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A Merchant’s Guide to Taking Control of Chargebacks

Why They Happen. How to Stop Them.

Posted Oct 1, 2018
Chargeback fraud hurts business. Having a clear return policy on your receipt helps reduce chargebacks.

It’s critical that all merchants who accept credit cards – or are thinking about adding this convenience for their customers – fully understand what chargebacks are, the dangers they present, how to protect your business from them, and what your rights are as a merchant.


The original intent of the chargeback was to provide a means for consumers to recoup money when faced with an unscrupulous merchant.  It was meant as a consumer protection and intended to help build confidence in the security of credit card transactions at a time when Americans were just getting used to the idea of bank cards.

Given how many people use cards today for even the smallest transaction, the piece of mind that having the safety net of chargebacks provided obviously worked to help build that confidence.

Chargebacks give consumers the ability to work directly with their bank to reverse a charge against their credit card. As designed, the chargeback rules mean that a consumer has the right to contact their bank if they did not receive satisfaction by the merchant, to question a transaction and ask for a removal of the charges.

This means that if a consumer finds an unauthorized charge on their account, the consumer can dispute it. It also provides a way for consumers to receive a refund if the item they received was damaged, shoddy, or not as described, and the merchant won’t issue a refund. Consumers can also use this protection if the merchant will not issue a credit when an item they ordered never arrives.

On the merchant’s side, chargebacks can be costly. If the card-issuer investigates and finds the chargeback claim has merit, they not only remove the funds from the merchant’s account, they also assess the merchant a fee. In some cases, even if the merchant disputes the chargeback and wins, they may still be out the associated fees.

The chargeback process assumes that the consumer has made attempts to rectify the situation with the merchant first, asking for replacements or refunds, and been refused. That was the balance intended with the implementation of the chargeback process.


Unfortunately, time and technology have skewed the chargeback system toward the consumer. Customers who don’t recognize a charge on their statement may claim fraud, even if they made the purchase. Consumers who don’t feel like managing the return process with the vendor may claim a chargeback, even though the merchant may be willing to work with them and using the chargeback process takes longer to recover funds.

The Connection Between Chargebacks and Fraud

Credit and debit card fraud is no small concern. According to records for 2015, global credit and debit card fraud resulted in nearly $22 billion in losses. These losses encompass the results of multiple kinds of fraud, from compromised card numbers to chargebacks.

Three things have combined to create a “perfect storm” of fraud associated with chargebacks today. First is the explosion in popularity of e-commerce. Second is card regulations lagging behind technology and retail industry trends. And the last is the ready availability of chargebacks.

The majority of fraud is executed through compromised accounts and ends up a loss for card issuers. These fraudulent transactions are completed by thieves who either steal a card number from an individual, through phishing, skimming, or account takeover, use identity theft to apply for a new card, or set up a BIN attack against a card-issuer. These are deliberate schemes to defraud individuals and credit card companies.

Hackers and credit card number theft cause many chargebacks.

Hackers work stolen credit card numbers to defraud you.

Chargeback fraud isn’t always committed with the initial intent to steal, which is why some forms are referred to as “friendly fraud.” This “friendly fraud” is committed by individuals usually because of a lack of process or consideration. But it is no less stealing than the more directed activities described above.

Friendly fraud can take many forms, but typically looks something like one of these scenarios:

  • John orders an item online. He receives the item but isn’t entirely happy with it. He files a chargeback, claiming the item was not as described and receives a refund from the bank. He keeps the item and continues using it even though he reported it not living up to his expectations.
  • Sally makes a purchase at a local craft fair. When the charge comes in, she doesn’t recognize the name of the merchant. She claims that it’s a fraudulent charge and gets her money back, but continues to use the item, unaware that she never actually paid for it.
  • Jeff orders an item and has it shipped to his home. Jeff notices there is no tracking on the order, so even though he received the item he reports to his credit card company that the item never arrived.

Each of these situations is theft – taking an item but not paying for it – whether it was intentional or not. In all of these cases, the merchant loses the revenue and pays a fee for the chargeback.

This is a seriously concerning trend and one that is growing year over year. In a 2017 report, as many as 86% of chargebacks were suspected of being “friendly fraud,” with the number having grown by 41% from 2015 to 2017.

While the industry catches up to modern use – and misuse – of bank cards, merchants must educate themselves on how to protect themselves from this kind of fraud or face potentially dire consequences.

