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Why More Customers Are Misusing Chargebacks

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Miranda Russell | August 29, 2020

“Merchants need to know how to protect themselves from chargeback fraud and the many forms it comes in.”
8 min read
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    Last Updated on August 30, 2023 by Labib Ahmad

    What are chargebacks?

    Chargebacks were originally introduced to protect customers from fraud and the unauthorized use of their credit cards. This promotes the free flow of commerce allowing consumers to feel confident using their credit cards knowing that if there is a transaction on their statement that they did not approve, that they can contact their bank and dispute the transaction to get their money back.

    The problem with chargebacks

    However, while chargebacks are a great consumer protection tool, they can be costly to merchants, especially if used irresponsibly for dishonest reasons. Merchants can face stiff penalties and fees in addition to their lost revenue, and can also be penalized for excessive chargebacks by being flagged by the card brands or losing their merchant account altogether.

    Merchants only have a short window to defend themselves against a chargeback, and validating such a dispute with the appropriate evidence can be difficult. Defending against chargeback fraud requires a thorough knowledge of just how easy it can be for cardholders to file chargebacks, and how they might exploit this measure.

    Why is chargeback fraud on the rise?

    While it's perfectly reasonable to assume that a significant amount of chargebacks get filed for honest reasons, the fact is that chargeback fraud is on the rise and consumers are increasingly misusing these bank-facilitated refunds. Chargeback regulations have not kept pace with adapting to a dynamic and changing marketplace where faceless, online shopping has become more popular.

    Common chargeback fraud trends

    A disturbing trend that has been recognized in consumers is this: they file their first chargeback for a legitimate reason, then, after realizing how easy it was to get their money back, they file more chargebacks after that for dishonest reasons. This makes a lot of customers who file chargebacks repeat offenders of chargeback fraud, and merchants don't have a lot of power to fight this practice.

    The problem is that legitimate chargebacks can be difficult to discern from dishonest chargebacks, so it's important to understand all the reasons they might be filed against you, and how you can protect yourself. We've outlined six reasons why a customer might file a chargeback, and how you can prevent them.

    Be aware of the causes of chargebacks

    Chargebacks can be frustrating when they occur for legitimate reasons, and even more so when they occur for reasons that can be avoided or when the customer is being dishonest or, at worst, cyber-shoplifting. By no means are we advocating widespread suspicion of all customers and transactions, but it's important to understand and be aware of the common types of misuse that can occur so that you can be vigilant in protecting your business.

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    Here are six reasons why customers might issue a chargeback:

    1. They want to get a refund

    Unfortunately, some customers might choose to file a chargeback simply because they want to be refunded for a purchase, whether there is merit for a refund or not. They often incorrectly assume that a chargeback is just an easier and more convenient path to a traditional refund. The customer might feel that going directly to their financial institution will be a faster and easier way to be refunded, instead of working directly with the business.

    The solution

    Whenever possible, it's often better to deal with customer disputes with the customers directly, and you should encourage them to engage with you in the event an issue arises.

    You can help make it easier for your customers by ensuring your refund policy is clearly written and easy to find on your website, so customers know the process to go through if they would like to pursue a refund. By giving your customers the refund information before they need it, they will be more likely to request the refund through your business, instead of resorting to requesting one through their financial institution.

    2. Because they're not happy with a product

    If a customer isn't happy with a product once it's received, or if it's not what they were expecting, then they might file a chargeback with their financial institution. Unfortunately, it's possible for consumers to simply claim they did not receive what was promised or that it was faulty upon receiving it.

    The solution:

    Ensuring your product images, descriptions and details are as accurate as possible is a good way to set accurate expectations with customers before they make a purchase. This also makes it more difficult for someone to falsely claim they received a product that was not in line with what was depicted on the website. Again, it can also be beneficial to have your refund policy and process clearly listed, so customers know what channels are available to them to return a product, besides filing a chargeback.

    3. They don't recognize your merchant descriptor on their credit card

    Your merchant descriptor or your business name is the description your customers will see for your business when they're reviewing their credit card statements. If your merchant descriptor is not clear or does not match your business name, then you're increasing the chance of confusion and customers will be more likely to question the legitimacy of the transaction. Don't give a customer the chance to file a chargeback - honestly or otherwise - by having an unclear descriptor that doesn't match your business name.

    The solution:

    The best solution is to have your merchant descriptor match the name of your business. It will get rid of any confusion for the customer. If for some reason your merchant descriptor is going to vary from the business name customers associate with you, bring that to the customer's attention during the purchase stage of their interaction. By letting customers know what the description of the purchase will be on their statement you can help customers recognize and validate the purchases on their credit card statement, and not give them a reason to claim confusion.

    4. They are worried about fraud

    Fraud is a concerning topic for customers and businesses. If a customer is already concerned about fraud, then they might be more likely to dispute purchases that seem even slightly suspicious, without doing their due diligence to validate the transaction.

    The solution:

    Although it can be more difficult to prevent these types of situations from resulting in a chargeback, ensuring your merchant descriptor is clear can help the customer clearly identify which business the transaction is from, so they can match the transaction to their purchase easily.

    5. A subscription billing chargeback

    If a customer has signed up for a monthly subscription, and they are charged on their credit card after they claim to have canceled their subscription, then this might trigger them to file a chargeback. If you're offering products or services on a subscription basis, it's important to have the tools in place to cancel and adjust a customer's final bill quickly and easily.

    The solution:

    If a customer is still going to be billed the next month, or if there is still an amount owing on their account, it's important to let them know when they're canceling. By letting them know, they will be anticipating the charge and understand why it is still on their statement. Clear communication and setting accurate expectations are always helpful for preventing illegitimate subscription billing chargebacks. If you suspect that they're being dishonest, check to see if they logged in and used your service or product after they claimed to have canceled their subscription, that would help prove your defense in the case a chargeback is filed.

    6. The product they purchased wasn't delivered

    If a customer orders a product online and it is not delivered, then they might decide to file a chargeback. Again, this might be because they feel that contacting their financial institution is easier than reaching out to the business in question, or because they are unsure of the proper channels to use.

    The solution:

    Having your refund policy clearly stated on your website and having clear and open channels for facilitating legitimate refunds can help protect yourself from these types of claims. It might also be helpful to have refund information printed on any invoices or receipts you send out.

    Additionally, don’t forget to provide tracking numbers to your customers whenever possible. This can help shift the responsibility to the shipping company if it was their error that resulted in the product not being delivered.

    Final thoughts

    By communicating clearly with customers, making it easy for them to contact your business, and having clear policies in place for refunds, returns, or disputes, you can help educate customers on the proper way to dispute a purchase if they are confused or not one hundred percent satisfied.


    Can a chargeback be fraud?

    Yes, a chargeback is considered fraud when customers file for a chargeback with the intention of acquiring a refund while keeping the purchased items. If you suspect chargeback fraud, it's crucial to take appropriate measures mentioned in this article to protect your business.

    Is chargeback fraud illegal?

    While chargeback cases are subjective and hard to prove, making fraudulent chargebacks claims in most American states may be punishable with a fine or imprisonment.

    What is an example of a chargeback fraud?

    An example of chargeback fraud is when a customer claims to have not received an item but in reality they have. For example, a customer ordered a laptop from an electronic store and the laptop is set for delivery in 5 days. However, after 6 days, the customer initiates a chargeback, alleging they did not receive the laptop. In reality, if the customer did, indeed, take delivery of the laptop, this situation would be considered chargeback fraud.

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