Chargeback fraud: The essential guide

For online businesses, chargebacks can feel like an unavoidable cost of doing business. But when fraudulent chargebacks - also known as friendly fraud - start eating away at your revenue, the impact is anything but friendly.

From lost sales to increased processing fees and even potential account termination, chargeback fraud poses a serious risk to all merchants.

So, how can businesses fight back? The key lies in proactive fraud prevention, real-time dispute management, and cutting-edge chargeback protection.

In this article, we’ll explore the growing challenge of chargeback fraud, its financial and operational consequences, and - most importantly - how advanced fraud detection and chargeback prevention tools empower merchants to safeguard their revenue and maintain a healthy chargeback ratio.

What are chargebacks?

Chargebacks occur when a customer disputes a transaction with their bank or credit card provider, resulting in the reversal of the payment and a refund issued directly to the customer, often at the expense of the merchant.

Unlike traditional refunds, which businesses process voluntarily, chargebacks are enforced by the cardholder’s bank after the customer files a dispute, automatically withdrawing funds from the business’s account.

The chargeback process was originally designed as a consumer protection measure against fraud and unauthorized transactions. However, they have evolved into a complex challenge for merchants, often being misused in cases of buyer’s remorse, misunderstandings, or even chargeback fraud, known as friendly fraud.

What is chargeback fraud?

Chargeback fraud happens when a customer disputes a legitimate purchase with their bank, triggering a forced refund through a chargeback.

Unlike cases of true fraud, where a stolen payment method is used without the cardholder’s knowledge, chargeback fraud occurs when a customer claims they didn’t authorize the transaction, didn’t receive the product, or weren’t satisfied, without ever attempting to resolve the issue with the merchant.

Sometimes, chargeback fraud is accidental. A customer might forget about a purchase, fail to recognize a charge on their statement or misunderstand a merchant’s return policy. However, in many cases, it’s a deliberate act made for illegitimate reasons - shoppers exploiting the chargeback system to get their money back while keeping the product or service.

For merchants, chargeback fraud is more than just a lost sale. It comes with extra operational costs, including chargeback fees, lost inventory, increased dispute ratios, and potential penalties from payment processors. If chargeback rates climb too high, businesses may even face restrictions or higher processing costs.

Examples of chargeback fraud

Chargeback fraud comes in many forms, but the result is always the same: businesses dispute fraudulent chargebacks, lose revenue and inventory, and experience direct costs.

While some cases may stem from mere misunderstandings, others are intentional attempts to exploit the system by making an illegitimate chargeback. Here are some of the most common types of chargeback fraud merchants face:

"I didn’t authorize this charge"

A customer disputes a legitimate transaction by falsely claiming they never made the purchase. This can happen when a cardholder forgets about a transaction, doesn’t recognize the merchant’s name on their credit card statement, or deliberately tries to reverse a purchase they made themselves.

"I never received my order"

Despite receiving their goods or services, a customer claims that their order never arrived and requests a chargeback. This type of chargeback abuse is particularly common in eCommerce, where proving delivery can be challenging, especially if tracking information doesn’t require a signature.

"The product or service wasn’t as described"

A customer receives exactly what they ordered but disputes the charge by claiming the item was defective, misrepresented, or not what they expected. Instead of contacting the merchant for a refund or exchange, they go straight to the credit card company to force a chargeback.

"I canceled my subscription, but I was still charged"

Subscription-based businesses often face disputes from customers who claim they cancelled their membership but were still billed. In many cases, the customer either forgot to cancel or misunderstood the terms, yet they still initiated the dispute process instead of contacting the business's top-notch customer service team.

"Someone in my household made this purchase without my permission"

Family fraud occurs when a family member, friend, or employee purchases the cardholder’s account, but the cardholder later denies approving the transaction. Parents frequently dispute charges made by their children on gaming platforms or streaming services, even when they have access to the payment method.

Deliberate "cyber-shoplifting"

Some customers knowingly commit chargeback fraud by making a purchase, receiving the item, and then falsely disputing the charge to keep both their money and the product. This is one of the most damaging types of online fraud, as businesses lose not only revenue but also the inventory and associated costs.

Do banks investigate fraudulent chargebacks?

The short answer is: yes, but not always as thoroughly as merchants might hope.

Banks follow a structured review process when handling chargebacks. They assess the cardholder’s claim, look for signs of fraud or error, and request evidence from both the customer and the merchant.

However, because banks want to protect consumers, merchants often face an uphill battle in proving the legitimacy of a transaction, especially if they don’t have strong documentation.

How do you fight chargeback fraud?

Here’s how businesses can effectively combat chargeback fraud:

Leverage advanced fraud detection

Traditional fraud prevention methods aren’t enough to stop today’s sophisticated fraudsters. Businesses need AI-driven fraud detection tools that analyze customer behavior in real time, identifying red flags before a transaction is completed. Technologies like:

• Machine Learning: Detects unusual spending patterns and high-risk transactions based on historical data.
• Device Intelligence: Tracks device fingerprints to identify repeat offenders or suspicious activity.
• Digital Footprint Analysis: Monitors IP addresses, geolocation, and browsing behavior to verify legitimate customers.

Strengthen payment authentication

One of the most effective ways to stop chargeback fraud is to ensure that every transaction is verified and authenticated. Businesses should implement:

• 3D Secure (3DS2): An extra layer of authentication for online payments that requires customers to verify their identity.
• Multi-Factor Authentication (MFA): For account logins and high-risk transactions to prevent unauthorized purchases.
• Clear Billing Descriptors: Avoid confusion by ensuring your business name appears correctly on a customer's billing statement.

These steps make it harder for customers to falsely claim a transaction was unauthorized.

