What Is Chargeback Fraud: Detection and Prevention Strategies

The 2025 chargeback landscape is defined by a striking rise in friendly fraud. The 2025 Global eCommerce Payments & Fraud Report indicates that 62% of merchants have reported an increase in first-party misuse, commonly known as friendly fraud.

This trend is attributed to the proliferation of digital payment methods and mounting economic pressures on consumers. Such developments underscore the imperative for proactive chargeback management and robust fraud prevention strategies to safeguard revenue in today’s challenging commercial environment.

What Is Chargeback Fraud?

Chargeback fraud refers to the misuse of the chargeback process, whether intentional or opportunistic, resulting in financial harm to merchants. Often termed friendly fraud or first-party fraud, it occurs when a customer disputes a legitimate transaction, falsely claiming the product wasn’t delivered, was defective or that the purchase wasn’t authorized.

On the other end of the spectrum, third-party fraud involves bad actors using stolen card details to make purchases, which are later charged back when the actual cardholder notices the unauthorized transaction. In both cases, merchants not only lose revenue and goods but also incur processing fees and face potential reputational damage.

How Does Chargeback Fraud Work?

The process closely mirrors that of legitimate chargebacks, making detection especially challenging. A customer (maliciously or mistakenly) contacts their issuing bank to dispute a charge. Common reasons include claiming the item never arrived, the transaction was unauthorized or the product didn’t match expectations. The bank then initiates a chargeback through the card network, prompting the merchant’s acquiring bank to reverse the transaction temporarily. The merchant must then either gather evidence to challenge the claim or accept the financial loss. For high-volume retailers and digital-first businesses, this creates operational strain and opens the door to repeated exploitation.

Three Common Types of Chargeback Fraud

While some chargebacks stem from merchant error or poor customer service, it is worth noting that honest disputes do occur as a result of communication breakdowns. The three most common types of chargeback fraud include:

1. Friendly Fraud: Friendly fraud is a broad category of fraud in which legitimate buyers are responsible for unwarranted chargebacks. In these scenarios, the card’s rightful owner makes an online purchase and later disputes the charge with their bank, falsely claiming it was unauthorized or that the product was never received. Subcategories include innocent or accidental fraud and opportunistic or malicious friendly fraud.
   
2. Criminal Fraud: This form of deliberate fraud is where a criminal uses a stolen credit card to make a purchase and then requests a chargeback from the bank after receiving the goods or services. In this type of fraud, the fraudster’s objective is to receive purchased items or services without paying for them. At the same time, the genuine cardholder remains unaware of the transaction until after the fraud has occurred.
   
3. Triangulation Fraud: Triangulation fraud is a particularly malicious and complex exploit involving the customer, the fraudster and an online store. The fraudster sets up a web store or lists items on a big marketplace at unrealistic prices. When they receive an order for an item, they’ll use the unsuspecting customer’s information, shipping address and stolen credit card data to purchase that item from a different store. The customer receives their order, unaware of the fraud. Meanwhile, the customer’s payment information is retained for further unauthorized transactions.

There is much overlap between the types of chargeback fraud. Still, one thing to keep in mind is that all friendly fraud is conducted by a legitimate shopper (who is nevertheless acting maliciously), all first-party fraud is run by the cardholder (who is also acting maliciously), but not all chargeback fraud comes from the cardholder. Another way to look at it is that it all comes down to intentions.

What Are the Costs of Chargeback Fraud for Businesses?

Whether accidental or malicious, chargebacks come with a hefty price tag. Beyond the lost revenue from the original sale, they trigger a cascade of direct and indirect costs that chip away at your margins and operational efficiency. Key impacts include:

• Hefty fees & revenue loss: For every $1 lost to a chargeback, merchants face total losses of approximately $1.50–$2.50. This includes chargeback fees, which typically range from $20 to $100 per dispute and are rarely recoverable. Combined with fulfillment, shipping and administrative costs, the true cost of a single chargeback can balloon to as much as 260% of the original sale value, making each dispute a high-stakes drain on revenue.
• Lost inventory: In most cases, goods are never returned after a successful chargeback, leaving merchants with neither payment nor product. This compounds the financial damage, particularly for high-value physical or digital goods.
• Risk of card network penalties: Card networks closely monitor merchant chargeback ratios. Crossing the industry threshold of 1% may result in being placed on a monitoring program, facing increased per-chargeback fines or even losing the ability to process payments altogether.
• Operational overhead: Managing disputes is labor-intensive. Teams must gather evidence, respond within tight deadlines, and track outcomes. Even with effective fraud tools in place, it eats into time, budgets and team capacity.
• Opportunity costs: Every chargeback diverts attention from growth-driving activities. Time spent on dispute resolution is time not spent serving real customers, optimizing experiences or building your brand. It affects everyone from customer support and finance to sales and operations.

