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Know How to Prevent Chargeback Fraud in E-Commerce

Ali Sherwani
March 20, 2025
6 min read

Introduction

Imagine this: You’re running a thriving e-commerce business, processing thousands of transactions daily. But suddenly, an influx of chargeback fraud cases starts crippling your revenue. Customers claim they never received products, or worse, say they never made the purchase—while you sit with payment disputes piling up. Sounds familiar? You’re not alone. In 2023, global friendly fraud losses reached a staggering $117.5 billion, with businesses absorbing nearly $40 billion of these costs.

The e-commerce boom has made digital payments seamless, but it has also opened doors for online fraud. As merchants navigate through payment disputes, understanding friendly fraud and deploying risk management strategies becomes critical. Let’s deep dive into the world of chargeback fraud, its impact, and the foolproof measures to combat it.

Also Read: Payment Gateway

What is Chargeback Fraud?

Chargeback fraud, also known as friendly fraud, occurs when a customer fraudulently disputes a legitimate transaction with their bank to receive a refund. Unlike genuine fraud cases where credit card details are stolen, friendly fraud is intentional and deceptive.

How does it work?

  1. A customer purchases from an online store.
  2. The merchant processes the order and delivers the product/service.
  3. The customer files a chargeback with their issuing bank, falsely claiming unauthorized or undelivered goods.
  4. The bank reverses the payment, leaving the merchant with a financial loss and additional fees.

Real-World Example:

In 2023, an e-commerce giant reported over $150 million in friendly fraud losses, with fraudulent payment disputes skyrocketing by 30% year-over-year.

What Is The Connection Between Chargeback Fraud and Online Fraud 

Online fraud is a broader term that includes different types of fraudulent activities in digital transactions, and it is a major contributor. Many fraudsters exploit online fraud loopholes in payment systems to file fake disputes and claim refunds unfairly. The rise of online fraud in 2024 has led to an alarming increase in friendly fraud cases by 25% compared to previous years. This trend proves how online fraud continues to evolve, making it harder for businesses to manage chargeback risks effectively.

Key Indicators in Online Fraud Cases

  • Frequent disputes from the same customer – A customer repeatedly files payment disputes over multiple purchases.
  • Mismatch in shipping and billing addresses – Many online fraud cases involve stolen payment details.
  • High-value orders with expedited shipping – Fraudsters often place high-value transactions to maximize their gains before banks detect suspicious activity.
  • Multiple chargebacks in a short timeframe – A sudden increase in friendly fraud cases within a business indicates targeted fraudulent activity.

What Is The Financial Impact of Online Fraud and Chargeback Fraud?

A study in 2024 reported that online fraud is projected to cost businesses over $200 billion globally, with friendly fraud contributing nearly $50 billion to these losses. The increase in online fraud incidents has pushed businesses to invest more in risk management strategies, fraud detection tools, and secure payment processing methods to prevent this effectively.

How Businesses Can Combat Chargeback Fraud in Online Fraud Cases

To tackle this resulting from online fraud, businesses must:

  1. Implement AI-Powered Fraud Detection – Fraud detection systems analyze transaction patterns and flag potential fraud attempts.
  2. Enhance Payment Verification – Using strong authentication methods like 3D Secure 2.0 reduces unauthorized transactions.
  3. Educate Customers on Chargeback Policies – Informing customers about the correct chargeback process helps minimize fraudulent claims.
  4. Use Chargeback Alerts Services – Platforms like Verifi and Ethoca help businesses get early alerts on potential friendly fraud cases and allow them to dispute claims proactively.
  5. Monitor High-Risk Transactions – Businesses must closely track online fraud indicators such as IP mismatches and unusual purchasing behaviors.

By understanding the deep connection between chargeback and online fraud, businesses can improve their risk management strategies, minimize losses, and safeguard their revenues from fraudulent payment disputes.

What Are The Common Types Of Frauds In Online Transactions?

Digital payments have revolutionized commerce, but they also come with risks. Various deceptive practices impact businesses and financial institutions, leading to disputes and financial losses.

1. Friendly Fraud

Customers claim they never received an item or didn’t authorize a purchase despite having received it. Friendly fraud accounts for over 60% of all friendly fraud cases.