The Impact of Chargebacks to Your Bottom-line

As mentioned before, if the card issuer finds in favor of the customer, they remove the funds for the transaction. They also charge the merchant fees associated with the process, anywhere from $20 to $100 per transaction. The consumer can later cancel the chargeback – for instance, they recognize the shop’s name, or an item reported as not being delivered does show up – but even then, the merchant pays the fees.

That’s actually the least of what a chargeback could mean to your business, however.

If you are a merchant who receives a lot of chargebacks, you run the risk even heavier fines. Your processing agreement with your acquiring bank defines a threshold for monthly chargeback rates. If you exceed that threshold you could be charged significant penalties.

If your chargeback rate remains high, the news gets even worse. You may be moved to a high risk merchant account – accounts that have high processing fees and a requirement for a non-interest bearing reserve account — to protect the bank.

And if you have a consistently high volume of chargebacks, your merchant account can be terminated. You’ll be unable to process credit card transactions, meaning lost business.

Merchant accounts that are terminated get placed on the MATCH (Member Alert to Control High-Risk Merchants) list. In effect, your business is blacklisted and you won’t be able to get a new account for five years or more.


Consumers don’t have all of the power in these situations. You have rights, too,  when it comes to fighting chargebacks.  There are a number of steps you can take to protect your business, regardless of whether you sell online or in a brick and mortar store.

Preventing Chargebacks in eCommerce

Because of the increase in bank card fraud, including chargebacks, it’s imperative that e-commerce merchants know what to look out for and take the necessary steps to protect themselves from this rising segment of online fraud.

Look Out for Unusually Large Orders

Always look out for unusually large orders. Whether by number of items or dollar amount, unusually large orders can be a signal of fraudulent activity.  Consider creating a threshold amount that signals you to hold the order until you verify cardholder name and address with the card-issuing bank.  You might also contact your card processing company for help. 

Watch for Several Orders Placed with Different Card Numbers but from the Same IP Address

Another signal of fraud is several failed transactions.  This can happen because fraudsters may be attempting many different card numbers until they find one that succeeds.

You should be able to view the IP address of customers coming on your website as well as the card information being entered.  Once you’ve identified such an IP address, you can now ban it as well as the card information from coming onto your website.

Doing credit card balance with calculator and highlighting pen

Be Wary of a Transaction that Attempts to Charge More Than the Transaction Amount

Any transaction that attempts to overcharge the card for more than the transaction amount and then pay out a third party, such as a shipping carrier, by a different payment type (cash, Western Union, money order, check, etc.) is likely to be fraud.

Verify that the CVV and the Ship-to and Bill-to Addresses Match

Make sure your online payment gateway does an AVS (Address Verification System) match to ensure an order’s bill-to address matches what the credit card issuer has as a bill-to address.  If they don’t, it’s a red flag that fraud is underway. 

Second, you should flag any order that has a correct AVS match but the shipping address is different than the matched billing address. Any cardholder can initiate a chargeback because the goods were shipped elsewhere, and the card issuer will side with the cardholder 100% of the time.

And don’t forget to check that the CVV (the 3-digit code on the back of a card) matches.  If it doesn’t, and a chargeback is submitted, you will lose.

Look Out for Transactions Attempted from IP Addresses in High-Risk Countries

Keep a close eye on transactions attempted from high-risk countries, such as Russia, Ghana, and Malaysia.  Also look for IP addresses whose location does not match either the billing or shipping address.

Ensure Billing Descriptors Are Accurate

A billing descriptor is often only the merchant’s name and appears alongside the amount of the corresponding transaction. Merchants often use unrecognizable names, which can lead to cardholders disputing the charge in the belief that the transaction was fraudulent.  Online businesses should take the time to ensure their billing descriptors are clear and accurate.  Using the domain name and customer service phone number is always recommended and helps cardholders contact you, reducing chargebacks and retrieval requests.

Deploy a Layered Suite of Fraud Tools Within Your Payment Gateway

Talk with a chargeback expert and identify a custom set of fraud prevention tools that make sense for your business.  The right fraud prevention tools can detect anomalies early in the sales process, often placing a suspicious transaction on hold before the merchandise is shipped to a fraudster. Further, these tools can help reduce and eliminate “stolen card testing” — a tactic where fraudsters use stolen card numbers to make purchases to test if they are still active —  which would rack up your authorization and transaction fees.