How to Detect and Prevent Chargeback Fraud

Preventing chargeback fraud begins long before disputes are filed. While dispute management is important, the most effective strategy is proactive: stopping fraud before it reaches the checkout. That means accurately identifying users, understanding behavior patterns and applying layered fraud detection across the customer journey from account creation to payment.

1. Strengthen Payment Security with Proven Protocols

Implementing robust, secure payment practices is a critical first line of defense. These measures help reduce unauthorized transactions and discourage opportunistic chargebacks:

• Chargeback fees and cost control: Minimizing disputes helps reduce exposure to chargeback fees, which can cost merchants up to $100 per case, not including lost revenue or goods.
• 3D Secure 2.0 (3DS2): A key card network protocol that supports frictionless authentication. It uses transaction data (IP, purchase history, behavior) to help banks assess risk in real time.
• CVV, AVS and tokenization: Combining Card Verification Value (CVV) and Address Verification Service (AVS) at checkout offers layered validation. Tokenization further protects cardholder from transaction fraud data by substituting sensitive info with randomized strings.
• SCA & MFA: Under PSD2, Strong Customer Authentication (SCA) mandates enhanced identity verification. Multi-factor authentication (MFA), biometrics, and one-time passwords (OTP) can help validate genuine users.
• SSL encryption: Displaying secure SSL certification reinforces customer trust while protecting payment data during transmission.

2. Leverage Digital Footprint Analysis to Identify Risky Behavior

Every online interaction leaves a digital trace. Analyzing this data enables merchants to distinguish legitimate users from high-risk actors:

• Email intelligence & domain analysis: Flag suspicious domains (e.g. temporary or disposable addresses), verify age of email accounts and assess if the identity aligns with account or billing details.
• Phone number & carrier analysis: Validate numbers against messenger app presence, carrier origin, SIM type and detect fake or invalid entries.
• IP, ISP & proxy detection: Identify risky connections via proxy, VPN or Tor usage. Analyze ISPs and geolocation to highlight inconsistencies between claimed identity and technical signals.
• Blacklist & BIN checks: Check against blacklists for negative behavior and run BIN lookups to verify issuing banks and card country.

Carefully investigating users’ digital footprints not only helps in real-time decision-making but can also provide evidence for dispute resolution.

3. Set Up Smart, Flexible Velocity Rules

Velocity rules monitor how often specific actions occur over a set timeframe, flagging abnormal patterns that could indicate fraud:

• Repeated failed login attempts
• Multiple credit card entries at checkout
• Sudden changes in shipping addresses

Feeding this data into a dynamic risk scoring engine allows you to calculate fraud risk with weighted rules tailored to your business. When a threshold is reached, transactions can be flagged for review or blocked entirely, automating protection without disrupting genuine customers.

4. Communicate Clearly with Customers

Sometimes, chargebacks result from misunderstandings and not malicious intent. To reduce friendly fraud:

• Provide transparent product descriptions
• Make support channels easy to find
• Send order confirmations and tracking details
• Respond quickly to customer concerns

A clear, communicative customer experience reduces friction, builds trust and makes it less likely that buyers will turn to their banks for a refund.

Fighting Chargeback Fraud: A Holistic Approach

Chargeback fraud is evolving, but so are the tools to stop it. Businesses that combine behavioral insights, digital footprint analysis, secure payment protocols and smart decision rules can detect threats early without sacrificing the customer experience.

The result? Lower fraud losses, fewer chargeback fees and a checkout that’s both secure and seamless.

Frequently Asked Questions for Chargeback Management 

Sources

• Merchant Risk Council – 2025 Global eCommerce Payments and Fraud Report