2. Subscription Chargebacks

Buyers subscribe to a service, use it, and later dispute the payment, claiming they never authorized the transaction.

3. Refund Abuse

Customers demand refunds via chargebacks instead of using the proper return policies.

4. Stolen Card Fraud

Criminals use stolen credit card details for purchases, triggering payment disputes when the real owner notices unauthorized transactions.

5. Merchant Error Exploitation

Some of the cases arise due to unintentional mistakes like incorrect billing, product defects, or poor risk management by the business.

How Chargeback Fraud Affects Businesses and Merchants?

Unauthorized payment reversals and transaction disputes not only lead to monetary losses but also impact a company’s credibility, operations, and long-term stability.

1. Financial Losses

For every $1 lost to this fraud, businesses lose $3.75 in total costs due to fees, penalties, and operational inefficiencies.

2. Increased Processing Fees

Excessive payment disputes increase merchant risk levels, leading to higher transaction fees from payment processors.

3. Damage to Reputation

Frequent friendly fraud cases lead to poor ratings with banks, making it harder to maintain credibility.

4. Risk of Merchant Account Termination

High chargeback rates can result in merchant accounts being shut down, affecting business continuity.

What Are The Strategies to Prevent and Dispute While Any Fraud Happens?

To safeguard against unwarranted reversals, businesses need robust verification systems, effective communication practices, and advanced fraud detection tools.

1. Strengthen Transaction Verification

  • Implement 3D Secure 2.0 authentication.
  • Require CVV and AVS (Address Verification System) to prevent online fraud.

2. Maintain Clear Communication

  • Send order confirmation emails and shipping details.
  • Provide transparent refund policies to minimize payment disputes.

3. Leverage AI-powered Fraud Detection

  • Use machine learning models to detect suspicious patterns.
  • Fraud prevention tools like Riskified and Signifyd reduce chargeback fraud by 50%.

4. Use Chargeback Alerts and Dispute Management Services

  • Services like Verifi and Ethoca notify merchants before a chargeback is initiated.
  • Merchants can dispute fraudulent chargebacks and recover lost revenue.

What Are The Chargeback Policies of Payment Gateways and Banks?

Financial institutions and payment platforms have structured guidelines to manage transaction disputes, ensuring fairness for both merchants and consumers.

1. Visa Chargeback Rules

  • Merchants have 30 days to respond to a chargeback fraud claim.
  • Visa uses Compelling Evidence 3.0 for dispute resolution.

2. Mastercard Chargeback Process

  • Chargebacks must be responded to within 45 days.
  • High-risk merchants face increased risk management scrutiny.

3. PayPal Chargeback Policy

  • Merchants must provide proof of delivery to dispute payments.

Conclusion

Chargeback fraud remains a growing concern, with businesses losing billions annually due to fraudulent payment disputes. By implementing risk management strategies such as fraud detection, AI-powered prevention, and robust chargeback dispute management, merchants can reduce losses. Recent studies show that businesses that adopt multi-layered fraud prevention strategies see a 70% drop in these fraud cases.

As the digital economy expands, understanding friendly fraud and taking proactive measures will be critical for long-term success. Businesses must partner with trusted platforms like RegisterKaro to stay ahead in the fight against friendly fraud.

At RegisterKaro, we help businesses implement risk management solutions to reduce friendly fraud. From setting up secure payment gateways to dispute handling, we ensure smooth e-commerce transactions. Contact support@registerkaro.in for expert guidance.

Frequently Asked Questions (FAQs)

1. When does chargeback fraud happen? 

A: It occurs when a customer disputes a legitimate transaction to receive a refund while keeping the purchased item.

2. How does chargeback fraud affect businesses? 

A: It results in financial losses, increased transaction fees, and damaged reputations.

3. How can merchants prevent chargeback fraud? 

A: By implementing fraud prevention tools, strong authentication methods, and clear refund policies.

4. What are the chargeback policies of major payment gateways? 

A: Visa, Mastercard, and PayPal have strict dispute resolution processes that merchants must comply with.

5. How can RegisterKaro help with chargeback fraud prevention? 

A: RegisterKaro provides solutions to prevent these frauds through secure payment processing and dispute resolution. Visit RegisterKaro for assistance.

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