What is Chargeback Fraud?

chargeback fraud

A chargeback happens when a payment is reversed by the customer’s bank. It’s called chargeback fraud when bad actors cheat this process. Instead of contacting a merchant for a refund, they go right to their financial institution.

There are three types.

  • Criminal Credit Card Fraud Chargebacks. A criminal steals a card and makes purchases. And they try to get money back.
  • Friendly Fraud Claims. The card owner buys something and then files for a chargeback anyway.
  • Merchant Errors. This one happens with a merchant account. They show up on a statement when a customer doesn’t get something they paid for. They happen due to processing errors, accidental duplicate charges, and charges for canceled subscriptions.

What Is Chargeback Fraud?

Chargebacks that involve friendly fraud and/or unauthorized purchases are a big problem for entrepreneurs. They are not just a cost of doing business anymore. Consider the fact that most online merchants (75%) saw an increase in attempts at illegitimate chargebacks in 2021.


What Rules Govern the Chargeback Process?

The process behind issuing digital bank transactions like chargebacks is simple. Here’s an overview..an authorized cardholder cant resolve a purchase issue with the business. However, the customer can take the dispute to the bank.

Here’s the rest of the process.

  • The bank listens to the cardholder’s claim against the merchant. They are looking for a valid reason to settle the dispute with the chargeback. Most banks side with customers looking for this type of refund.
  • The bank issues a provisional credit to the cardholder. The customer gets the purchase amount and the merchant’s acquirer gets notified.
  • The bank informs the merchants about the dispute.
  • Merchants can fight this kind of cardholder dispute. A rebuttal letter can be filed against these consumer disputes. The issuing bank will want to see supporting evidence.
  • Even merchants who lose a customer dispute can go to arbitration. The card network gets involved.

Remember there are chargeback reason codes. They are alphanumeric and issued by the banks. There are different systems used when customers want to reverse a purchase. False declines of good purchases happen when transactions aren’t properly reviewed. False positives are similar, but an account can be shut down.

How Does Chargeback Fraud Happen?

Friendly fraud chargebacks are common digital transactions. Here are several ways these happen.

  • A customer buys a product but forgets about it. This happens in certain industries more than in others. For example, a customer can order pizza late at night and then forget about it. They might not recognize the charge when the bill comes in on their credit card statement.
  • Sometimes a chargeback is simply a merchant error. A business might accidentally duplicate a charge and the credit card information shows this.
  • A household member can make an unauthorized purchase triggering a chargeback.
  • True fraud is a criminal act. Where a stolen card gets used, the criminal makes a purchase and then tries to collect.

There are legitimate chargebacks too. Misplaced orders and shipping errors account for these.

How Do You Prevent Fraudulent Chargebacks?

Being proactive is the first step to chargeback fraud prevention. Distinguish between cyber shoplifting and a legitimate transaction with these tips. These work with excellent customer service to prevent chargebacks.

  1. Keep An Eye On Order Sizes. You can fight friendly fraud starting with a simple tip. Unusually large numbers of items or big dollar amounts can be tipoffs to fraud.
  2. Following Protocols Makes a Difference. This is another excellent way to separate a legitimate charge from a bad one. Online transactions look for more than card information. Some protocols look for customers’ IP addresses and card verification value CVV .
  3. Watch Out For Overcharges. Another red flag is a transaction that overcharges the card. Fraudsters try to add to the transaction amount and then pay out to a third party.
  4. Make Sure Your Merchant Description is Clear. If consumers don’t recognize a transaction, they might report it to their banks. Make sure your business merchant descriptor matches up to the storefront. Good chargeback management involves checking your billing descriptor to reduce fraud.
  5. Keep An Eye On The IP Address. A cardholder’s payment information can be the red flag you need to watch for. Keep an eye out for high-risk IP addresses that come from certain countries. Like Russia and Malaysia for example.

Can People Get Caught for Friendly Fraud?

Most states make friendly fraud a punishable offense. New York lawyers Bachner & Associates, PC report you can go to jail for one to three years. And pay a fine of up to $10,000.

What Are the Chargeback Fraud Consequences?

This type of criminal fraud is a big issue for merchants. And any type of dispute can affect the VISA cards of customers too. If you’re still asking is chargeback fraud illegal? Check out these consequences.

For Business:

  • Small businesses get hit with fees. It’s the number one reason they want to avoid friendly fraud chargebacks. Every time friendly fraud occurs, or any type, merchants need to pay a fee.
  • A chargeback system has a threshold. Fines get levied to the merchant directly if these are exceeded and disputing chargebacks take time.
  • Amass enough chargebacks and a bank will close a merchant account.

Chargeback Consequences for Consumers.

When a customer commits fraud, there are consequences. Small businesses can prevent friendly fraud by educating them.

  • Chargebacks can take months. A legitimate refund is much faster.
  • Even family fraud where a family member uses a cardholder’s payment information has consequences. The authorized cardholder can be penalized. This type of fraud can even close bank accounts.

How Do You Fight a Fraudulent Chargeback?

Chargeback costs rise the more times a customer makes one. Research says chargeback disputes can cost up to 250% above the original transaction.

Merchants can fight back against fraud. A rebuttal letter states your case. It’s called representment. Include info on fraud prevention methods, specific customer info, and if a previous purchase has been made.

Here’s some other info on handling disputes this way.

Is Friendly Fraud Hard to Prove?

Yes, friendly fraud can take different forms so it is hard to detect. Merchants and banks often hear customers didn’t receive the goods when they really want to avoid paying.

Or, clients say the customer experience was below grade. A legitimate purchase was made but the client has buyer’s remorse. They might say items don’t match online descriptions.

Businesses make proving friendly fraud more difficult too. They don’t want to flag friendly fraud accounts. They only flag those who commit friendly fraud some of the time.

Image: Envato Elements

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Rob Starr Rob Starr is a staff writer for Small Business Trends. Rob is a freelance journalist and content strategist/manager with three decades of experience in both print and online writing. He currently works in New York City as a copywriter and all across North America for a variety of editing and writing enterprises.

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