Navigating Chargeback Fraud: Detection, Prevention, and Mitigation

chargeback fraud

When a purchase goes wrong and the business doesn’t respond, consumers can file a chargeback with the bank. The money goes back into their account, and all is well! 

But what happens when customers file a chargeback for a legitimate purchase? That’s called chargeback fraud, and it comes with a long list of negative consequences for ecommerce businesses. And unfortunately, chargeback fraud isn’t a rare occurrence—one survey found that 50% of cardholders admitted filing a chargeback without trying to contact the merchant first.

In this article, we’ll explore several types of chargeback fraud using hypothetical scenarios. By the end, you’ll know how to recognize chargeback fraud, what to do about it, and how to prevent it. 

But first, let’s define chargebacks and chargeback fraud in a little more detail. 

What Is a Chargeback?

What is a chargeback, anyway? Chargebacks are a measure put in place to protect consumers from fraud. If a cardholder notices an unauthorized transaction, they can dispute the purchase with their bank and have the money returned. 

Customers are also entitled to file chargebacks if a product is damaged, never arrives, or doesn’t match the description, but they’re expected to try to resolve the issue with the seller first. 

What Is Chargeback Fraud?

Chargeback fraud, also known as friendly fraud, is a type of fraud where customers file chargebacks for legitimate purchases. This can happen for several reasons, but the end results are the same: merchants lose money, waste time, and face repercussions with payment providers and financial institutions. Merchants estimate that chargeback fraud accounts for 44% of the chargebacks filed against them.

The Cost of Chargeback Fraud

What happens if you don’t take steps to limit chargeback fraud? You could find yourself facing some steep consequences. 

  • Lost merchandise
  • Lost revenue
  • Lost shipping costs
  • Higher operational costs
  • Tarnished reputation
  • Damaged relationships with payment processors
  • Higher chargeback fees

The following examples will help you recognize the various types of chargeback fraud and put preventative measures in place.

Scenario 1: The Customer Forgets About a Purchase

Sarah, a busy professional, orders a new laptop charger during her lunch break. Unfortunately, her hectic schedule causes her to forget about the transaction. When she’s scrolling through her bank details a few weeks later, she’s surprised to see a charge on her credit card that she doesn’t recognize. Thinking someone must have used her payment details without permission, she files a chargeback. 

Why It Happens

Nobody has a perfect memory. And when consumers make multiple online purchases in a week (or sometimes in a day), they’re bound to forget about some of them. The real trouble comes when they look over their transaction history and don’t recognize the purchase—and that’s a problem you can solve!

How To Prevent It

To help customers remember their transactions, follow these two simple steps:

  • Use a clear merchant descriptor. The merchant descriptor is the name that shows up on bank statements when someone makes a purchase. To avoid confusion, make your merchant descriptor as similar as possible to the customer-facing name of your business. 
  • Send order confirmation emails. Don’t leave consumers racking their brains trying to remember what they bought. By sending a confirmation email, you’ll give them an easy way to keep track of purchases.

Tip: Keep a record. Customers aren’t the only ones who should receive a record of their purchase—your business should keep that information on file too! Some people will always decide to take the path of least resistance: chargebacks. To prepare for this, keep detailed records of orders, transactions, customer communication, and delivery history. Then, if you need to dispute a chargeback with a bank, you’ll be able to prove that the consumer never approached you to resolve the problem. If a customer claims their product never arrived or got damaged during shipping, but you have no record of a complaint, the bank will likely take your side and cancel the chargeback.

Scenario 2: The Customer Is Dissatisfied or Regrets an Impulse Buy

Alex, a college student, buys an electric toothbrush online. When it comes, he’s disappointed that it doesn’t leave his teeth feeling as clean as he’d hoped. Instead of initiating a return, Alex files a chargeback. By using this shortcut, he avoids having to go through the hassle of returning the toothbrush. Since dissatisfaction with a product is not a valid reason to file a chargeback, Alex has committed chargeback fraud.

Let’s look at a similar scenario: the impulse shopper who experiences buyer’s remorse. Maria, feeling spontaneous, orders an expensive designer handbag. The next day, after seeing how much she has in her checking account, Maria experiences buyer’s remorse. Hoping to quickly make the problem go away, Maria files a chargeback, citing the transaction as unauthorized.  

