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What Is Chargeback Fraud and How to Prevent It?

Boaz Gam

Boaz Gam


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6 min

Chargeback Fraud: What It Is and How to Tackle It

Article content
  1. Understanding the Chargeback Process
  2. How Friendly Fraud Works
  3. Ways of Identifying Chargeback Fraud
  4. Effective Methods of Mitigating Friendly Fraud Risks
  5. Can Chargeback Insurance Help?
  6. When Is Chargeback Insurance Applicable?
  7. Bottom Line: Is Chargeback Fraud Preventable?
  8. Payneteasy - Your Reliable Partner in Combating Chargeback Fraud

The rise of eCommerce has launched a new prosperous era for merchants worldwide. However, online sales are imminently followed by increased risks of fraud. What’s more, dishonest activity can be expected not only from fraudsters but also from consumers.

Such occurrences are known as friendly fraud or chargeback fraud. Read on to find out in which forms it comes and how to minimize your encounters with it.

Understanding the Chargeback Process

Before proceeding to define friendly fraud, it's crucial to understand what chargebacks are. In short, it’s a situation in which a consumer files a dispute for a charge made to their debit or credit card. Initially, this results in the payment card in the charge being reversed and the funds returned to the client. Further on, the merchant has the right to file an appeal and get the money back. Read more on this topic in our detailed chargebacks guide.

Chargebacks were introduced to safeguard the consumers from dishonest sellers. However, it has now become a tool some buyers use as a tool to get products without paying. Let’s take a closer look at how exactly this happens.

How Friendly Fraud Works

Chargeback Fraud: What It Is and How to Tackle It

Chargeback fraud is the dishonest activity of a consumer who purchases a product or service in an online store using their payment card and later contacts their card issuer to dispute the charge. It is also often called “friendly fraud”, as it might come off as harmless at first glance.

However, the reality is that even though chargeback fraud can be deemed accidental on rare occasions, it is typically planned and is far from being friendly. In fact, chargeback fraud can cause severe short and long-term consequences for merchants.

Ways of Identifying Chargeback Fraud

Chargeback Fraud: What It Is and How to Tackle It

Merchants with experience who know their consumers’ buying habits can usually identify a fraudulent transaction.

Here are some common fraud claims shoppers submit to their card-issuing banks:

  • “The product wasn’t delivered”
  • “The purchased item doesn’t match the product description in the online store”
  • “The item was returned to the seller, but the refund wasn’t issued”
  • “The order was canceled, but the seller still shipped the item”
  • “The purchase wasn’t initiated by the user, and the credit card was compromised”

While these claims can be valid, and the issue might have actually occurred, the reasons listed above are common among chargeback fraud initiators and require special attention.

Effective Methods of Mitigating Friendly Fraud Risks

Chargeback Fraud: What It Is and How to Tackle It

Knowing how to identify chargeback fraud and having the right tools to address it gives merchants the power to minimize associated risks. Here are some tactics that can be implemented to dispute false chargeback claims:

  • Provide shipment tracking. Having tracking mechanisms in place is beneficial both for online stores and honest customers. While merchants have the opportunity to verify whether the clients have received their purchases, the consumers get peace of mind knowing at which stage their order is.
  • Request a customer signature upon delivery. Choose delivery services that require the recipient to sign a document upon receiving the shipment. This way, you’ll ensure that the product was indeed ordered and delivered.
  • Have a transparent refund policy. Providing transparent information regarding returns and refunds is essential to effectively minimize friendly fraud. In particular, state clearly that the refund is only issued if the item is returned in pristine condition within a specified period.
  • Know how to defend your rights. When a customer submits a claim against your store, it’s critical that you know how to use the collected evidence to win the case.

Overall, it’s essential to collect and store the order information, payment data, and shipment details at least for a month after the purchase is complete.

Can Chargeback Insurance Help?

