Chargeback Fraud Statistics: Everything You Need to Know

A chargeback happens a cardholder contacts their card issuer to dispute a transaction and get their money back, instead of contacting the business they made the purchase at for a refund. Sometimes, customers can wrongfully use chargeback to avoid paying, this is called chargeback fraud.

Regardless of if fraud is involved or not, chargebacks can negatively impact your business financially, since you’ll lose out on merchandise or services, and you’ll also usually have to pay a chargeback fee. Plus, after too many chargebacks, your business can be deemed a high risk merchant account by your payment provider, resulting in higher fees or end of service.

So, to better protect your business from chargeback fraud, keep reading as we break down the most important stats.

What is Chargeback Fraud?

Commonly known as friendly fraud, chargeback fraud is when a consumer attempts to initiate a chargeback process under fraudulent claims.

Instead of contacting the merchant directly and requesting a refund, the consumer will contact their card issuer and falsely claim that the product was defective, that it wasn’t delivered at all, or that they didn’t authorise the transaction.

There are other false claims consumers might make but these tend to be the most popular.

Chargeback Fraud by Industry

In general, merchants who deal with card-not-present transactions (selling online, via links, or QR codes) are at higher risk of chargeback fraud, and experience the highest rates of chargebacks.

The education and training industry – at 1.02% – has the highest chargeback rates. This can potentially be attributed to the fact that a lot of courses are sold online, and as a subscription.

This business model relies on charging people on a recurring monthly cycle – and on free trials that soon turn into a high monthly cost. Because of this, consumers may be less likely or willing to pay for the subscription when it does turn into a paid one, and request a chargeback accordingly.

Other industries with notably high chargeback to transaction ratios are:

• Travel (0.89%)
• Health and wellness (0.86%)
• Online gaming (0.83%)
• Software services (0.66%)
• Media entertainment (0.56%)

As you can see, a lot of these industries operate on a subscription model, except travel. Since the travel industry generally charges high fees for products or services, it’s possible consumers are requesting chargebacks after regretting an impulse buy or experiencing a last-minute change of plans.

When an industry or business type experiences a high chargeback ratio, it tends to wind up being labelled by the banks as ‘high risk’. These are enterprises earmarked as being easy targets for fraudsters, and – in addition to the above – include:

• Online pharmaceuticals
• Adult entertainment
• Dating services
• Retail
• Online gambling
• Jewellery
• Legal and financial services

If you’re a merchant operating in one of the above industries, chances are high that you’ll need to secure the services of a merchant account that specialises in catering to risky businesses.

For our top picks, explore Expert Market’s guide to the best high-risk merchant accounts. 

The Increase in Chargebacks

Almost 57% of chargeback managers have reported seeing chargebacks increasing year on year. This is largely attributed to the rise in online shopping and services.

And, with the ease of setting up businesses even more prevalent now thanks to social media and e-commerce platforms, it’s much easier for fraudulent consumers to carry out chargeback frauds on small businesses or businesses that might not have as many protective measures in place.

Customer’s role in chargebacks

Chargebacks exist to protect customers and merchants from fraudulent activity and mistakes.

Most chargebacks occur when a customer disputes a transaction on their bank account. They will then ask their bank to return the fund’s from the transaction in question. The bank will then carry out an investigation. This procedure should provide a level of protection to the merchant from fraudulent chargebacks.

Chargebacks should only be processed once it can be proven that a transaction has occurred due to a mistake, unfairly, or due to fraudulent reasons.

Instances that warrant a chargeback include:

• A consumer never received the product or service
• A purchase was made with a stolen card
• A card machine or online payment portal caused an accidental transaction
• The merchant accidentally overcharged the consumer

Chargebacks can be processed through a payment processor for both credit and debit cards and there is typically a period of around 120 days from the transaction for the cardholder to dispute the charge. This period can change depending on the payment provider or payment time.

Consumer chargeback statistics

Here a few things to know about how consumers influence rates of chargebacks:

• 1 in 9 consumers who win a chargeback claim will initiate another one. This is why it’s important to ensure that you prevent this process from occurring and instead initiate a refund process if there is a genuine problem with the customer’s order or service.
• Under 50% of customers will directly complain to the merchant if there’s an issue with their order, leaving you more vulnerable to fraudulent chargebacks.
• 72% of customers have said that ‘convenience’ has driven them to filing a chargeback claim.
• 30% of chargebacks initiated are a result of transactions made with a stolen card.

The Cost of Chargebacks to Merchants

Merchants can end up spending 2.5 times the cost of a disputed transaction.