Why It Happens

Often, dissatisfied customers don’t go through the proper channels to return products because they don’t understand the returns policy or feel like it would be too difficult. 

How To Prevent It

The solution? Make your returns policy simple, clear, and accessible. Your policy needs to be easy to find on your website, and it should include details like the acceptable return window and instructions to initiate a return. Remember, a generous returns policy encourages people to use the proper channels, while an overly strict one can be a major deterrent.

While your business might incur additional costs with increased returns, it’s better than facing higher chargeback fees, which can lead to trouble with payment providers.

Tip: Describe products accurately. One way to avoid chargebacks caused by impulse buying and/or customer dissatisfaction is to make sure people know what they’re getting themselves into before they click “Buy.” Include detailed, accurate product descriptions and high-quality photos on your site.

Scenario 3: A Family Member Made the Purchase

Taylor's younger sibling, Jordan, orders a gaming console online. Because Taylor has ordered from the site in the past, his card information is saved there, and Jordan accidentally chooses that card during checkout. Unaware of the transaction, Taylor discovers the charge and, thinking it’s fraudulent, initiates a chargeback. 

Why It Happens

This kind of chargeback fraud is most common with things like in-app purchases. When the payment information is already set up, a child can simply buy what they want, without their parents having a clue. But it can happen in ecommerce too! Consumers are expected to do their due diligence to prevent “family fraud,” but your business can take action as well.

How To Prevent It

A few techniques that we’ve already shared can be helpful in this situation. Clear merchant descriptors and confirmation emails will both help the cardholder get to the root of the issue, hopefully realizing that a family member made the purchase. You can also try the following strategies:

  • User authentication. To ensure the buyer is the authorized account holder, consider requiring users to log in before making a purchase. Be careful, though—some customers find it annoying when they’re required to create an account.
  • Notification alerts. Set up notification alerts for unusual or high-value transactions. If a purchase seems out of the ordinary, it will trigger a notification to the cardholder and give them additional information about the time and location of the purchase.

Scenario 4: The Customer Is Exploiting the Chargeback System

After purchasing a high-end camera for a special event, Chris decides to file a chargeback. Although the product was successfully delivered, he claims it never arrived. The result? Having deliberately exploited the chargeback system, Chris keeps the camera and gets his money back. 

Why It Happens

The customer is committing chargeback fraud in order to get products without paying for them—essentially the virtual version of shoplifting. 

How To Prevent It

People who intentionally file illegitimate chargebacks choose from an assortment of fake complaints: 

  • The product didn’t match the description
  • The product was damaged or defective
  • Their order was never delivered
  • Someone used their card without permission

The best way to counter their claims is to keep detailed records of all customer transactions, delivery information, and communication. If you have solid evidence that a customer is lying about the reason for their chargeback, you can dispute it with the bank in a process called representment. With the proof on your side, the bank will rule in your favor and cancel the chargeback.

Scenario 5: True Fraud (Criminal Fraud)

Sarah notices a charge on her credit card statement for a high-end sound system that she didn't order. The transaction took place in a city she’s never visited. Realizing that her credit card information has been compromised, Sarah files a chargeback and gets reimbursed for the unauthorized transaction. 

This is not an example of chargeback fraud. Sarah didn’t commit fraud—the person who used her card without permission did. But even though Sarah has a right to file a chargeback, it’s not ideal for your business. To learn how to prevent criminal fraud, check out this article.

How To Respond to Chargeback Fraud

If you suspect someone has committed chargeback fraud, start by compiling transaction details and gathering evidence like order confirmations and delivery receipts. Following the payment processor’s guidelines, dispute the charge. At the same time, maintain open communication with the customer to address their concerns. If needed, facilitate a refund through the proper channels to prevent future chargebacks.

Taking a Proactive Stance Against Chargeback Fraud

And there you have it! Now you know what chargeback fraud is, why it happens, and what your business can do about it. With the right techniques, you’ll significantly reduce fraudulent chargebacks, keeping your ecommerce store running smoothly and efficiently. 

Continue learning about ecommerce fraud prevention.

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