Chargeback Fraud: What It Is and How to Tackle It

Insurance companies have invented measures to fight the consequences of friendly fraud, one of the most prominent methods being chargeback insurance. It’s a policy that merchants can purchase from insurance firms to receive the coverage of chargebacks’ costs and fees.

While it’s an option that definitely helps to support merchants dealing with high volumes of friendly fraud, it isn’t the ultimate solution. It’s important to keep in mind that all policies are different and provide varying levels of financial coverage. Besides, it doesn’t alleviate the responsibility to know every detail of the chargeback case from the merchant.

When Is Chargeback Insurance Applicable?

Chargeback Fraud: What It Is and How to Tackle It

Chargeback insurance protects sellers in the following fraudulent cases:

  • When a transaction is conducted with a lost or stolen payment card before the cardholder reports it as missing.
  • Charges made with a fake credit card or bank account.
  • When the client edits shipping information after the order is complete.
  • If there’s an issue with the client’s signature.

Depending on the conditions listed in your insurance policy, the cost of chargeback you bear as a merchant in such cases can be reimbursed.

However, the majority of friendly fraud cases are not covered due to their ambiguous nature. Thus, chargeback insurance can’t be considered the ultimate solution for friendly fraud.

Bottom Line: Is Chargeback Fraud Preventable?

Chargeback Fraud: What It Is and How to Tackle It

Chargeback fraud, like any other type of malicious online activity, can’t be eliminated fully. However, there are ways that have proven themselves to be effective in mitigating the risks of it affecting merchants, such as:

  • Thorough authentication and authorization processes. Implement technological solutions that effectively ensure the privacy policy is being followed, verify the users’ identities, review their purchases, and send confirmations of payment and shipment.
  • Consumer data collection. Storing customer information, such as their personal data, order history, and contact requests, if applicable, is extremely important. This way, you’ll have plenty of evidence in case of a suspicious or false chargeback request. Make sure you’re using a reliable and convenient database for easy information retrieval.
  • Detailed product and policy information. The fewer flaws your product description and refund policy have, the higher the chances of you winning a chargeback dispute.

Yet the most reliable method of protecting your online store from chargeback fraud is by integrating an end-to-end solution that authenticates, authorizes, processes, and tracks purchases.

Payneteasy - Your Reliable Partner in Combating Chargeback Fraud

Chargeback Fraud: What It Is and How to Tackle It

Payneteasy is a leading payment platform provider ready to help you with avoiding friendly fraud. Our tailored solutions effectively identify suspicious activity and prevent the majority of fraudulent chargebacks.

Some benefits of working with us include:

Reach out to us now, so we could come up with the perfect chargeback prevention package specially for you!


What is chargeback fraud?

Chargeback fraud, also known as friendly fraud, is the type of malicious activity during which a consumer submits a chargeback claim without having any sufficient grounds for that. Such actions are performed to receive a product or service for free.

Does chargeback insurance guarantee zero friendly fraud?

Despite the common misconception, chargeback insurance doesn’t offer protection from friendly fraud. Instead, such merchant insurance policies cover the costs sellers bear when they encounter certain types of consumer dishonesty.

Is it possible to fully eliminate chargeback fraud?

Unfortunately, there’s no way of fully preventing friendly fraud cases. On the bright side, there are methods that enable merchants to significantly mitigate the risks of it occurring, such as collecting transaction data, having a clear refund policy, and cooperating with reputable payment solutions like Payneteasy.

What is the goal of the chargeback process?

Chargebacks were introduced to protect the consumers from dishonest sellers that don’t provide the services or deliver the items that were paid. Nowadays, however, some consumers use this functionality to their favor through acts of friendly fraud.

How to deal with a fraudulent chargeback claim?

It’s important for a merchant to react to chargeback claims as soon as they receive them from the customer’s issuing bank. Be ready to provide all the evidence regarding the case and contact the chargeback insurance company if you are cooperating with one.

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