Preventing Chargebacks in Brick & Mortar Stores and Restaurants

Online merchants aren’t the only ones at risk from friendly fraud. Brick & mortar stores and restaurants should also take precautions to protect themselves.

Provide Excellent Customer Service

Although some customers may go straight to requesting a chargeback, many do follow the proper process and try to work with the merchant first. Making excellent customer service a standard in your store will prevent some consumers from feeling as if the only way to get satisfaction is to report a chargeback.

This doesn’t mean you have to roll over for every customer and for every issue. But it does mean that you should respond promptly and professionally to all customer issues. If a customer brings back an item that adheres to your return policy, issue the return promptly. Always be willing to listen to the customer’s concerns, even if a return isn’t warranted.

Make Sure Your Name is Clear on Credit Card Statements

If a customer doesn’t recognize a charge, they may think its fraud and request a reversal even when it’s valid. To stop this kind of chargeback before it starts, be sure the payment descriptor that appears on customers’ credit card statements clearly states your business name and provides a phone number where they can contact you if there are any questions.

Verify Signatures with an ID

One simple step can help reduce chargebacks in your store – verify an ID along with a card purchase and make sure the signatures match. Yes, the card brands have stopped requiring signatures in most cases.  But if you collect a signature at time of purchase, it’s an extra level of proof that you can present if the customer pushes for a chargeback.  Stores that sell high-risk fraud items should be particularly vigilant.

Fight chargebacks with solid anti-fraud credit card processing steps.

Be sure your card processor has anti-fraud measures in place.

Make Sure Your Payment Processor has Fraud Detection Features

A good payment processor is worth their weight in saved chargeback fees. Your payment processor should have fraud detection and merchant protection features that will help you combat fraud before it happens and provide you with the information you need if you have to fight a chargeback.

Be Clear with Your Return Policies

Simply being clear about your return policy can prevent customers from filing a chargeback. If a consumer knows up front that they only have 30 days to make a return, most people will make an effort to meet your requirements. If you don’t already have a policy, create one and make sure that it’s clearly posted where customers will see it and include it on the back of customer receipts.

Your Rights with Chargebacks

Even if you’ve done everything to protect yourself, you may still find yourself holding a chargeback notification. It’s important to know what your rights are in these situations and to follow the rules to dispute and re-present valid charges. Also, different chargeback reasons have different time limits associated with them.

Understand the Reason Codes for Chargebacks

Every chargeback must have a reason code attached to it. These reasons vary from a charge not being authorized to not having received the goods, and many others in between those. By understanding the code attached to the chargeback, you’ll know exactly what information you need to dispute it if appropriate.

Late Deliveries Aren’t a Good Enough Reason

There is a big difference between a shipment not showing at all and a shipment being late. A customer might be unhappy if their item arrives late, especially if it’s for a special event.  But that isn’t a good enough reason for a chargeback. Clear return policies can help in these situations, as can excellent customer service. It’s better to consider refunding shipping fees on something that arrived late than dealing with the hassle of chargeback fees and the time lost by having to deal with a dispute.

You Have the Right to Dispute

If you feel you have a good case, it might be worth it to fight the chargeback, but be judicious. If you don’t have many chargebacks, and it’s a low-cost item and your proof is not strong, it might not be worth your time or the risk to dispute.  Studies show that only 18% of merchants win 60% or more of their disputes.

Have the Proof You Need to Re-Present

There are times when fighting a chargeback is well worth the time. This is where all of your record keeping, tracking, and card processing features come in. If you choose to re-present the charge, gather all of the information you have as proof.  This includes the tracking and delivery confirmation of the shipment and signatures of receipt. It also means all transaction proof, like POS data, invoices, and receipts. This will give you the best chance possible of having the transaction honored.

The prospect of chargebacks can be frightening for merchants. If it comes down to it, make sure you have proof of the purchase, of delivery, and of receipt. Remember, though, that the best offense is a good defense.  Put the right processes and procedures in place as well as policies that are clear. By stopping chargebacks before they start, you’ll reduce the number you’re faced with fighting and the fees associated with them.


Simpay has a powerful history of helping clients stop thousands in chargeback theft.  
If chargebacks are plaguing your business,
call us at 866-363-8603 for a free “Chargeback Analysis.”