While chargebacks are something every business encounters, as e-commerce continues to grow, chargeback fraud is becoming a more serious problem.
Chargeback fraud—a type of fraud that revolves around disputing charges for products received or services rendered—is on the rise, and has been for decades. Estimates from Mastercard show that global chargeback volume will exceed 335 million by 2026, a 42% increase from 2023’s numbers. Half of all consumers investigated purchases they have made in the last 12 months, leading to 24% making inquiries due to unrecognized purchases. The increased number and value of purchases have seen e-commerce sales grow to $6 trillion in 2024, while also increasing the number of transaction disputes.
This has given fraudsters ample opportunity and new attack vectors, either through first-party fraud (disputing charges for items or services rendered) or true fraud (fraudsters using stolen cards to make purchases that are then disputed by the legitimate cardholder). In 2023, merchants paid an estimated $100 billion in chargebacks alone. Nearly half (43%) of U.S. consumers admitted to disputing legitimate charges, and this is before accounting for more organized efforts of chargeback fraud that’s estimated to cost merchants over $20 billion by 2026.
In this article, we’ll discuss how you can recognize chargeback fraud, how you can counter it through best practices, and how preventative measures from payment fraud protection solutions like Sift can mitigate this issue now and in the future.
What is Chargeback Fraud?
Chargeback fraud is when a person makes a purchase with a credit card and then intentionally disputes the charge through the credit card company. It’s a subset of first-party fraud, and looks similar to legitimate chargebacks, making them difficult to detect and counter. It can look similar to third-party fraud as well, but it’s important to understand the distinction between these three causes for chargebacks.
The typical chargeback fraud process follows these steps:
- It starts when a person makes a legitimate credit card purchase.
- The person will contact the credit card company to report the purchase as fraudulent. They will do this without attempting to contact the merchant for a refund or to fix their alleged issue.
- The card issuer will cancel the charge. The merchant loses the money from the sale and the value of the product or service rendered.
Chargeback fraud, first-party fraud, and third-party fraud may all involve chargebacks, but there are distinctions. Chargeback fraud is a type of first-party fraud, while third-party fraud will usually result in a chargeback, but is not technically chargeback fraud.
What is First-Party Fraud?
First-party fraud is when an individual uses their own information or identity to commit fraud for personal gain. Chargeback fraud is one example, but first-party fraud can also include refund fraud (the intentional abuse of a retailer’s refund policy). In first-party fraud, the cardholder makes a legitimate purchase, receives the product or service, then disputes the charge with their card issuer or the merchant. This type of fraud is common, accounting for around 70% of all credit card fraud.
What is Third-Party Fraud?
Third-party fraud is not chargeback fraud, but usually results in a chargeback. It involves stolen bank card information and payment fraud. A fraudster will attain enough information about a credit card to make a legitimate purchase. The cardholder, seeing the unknown charge, will dispute it, often leaving the merchant with no recourse. LexisNexis reported in 2024 that merchants in the United States and Canada lose around $3 for every $1 lost to fraud.
What Businesses Need Chargeback Fraud Prevention?
Chargeback fraud can affect any company that accepts credit card payments, but there are some that are more susceptible.
1. Digital Commerce Retailers
Because e-commerce businesses primarily use card-based payment systems, credit card fraud is naturally more common. Further, online transactions are more difficult to verify than purchases made in person. Luxury goods that move smaller product quantities at a high cost are particularly susceptible to credit card fraud. Fraudulent actors usually look for “big scores” because their objective is to get something for free, seeking to get the most out of a single transaction.
Payment fraud prevention solutions like Sift help merchants apply customizable rules based on their industry-specific needs.
2. Internet Software & Services
Digital products like software, services, or courses can more easily be disputed because it’s more difficult to verify the customer received said products or services.
Payment protection platforms with data-driven insights can help identify suspicious transactions. Through the use of geographic location, payment frequency, and payment history, software and services businesses can either investigate suspicious transactions more thoroughly, request additional authentication, or simply block the transaction.
3. Subscription-Based Services
Services with subscription-based monetization are particularly vulnerable because it’s difficult to prove when fraud occurs. Customers often forget to cancel a recurring subscription or simply claim they did not authorize it, leading to chargebacks. Because there is no real method to verify that the customer didn’t use the service or that a fraudster used the service instead, chargebacks for subscription-based services can be difficult to win.
Again, here is where data-driven insights and machine learning pattern recognition can help. Geographic location can help indicate where the service was purchased from, while payment history from the same card can be cross-referenced across different industries to verify legitimate use.
While these business types are more likely to suffer from chargeback fraud, all businesses can benefit from proper payment protection, regardless of their industry.
How Chargeback Fraud Affects Businesses
Chargeback fraud and chargebacks negatively affect your business in multiple ways. While the occasional chargeback is expected, chargeback fraud has become prominent enough that payment providers and credit card companies include chargeback fraud in their metrics for determining which merchants are in good standing.
Here are all the ways chargeback fraud can affect your business:
- Financial: The clear result of losing a payment is financial damage. Merchants are three times more likely to lose a chargeback dispute compared to customers.
