What Is a Fraudulent Chargeback & How Does It Affect You?

Chargebacks are a mechanism allowing consumers to dispute transactions with their bank or credit card company, leading to a reversal of funds. While designed as a consumer protection tool, a specific concern has emerged with the rise of digital transactions: fraudulent chargebacks.

Defining Fraudulent Chargebacks

A fraudulent chargeback occurs when a cardholder disputes a charge without a legitimate reason. This differs from a valid chargeback, where a consumer has justifiable grounds, such as non-receipt of goods, an unauthorized transaction, or an uncredited refund. The distinction lies in the cardholder’s intent; in fraudulent cases, they falsely claim an issue to receive a refund while retaining the product or service.

This type of chargeback, often called “friendly fraud” or “first-party fraud,” is distinct from “true fraud” where a criminal uses stolen card information. In friendly fraud, the cardholder initiates the dispute themselves, despite having authorized and often received the purchase.

How Fraudulent Chargebacks Occur

One common scenario involves buyer’s remorse, where an individual decides they no longer want a product but initiates a chargeback instead of following a merchant’s return policy. Another instance is when a cardholder simply forgets making a purchase or does not recognize the merchant’s name on their statement, leading them to mistakenly dispute a legitimate charge.

Purchases made by family members or authorized users without the cardholder’s explicit knowledge can also lead to disputes. For example, a child using a parent’s stored card information for an online game might result in the cardholder disputing the charge, believing it to be unauthorized. In these situations, the cardholder might genuinely believe the charge is fraudulent, even though the transaction was authorized by someone with implied access to the payment method. These actions, whether intentional or unintentional, bypass direct communication with the merchant and can complicate resolution efforts.

Consequences for Businesses

Fraudulent chargebacks impose significant negative impacts on businesses. They face direct financial losses from the disputed transaction amount and incur additional chargeback fees from payment processors, typically ranging from $15 to $100 per incident. These fees are often non-refundable, even if the merchant successfully disputes the chargeback. If a physical product was shipped, the business also loses the item and its associated shipping costs.

Beyond financial penalties, businesses endure substantial administrative burdens. Resolving chargebacks requires time and resources for gathering evidence, submitting documentation, and communicating with payment processors and banks. A high volume of chargebacks can damage a merchant’s reputation with banks and payment networks, potentially leading to increased scrutiny, higher processing fees, or even the termination of merchant accounts. This hinders a business’s ability to accept credit card payments, impacting operations.

Consumer Actions

Consumers can help mitigate fraudulent chargebacks and protect their financial information. Regularly reviewing bank and credit card statements helps identify unfamiliar transactions promptly. If an unrecognized charge appears, contact the merchant directly to clarify or resolve issues before initiating a chargeback with the bank. This often resolves misunderstandings, such as an unclear merchant name on a statement.

Understanding merchant return and refund policies is important. Consumers should attempt to resolve issues through these established channels. Keeping detailed records of purchases, including receipts, order confirmations, and communication with merchants, can provide valuable evidence if a legitimate dispute arises. Protecting payment information by using secure websites and strong passwords further helps prevent true fraud, which might otherwise necessitate a chargeback.