Chargeback Fraud Statistics: Everything You Need to Know About Chargeback Fraud

A chargeback happens when the cardholder contact their card issuer to dispute a transaction. A chargeback is different to a refund, which is where the customer will  contact the business directly in order to process a refund.

Chargebacks can negatively impact your business financially as you’ll lose the merchandise or services provided. You’ll also usually have to pay a chargeback fee.

If the number of chargebacks your business receives meets a certain point, you could face more penalties either in the form of higher fees or you may lose your payment provider. If the latter happens, you may be considered a high-risk business and will need to find a payment provider willing to take on high-risk businesses.

Keep reading as we break down the most important stats you need to know about chargeback fraud so you can better protect your business.

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.

Top chargeback statistics

1. On average, chargeback impacts 6 in 1,000 transactions.
2. The price of chargebacks accounts for 0.47% of complete service provider income.
3. A consumer who has filed a chargeback claim is 9 times more likely to claim again.
4. Chargebacks increase by over 20% each year.

Top chargeback fraud statistics

• Chargeback fraud costs sellers over $20 billion in 2021.
• The cost of chargebacks is said to rise to $117.47 billion by 2023.
• 86% of chargebacks are probable cases of ‘friendly fraud.
• Friendly fraud has been increasing by 41 percent every two years.
• 75% of eCommerce businesses saw an increase in fraud attempts in 2021.

Chargeback fraud by industry

Whether it’s the type of stock or services they sell, the reputation of the industry, or simply the nature of the market, some industries are more at risk of experiencing chargebacks than others.

The software industry – at 0.66% – has the highest chargeback ratio. This can potentially be attributed to the fact that software is typically sold on a subscription basis (SaaS, or Software-as-a-Service).

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 rates are financial services (0.65%), media and ecommerce content (0.56%), retail (0.50%), and travel (0.50%).

When an industry or business type experiences a higher chargeback ratio at large, 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:

• Travel
• Online pharmaceuticals
• Adult entertainment
• Dating services
• Gaming
• Health and wellness
• Online gambling
• Jewellery
• Legal services

If you’re a merchant operating in one of the above industries, chances are high 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 50% of e-commerce merchants have reported seeing more chargebacks now than before March 2020. While technological advancements have opened up even more avenues for fraudulent activity, it seems that pandemic has also increased this activity.

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 which might not have as many protective measures in place.

Customers and chargebacks

The chargeback process exists to protect customers and merchants from fraudulent activity and mistakes.

The most common reason for a chargeback is because a customer has disputed a payment on their 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.

For example, a consumer could have been charged for items they never received, the cardholder’s information or card may have been stolen, there may have been an issue with the card reader that could have caused an accidental transaction, or the merchant could have accidentally charged the cardholder twice.

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.

Did you know that a consumer who wins a chargeback dispute is 9x more likely to 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.

Just 1 in 20 customers will directly complain to the merchant if there’s an issue with their order, which doesn’t mean that 19 out of 20 will initiate a chargeback, but it does leave you more vulnerable. 81% of customers have said that ‘convenience’ has driven them to filing  a chargeback claim.

Another statistic which can help to inform the behaviour of chargeback fraudsters is the fact that around 30% of chargebacks initiated are a result of transactions made with a stolen card.

The cost to merchants

Once a chargeback process has begun, merchants have little to no control, which is different to a refund process where it’s often left to the merchant’s discretion.

Merchants will be sent a request for information which usually contains enough information for the merchant to identify the transaction being disputed. Merchants will then have a specific period of time to dispute the request

The better a merchant can explain their terms & conditions, show a transaction history, and customer contact history, 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 can be anywhere between $20 and $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.

Chargeback protection measures

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.

Late delivery

Should a product you’re shipping arrive to the customer later than specified, it’s not good. But it doesn’t represent legitimate grounds for a chargeback, either.

In fact, 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.

It goes without saying, then, that this is your chance, as a business, to shine. 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!

The 15-day waiting period

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

This is the amount of time the issuer (which, as you’ll remember, is the cardholder’s bank) must wait after receiving the dispute, but 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.

Purchase price only

As we discussed earlier, chargeback fees are sometimes levied as a percentage of the transaction’s value.

However, 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

1. Not understanding reason codes

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

Through that lens, it makes excellent business sense to be engaging with your customers across as many communication channels as possible. That means maintaining a diligent presence on social media platforms including Facebook, Instagram, Twitter, LinkedIn, as well as installing chatbots on your website.

The more communication tools you have in your business’s arsenal, the quicker you can respond to complaints. The faster you can respond to complaints, the less likely you’re going to end up on the wrong end of a chargeback claim!

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.