- Reputational: If fraudsters determine your business is an easy target for chargebacks, you will likely encounter increased chargeback rates. High chargeback rates can damage your business’s professional relationships and reputation.
- Operational: Handling a high volume of chargebacks comes with labor and resource costs, including the finances needed to investigate claims, gather evidence, respond to banks, and more.
- Chargeback Ratios: Visa’s recent VAMP overhaul put the writing on the wall: high chargeback ratios will increase the cost of using them as a payment provider. Without being able to identify fraud, these chargebacks will negatively affect your ratios and reputation with card providers, driving up costs and (potentially) friction during customer checkout.
How to Prevent Chargeback Fraud
Preventing chargeback fraud isn’t as simple as installing software. It’s a multi-faceted process that requires the use of best practices, good customer service policies, data and analytics, and payment protection services. Here’s how you can get started:
Customer Service is Key
It’s increasingly difficult to determine if a chargeback is legitimate or fraudulent. Customers today expect quick, effective service. Because credit card companies provide an easy, straightforward way to dispute unknown charges, most will opt to deal with them instead of your company’s customer service, unless your customer service is good.
By being proactive, helpful, available, and flexible, customers that might have chosen to simply dispute the charge are more likely to resolve the issue through your company. This not only helps your reputation, but helps you keep both customers and payments.
Make Return Policies Clear
Chargebacks can happen after a customer attempts to contact your business to get a refund or return, especially if the product or service didn’t meet their expectations. By making your return policy clear and apparent (usually directly in your catalog and throughout the payment process) you can create an atmosphere of trust and transparency. Having this policy available also helps when responding to disputes.
Data is Everything
Knowing your transaction and chargeback rates is a necessity. It helps you understand your chargeback ratios (important for payment provider rates), identify emerging fraud trends, and notice recurring issues. Knowing how to interpret this information can give your business the data it needs to challenge transaction disputes, identify “red flag” transactions or users, and inform you where attention is needed for internal policies.
Employ Sift’s AI-Powered Fraud Decisioning
Interpreting data, monitoring transactions, and making decisions can be a monumental task if you’re in a high-volume or high-value industry, but Sift makes it easy. Our Global Data Network is fed and utilized by our customers around the world, giving you the insights required to make accurate decisions when it comes to user intent. This not only helps identify likely chargeback fraud, but streamlines transactions for trusted customers, reducing friction, boosting trust, and fostering growth.
How Sift Stops Chargeback Fraud While Increasing Growth
Sift’s industry-leading payment protection platform offers an unparalleled Global Data Networks of 1 trillion annual events, machine learning technologies, and a Clearbox Decisioning approach.
Sift’s Global Data Network Insights
Sift’s Global Data Network is comprised of customers across industries and regions. Our AI-powered platform recognizes patterns across over 16,000 different signals to identify individual suspicious users and broader global fraud trends. The Global Data Network is self-teaching, with every new transaction and signal giving us more insight into which transactions should be blocked, and which are clear to process. This means increased security, unparalleled accuracy, reduced transaction friction, and more opportunities for company growth.
Total Transparency with Clearbox Decisioning
With Clearbox Decisioning, Sift stands apart from alternative payment protection solutions. Most platforms utilize data networks to flag suspicious activity, but do not provide specific data points as to why these flags were applied. With Sift, our data is your data. You can see exactly why a user is flagged as suspicious, what connections they have globally, and why their activities may result in fraudulent action through transaction monitoring. You can even adjust thresholds to allow certain users depending on what fraud tolerance your industry or business permits.
Our Workflows Work For You
Every industry and business is different, which is why Sift workflows are designed with individual industries and business types in mind. They allow you to choose which activity you want to monitor, giving you the ability to run scenarios based on recent user actions. Sift workflows allow rules to be applied at different thresholds that you can adjust, giving you the insights and automated protection you need to refine your specific transaction process.
Chargeback Protection for E-Commerce is a Necessity
E-commerce brings with it a new era of fraud. Difficult to detect and with the potential for irrevocable damage, online fraud, account takeovers, and chargeback fraud represent the current challenges businesses face on a daily basis. Year-over-year, online companies face increasing rates of fraudulent transactions that can result in severe damage to finances, reputation, and your ability to run your business.
Thanks to vast data networks and more recent advances in artificial intelligence, staying ahead of fraud trends is more attainable than ever. Payment protection platforms monitor transactions in real time, gradually increasing scrutiny of suspicious transactions to verify their identity and validity. And because data networks continue to grow, there’s no shortage of patterns to analyze for advanced AI algorithms, making new trends easier to identify and stop.
Sift’s Global Data Network is the best way to keep your business and customers safe today while arming yourself with the knowledge needed to grow and face new threats tomorrow. Automation is key to helping you run a thriving business, but transparency is how you stay true to your individual company interests and specific customer needs. Sift not only keeps you safe, but helps you push your business forward.
Take Control of Your Chargebacks
Learn more about how Sift can help your business proactively prevent payment fraud and manage chargebacks.
