Shining a Light on a Growing Ecommerce Threat: Chargeback Fraud

As online commerce continues to surge, chargeback fraud victimizes more and more retailers. Experts report that chargebacks will cost merchants over $100 billion in 2023, and false claims and abuse of the chargeback process are a growing threat to merchants.

And yet many retailers remain unaware of chargeback fraud and its harmful impacts on business revenues.

However, there is a good reason why: fraud and first-party abuse is hard to identify. Customers dispute a valid transaction for many different reasons. That includes forgetfulness, impatience with failed deliveries or the simple inability to read a billing descriptor. With such a wide range of motivations, it is a challenge to distinguish honest disputes from fraudsters with false claims.

Still, the cost of chargeback fraud is simply too high to ignore. For every $100 in chargebacks, your true chargeback cost is $240. The hidden expenses of wasted time, expensive fees, penalties or additional losses of goods and services add up. 


Unfortunately for all of us in the industry, the problem of chargeback fraud continues to grow, and for several reasons:

The Growth 0f Ecommerce

First, ecommerce continues its rapid expansion. Here are statistics as proof: revenue in the ecommerce market is projected to reach $3.64 trillion in 2023. And that market value is expected to increase by 11.17% each year. Internet payments mean more purchases. 

However, the internet also causes problems. More transactions mean more fraud. There are now far more opportunities for people to exploit vulnerabilities in our chargeback systems.

Plus, as digital services expand, they introduce convenience. Before, consumers had to engage with customer service reps in physical brick-and-mortar stores. Now they can file a chargeback with just the click of a button.

Yes, ecommerce is crucial for sales revenue. But friendly fraud will also grow as the market expands.

The Complexity of Ecommerce

Second, service changes in the payment landscape contribute to more chargeback fraud. For example, many online transactions are “card-not-present,” which has less security than a physical card swipe. And many companies now offer risk-free return policies, which some people try to abuse. The same goes for online portals, loyalty programs and virtual gift cards.

Plus, instances of true fraud (when a criminal engages in identity theft and other scams) also are increasing in sophistication. Fraudsters use the same advanced technologies — but with malicious intent. As criminals become more creative, chargeback volume increases.

New services and payment methods are clearly a net benefit for retailers, but these complex systems do create more opportunities for chargeback fraud as merchants struggle to separate the different kinds of fraud.

Friendly Fraud and Consumer Awareness

Third, a lack of customer awareness will also contribute to chargeback fraud. Consider a family who submits a credit card into a family gaming console. The kids are then able to make some in-game purchases without the parents knowing. Mom and Dad then find several unknown charges on their credit card bill a month later, and a quick chargeback is filed. While these actions are committed honestly, it still counts as chargeback fraud.

Similar situations can occur because of buyer’s remorse, forgetfulness, impatience or confusion. The challenge for retailers is deciphering which is which, and mistakes will lead to expensive consequences. On the one hand, you want to defend against false chargeback claims to protect your revenue. But you also don’t want to outright blame an honest, long-term client. That could break the relationship, and you would lose the lifetime sales value. 

The entire industry is taking steps to remedy such problems. Education campaigns and data sharing are helping identify known instances of friendly fraud. However, until consumer awareness increases, chargeback fraud may grow in volume.

Regulatory Changes

Lastly, the fluid nature of the chargeback industry also contributes to chargeback fraud. Ecommerce and the payments industry are still innovating at a breakneck pace. In turn, that makes merchants feel “behind the curve.” There are always new chargeback reason codes to follow, new evidence requirements to add and new prevention tools to learn. Even helpful chargeback solutions involve a learning and adjustment period.

For example, Visa introduced new evidence requirements in April of 2023. The criteria change is designed to support merchants as they fight friendly fraud. While a much-needed update, it will introduce higher workloads, newer technology, possible process delays and frustration with more stringent submission requirements.   

In short, an ever-changing industry makes it hard to create effective response strategies. And we haven’t even talked about the resource strain fighting a chargeback can cause. Without regulatory support, the volume of chargeback fraud may increase.

Strategies of Defense

Luckily, there are plenty of ways to help address the problem of chargeback fraud. Here are some of the most common and effective defense strategies:

  • Fraud detection tools: New digital solutions are an excellent way to stop chargeback fraud before it occurs. These services can monitor your business and give rapid alerts on suspicious activity. You can also take steps to include strong authentication practices or make blacklists for problematic customers. Practicing prevention pre-transaction limits all the hassles of chargeback fraud that occur post-transaction.
  • Customer awareness practices: The more you inform a customer, the less likely they are to file a chargeback. That means writing out clear store policies, terms and conditions, product descriptions, billing descriptors and shipping information. Increased communication with customers is an excellent way to limit instances of friendly fraud. 
  • Collaboration: Payment, dispute, and customer service teams are often siloed, but chargeback fraud is a business-wide problem that impacts all departments. That’s why collaboration can be so successful. For example, customer service reps that embed right into the payment process can deter potential friendly fraud. And the data collected by payments can offer good evidence for dispute teams. Cross-department teamwork is necessary if you hope to identify the many various ways friendly fraud occurs.    
  • Customer service: Encourage all customers to resolve any complaints with customer service. Refunds are far less costly than chargebacks. Plus, service reps can turn a moment of high friction into a positive customer experience. 
  • Chargeback mitigation tools: Select a chargeback partner who can help handle all aspects of the chargeback lifecycle. The experts, equipped with innovative tools, help develop comprehensive response strategies tailored to your business. It is far easier to handle the ever-changing chargeback landscape with the support of professionals.

Of course, there are many more niche defense options. Behavior analysis, biometrics and AI-powered purchase analysis can all be helpful. But for merchants that need a few “quick wins,” focus on the consumer. It is the consumer who files the dispute, so customer-centric practices are the most effective strategies.

Ariel Chen is the Co-founder and CEO at Chargeflow. Prior to Chargeflow, Chen was the CEO of Babe Cosmetics, a cruelty-free beauty product and innovative subscription-based service company that he co-founded with his brother. The lessons he learned from Babe Cosmetics, combined with the fintech knowledge and experience gained as the Chief Operating Officer at MasterPOS, have uniquely positioned him to tackle the growing issue of chargeback.

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