Keep strong transaction records

A well-documented transaction is a merchant’s best weapon in a chargeback dispute. To build a solid case, businesses should:

• Store order confirmations, receipts, and shipping details with tracking numbers.
• Maintain customer communication records to show proof of delivery or resolution attempts.
• Use digital signatures or biometric verification when possible to confirm the buyer’s identity.

The more evidence you have, the stronger your case when fighting a dispute.

Proactively manage disputes

Businesses need a smart dispute management strategy to challenge fraudulent claims quickly and effectively:

• Identify and respond to disputes in real time before they escalate into chargebacks.
• Automatically submit compelling evidence to issuing banks to overturn fraudulent claims.
• Monitor chargeback ratios to stay compliant with card network regulations and avoid penalties.

Who pays for chargeback fraud?

Unfortunately for businesses, it’s the merchant who pays the price, and not just in lost revenue.

On top of losing the original sale, the business also faces additional costs, including:

• Chargeback Fees: Payment processors charge merchants a non-refundable fee for each chargeback, often ranging from $20 to $100 per dispute.
• Lost Inventory or Services: If a chargeback is fraudulent, the merchant not only loses the payment but also the product or service they have already provided.
• Higher Processing Costs: Frequent chargebacks can push a business into a high-risk category, leading to increased transaction fees.

Potential Account Termination: If a merchant’s chargeback ratio exceeds acceptable levels set by card networks like Visa and Mastercard, they risk losing their ability to process payments altogether.

Chargeback fraud consequences on businesses

Chargeback fraud can be a serious financial drain that can undermine a business’s profitability and long-term stability. Businesses are left covering bank fees, lost inventory, increased operational costs, and even reputational damage.

1. Lost revenue & profits

When a customer disputes a transaction, the issuing bank pulls the funds directly from the merchant’s account without waiting for the business to respond. This means:

• The merchant loses the original purchase amount.
• If the product was already shipped, they lose the inventory as well.
• For services, the merchant can’t recover the time or resources already spent.

2. Chargeback fees & penalties

Every chargeback comes with a non-refundable fee that merchants must pay, even if the chargeback is fraudulent activity. These fees add up quickly, eating into profits and making it even harder to recover from disputes.

3. Higher processing costs

Card networks like Visa and Mastercard track chargeback ratios, and merchants with too many disputes are labeled high-risk. This can lead to:

• Higher fees for payment processing, raising costs for every transaction.
• Stricter fraud monitoring, causing legitimate transactions to be flagged or declined.
• Potential loss of payment processing privileges, meaning businesses may struggle to accept card payments at all.

4. Operational disruptions

Fighting chargebacks isn’t easy. Merchants must gather evidence, submit documentation, and dispute fraudulent claims - a process that can take weeks. This creates a huge administrative burden on businesses, diverting resources away from growth and customer service.

5. Brand reputation and customer experience

A high number of chargebacks can signal customer dissatisfaction or poor fraud prevention, making new customers hesitant to trust the business. If a company is labeled high-risk, it may also struggle to build strong relationships with banks and payment processors.

Effective prevention strategies

Businesses can significantly reduce their risk by implementing clear policies, strong fraud prevention tools, and proactive customer communication.

Transparent & customer-friendly return/refund policies

Many chargebacks occur simply because customers don’t understand or aren’t aware of a company’s return and refund policies. A clear, easy-to-find policy can prevent unnecessary disputes by setting proper expectations.

• Make policies visible on product pages, checkout screens, and order confirmation emails.
• Use simple language to explain return timeframes, restocking fees, and eligibility for refunds.
• Offer multiple support channels (live chat, email, phone) so customers can resolve issues directly with you rather than with their bank.

By making the return process straightforward and hassle-free, businesses can turn potential chargebacks into customer service resolutions instead.

Clear & accurate transaction descriptors

Customers may not recognize a charge on their statement. Avoid confusion by ensuring your billing descriptor is easy to identify.

• Use a recognizable business name instead of a generic or parent company name.
• Include contact details so customers can reach out with questions before filing a dispute.
• Send post-purchase confirmations with details of the transaction, making it easy for customers to recall their purchase.

Comprehensive order tracking & proof of delivery

For businesses shipping physical products, delivery disputes are a major cause of chargebacks. Providing verifiable proof of delivery can help merchants win disputes.

• Use tracking numbers and delivery confirmations to prove items were shipped.
• Require signature confirmation for high-value orders to prevent false claims.
• Keep photos of packaged shipments to show the condition of items before they leave your facility.

Proactive dispute management

Even with the best prevention strategies, some chargebacks will still occur. That’s why merchants need a strong dispute response system to fight illegitimate claims efficiently, so businesses can:

• Receive real-time alerts when a chargeback is filed.
• Automatically submit compelling evidence to issuing banks.
• Track chargeback ratios to stay compliant with payment processor rules.

How can Nuvei help merchants protect their revenue?

Nuvei helps merchants protect revenue by preventing chargebacks and fraud.

Its AI-driven system analyzes transactions in real-time, using factors like customer behavior, purchase history, and device data, to detect and block high-risk activity before chargebacks occur.

For disputes, Nuvei’s automated platform provides rapid response tools, real-time alerts, and trend analysis, boosting the chance of winning disputes and recovering lost revenue. Preemptive alerts and predictive analytics further help merchants mitigate risks and deflect potential disputes, keeping chargeback ratios low and financial losses minimal.

Conclusion

By combining clear policies, proactive dispute management, and cutting-edge fraud detection, merchants can protect their businesses against chargeback fraud.

Ready to take control of chargeback fraud? Partner with Nuvei today and safeguard your revenue with smarter, data-driven protection.