Once a chargeback process has begun, merchants have little to no control, whereas in the case of a refund request, it’s often left to the merchant’s discretion. Here’s how the chargeback process works:

• Merchants are sent a request for further details, which usually contains enough information for the merchant to identify the transaction being disputed.
• The merchant is then given a specific period to dispute the request.
• The merchant can appeal the chargeback by explaining their terms & conditions, as well as showing a transaction and customer contact history. The more proof you give, the more likely it is that the appeal will go in their favour.
• If the appeal is unsuccessful or the merchant fails to respond, the funds will be taken out of the merchant’s account and sent to the customer.
• The merchant may also need to pay a fee to cover the costs of processing the chargeback. Chargeback fees are usually between £15 and £25, but can reach £100+, and will be outlined by your payment provider when you first sign up to them.

If you’re a high-risk business, you might want to opt for a payment processor with low chargeback fees.

Disputing Chargebacks: Need-to-know

Here are a few key points to bear in mind when disputing chargebacks:

Pay attention to reason codes

When a chargeback is first issued, the issuing bank takes down the customer’s reasoning for filing it. This is then used to assign the chargeback a ‘reason code’ – one of a standardised list of reasons that a customer may give for disputing a transaction.

What this gives you, when the chargeback lands on your business’s desk, is a clear idea of why the customer is unhappy. Knowing this can help you determine the reason the chargeback was raised, whether it’s valid, and – if not – provide fuel for further investigation and dispute.

Beware of late delivery claims

A customer might not be happy that a product has arrived later than the estimated delivery date, but it doesn’t represent legitimate grounds for a chargeback. Despite this, many consumers still file chargeback claims for this reason.

Late delivery doesn’t mean a customer can automatically file a dispute. First, they must at least attempt to contact you for a refund – or for more information about the status of the product – and return the item if they no longer wish to keep it. Otherwise, the chargeback will not be upheld.

To avoid these types of claims, hit your customer with top-notch customer service. Instill them with confidence that the product will be arriving, and – if they still don’t want to play ball – refund them promptly. It’s better and less costly than dealing with a chargeback.

Remember the 15-day waiting period

A merchant protection measure against chargebacks is the 15-day waiting period.

This is the amount of time the issuer (which, as you’ll remember, is the cardholder’s bank) must wait after receiving the dispute before they can file a chargeback. Handily, this gives you over two weeks with which to liaise with the customer and process a refund if necessary.

Chargeback fees have their limits

Chargeback fees are sometimes levied as a percentage of the transaction’s value, but this includes the value of the product only.

This percentage does not take into account any taxes, surcharges, or other costs for shipping or handling that may have been applied to the final purchase price at checkout. This, of course, is great for merchants, as it helps prevent chargeback fees from ballooning out of control.

Still, your policy should never be to merely limit the damage caused by chargebacks, but to fight them head-on. So read on – here are eight ways you can.

Common Mistakes when Dealing with Chargebacks

Here are a few mistakes and pitfalls to avoid when dealing with chargeback claims:

1. Ignoring reason codes

One merchant mistake that’s all too prevalent when it comes to fighting chargebacks is not paying attention to the reason code classifications are involved.

Reason codes not only inform you why the chargeback has been raised but also help you figure out the elements you’ll need to present an effective rebuttal. If you don’t understand what they mean in the first instance, you’ll struggle to fight against them.

2. Not following through with every case, or being too slow to respond

You won’t want to dispute every chargeback you receive – some, after all, are legitimate cases of a purchase being made with a stolen card.

For the chargebacks you do choose to fight, however, you should ensure you’re following through with the process to the end. Gather your documentation, pull together all the evidence at your disposal, and write a compelling rebuttal letter. Don’t put things in the ‘too hard’ pile, forget about them, or take too long to respond, or it won’t just be your wallet that takes the hit – it’ll be your reputation, too.

3. Not engaging with your customers across enough communication channels

When it comes to chargeback prevention, communication is key.

Providing prompt, polite customer service if a customer has an issue with a product or delivery means they’re less likely to become angry and resentful towards your company. Treating customer complaints with care and attention – and, if appropriate, refunding their purchase – means they’re more likely to end up harbouring positive sentiment towards you.

That, in turn, means they’re more likely to approach your business directly in the case of issues, rather than raise a chargeback instead.

Try to engage with your customers across as many communication channels as possible, from social media, to email, to chatbots on your website.

4. Not leveraging fraud protection tools

As your ecommerce business grows and potentially fraudulent transactions increase, failure to use a fraud protection tool can be costly.

These tools, such as Accertify, Sift, and Kount, leverage AI-powered technology to automatically fish out cases of suspected payment fraud – before they slip through the net. By catching these transactions early, you can stop them at the source, and avoid drowning in a sea of chargebacks later.