chips create a unique transaction code for each purchase, making it more difficult for fraudsters to replicate the card compared to magnetic stripe cards.

Secure Payment Gateways

Using a third-party secure payment gateway protects sensitive financial data during transactions.

Some widely recognised and trusted payment gateways:

Fraud Scoring

Automated fraud scoring methods use an algorithm to assess the fraudulent transaction risk. They analyse transaction data points and customer behaviours. They then assign a risk score to each transaction.

Fraud scoring methods:

  • Machine learning algorithms
  • Behavioural analysis
  • Geolocation and IP analysis
  • Email analysis
  • Credit card BIN (Bank Identification Number) checks
  • Historical transaction analysis

Customer Interaction and Service

As a merchant, you can do many things to reduce the likelihood of incurring chargeback fraud.  Many of these things hinge on customer service and fraud detection.

Efficient Customer Service

The happier your customers are, the less likely they are to commit fraud against you.  This isn’t true for all customers, but most want a transparent, efficient, and pleasant purchasing experience.

Policy Transparency

Customers want to know what they’re buying, how to buy it, and what happens if something goes wrong—in other words, secure, simple, and transparent policies.

Ensure your policies and procedures are clear and well thought-out.

  • Clear and visible terms and conditions
  • Detailed product descriptions
  • Accessible return and refund policies
  • Transparent shipping policies.
  • Visible contact information
  • Billing transparency
  • Clear and effective privacy policies
  • Use of simple language

Looking Forward

There’s a lot to know about chargeback fraud. More importantly, there’s a lot you can do to identify and prevent it. provides services to understand and manage the risk chargebacks pose to your business. It’s not wise to simply ignore them and pay the costs.

Chargeback costs are regained through diligent, automated, and intelligent systems. We give you the power to control the situation before a cardholder gets away with a fraudulent chargeback.

Your revenue, your business, and your reputation are protected.

Visit for more information and to book a free demo.

FAQs: Chargeback Fraud

How does chargeback fraud affect my business?

Chargeback fraud can lead to direct financial losses from refunded transactions, additional fees, and lost merchandise. Indirectly, it can increase your chargeback ratio, potentially leading to higher processing fees and strained relationships with payment processors. Ultimately, you can lose the ability to take credit card payments. This could kill your business.

What are some common signs of potential chargeback fraud?

Warning signs include unusually large orders, multiple orders in a short period, orders using different cards but shipped to the same address, and transactions from regions with high fraud rates.

What should I do if I suspect a transaction is fraudulent?

Conduct additional verification, such as contacting the customer for further information. Use fraud prevention tools like to assess and defuse the risk. If the risk seems high, consider declining the transaction.