Chargebacks: What They Are & How to Prevent Chargeback Fraud

For businesses that accept card payments, chargebacks can be a big problem. If you’re unsure what a chargeback is or how it affects your business, you’re not alone.

Chargebacks can lead to lost income, extra fees, and even limits on your account. That’s why it’s important to understand what a chargeback means and how to handle it.

In this guide, you’ll learn:

• What a chargeback is
• How chargeback fraud happens
• How to prevent chargebacks effectively

We’ll also explain why keeping your chargeback ratio low is vital for your company’s reputation and financial stability.

What Is a Chargeback?

In simple terms, a chargeback happens when the customer’s bank reverses a card payment. It occurs when customers dispute a transaction due to reasons such as:

• Unrecognised charges
• Fraud
• Billing mistakes
• Dissatisfaction with a product or service

Chargebacks exist to protect customers from unauthorised transactions. However, some people misuse them on purpose, leading to fraud and losses for merchants.

The True Cost of Fraudulent Chargebacks

Unfortunately, a fraudulent chargeback costs more than just the price of the goods or services. Merchants also face:

• Extra bank or processor fees
• Administrative costs
• Possible fines or penalties

Furthermore, your reputation with banks and card companies is harmed by repeated fraudulent chargebacks. As a result, this bad reputation may result in higher processing costs, account limitations, and decreased client confidence.

Why Does a High Chargeback Ratio Matter for Merchants?

There are serious drawbacks to high chargeback rates. In particular, payment processors view high chargeback rates unfavourably. Merchants with high chargeback ratios exceeding allowable thresholds (typically 1%) face various consequences, including:

• Additional fees and fines
• Higher transaction processing costs
• Potential account termination

Thus, maintaining a low chargeback ratio is crucial for business sustainability and growth.

If your business operates in a high-risk industry or faces challenges with chargeback management, partnering with an Independent Sales Organisation (ISO) can be advantageous. ISOs often have relationships with multiple acquiring banks and can assist in securing more favourable merchant account terms. Learn more about how partnering with an ISO can benefit your business.

Different Types of Chargebacks

Chargebacks generally fall into three main types:

• Chargeback fraud (criminal or hostile fraud) – when someone uses a stolen or compromised card.
• Friendly fraud – when a genuine customer disputes a charge they authorised but later forgot or didn’t recognise.
• Merchant error – when mistakes happen, such as double-billing or charging the wrong amount.

Criminals typically target companies with weaknesses, particularly those lacking robust fraud-prevention procedures. Small businesses and the internet are especially vulnerable to this kind of fraud.

Why Does a High Chargeback Ratio Matter for Merchants?

A high chargeback rate can seriously hurt your business. Payment processors see frequent chargebacks as a warning sign.

If your chargeback ratio goes over 1%, you could face:

• Extra fees and fines
• Higher transaction costs
• Possible account termination

Keeping your chargeback ratio low is key to keeping your business stable and growing. Recognising fraudulent chargebacks early can significantly reduce your losses. Fraudsters typically follow patterns, making their activities easier to spot.

Common Signs of Fraudulent Chargebacks

Multiple orders from the same address:

Be cautious if several orders using different credit cards ship to a single address. Fraudsters frequently ship stolen goods to the same drop location.

Rapid succession of orders:

Receiving multiple orders within a short period, especially from the same IP address but with different payment methods, is suspicious. Fraudsters often test stolen card information by making multiple quick purchases.

Discrepancies between billing and shipping addresses:

Transactions where billing and shipping addresses differ significantly, especially international shipments, may indicate fraud. Always double-check these transactions carefully.

Unusually large orders from new customers:

Sudden large-value orders, particularly from unknown or first-time buyers, may signify chargeback fraud. Fraudsters aim to maximise gain quickly, often making large purchases before cards are reported stolen

Multiple payment attempts with different cards:

Fraudsters may attempt transactions using multiple credit cards, especially after several declines. Pay close attention to repeated payment failures, as this could be a sign of testing stolen card details.

High-frequency orders from one IP address:

Multiple orders placed rapidly from a single IP address, especially using different payment methods or customer names, are suspicious. Consider restricting orders or reviewing these transactions manually.

Orders placed at unusual hours:

Transactions occurring late at night or early in the morning can also be a red flag, particularly if combined with other indicators.

Therefore, by recognizing these typical trends, your company can proactively handle and stop fraudulent chargebacks, saving money and safeguarding your brand.

Chargeback Prevention Strategies for Merchants

Preventing chargebacks means staying alert and acting early. Businesses that take proactive steps can avoid most costly disputes. Here are simple ways to protect your business:

Clearly display your merchant descriptor:

• Make sure your business name appears clearly on customer bank statements.
• Customers often start chargebacks when they don’t recognise a transaction.
• A clear name helps prevent confusion and reduces friendly fraud.

Use robust fraud detection tools:

• Install fraud detection software that flags suspicious activity quickly.
• Tools like CVV checks, Address Verification Service (AVS), and IP tracking can cut your fraud risk.

Verify customer identity thoroughly:

• Always confirm key order details, especially for expensive or risky transactions.
• Check if the billing and shipping addresses match.
• If something feels off, ask for extra proof of identity or contact the customer.

Have clear refund and return policies:

• Display your refund and return rules clearly on your website and checkout page.
• When customers know how to request a refund, they’re less likely to file a chargeback.

Be transparent about shipping and delivery:

• Share accurate tracking numbers and delivery updates with your customers.
• This builds trust and helps avoid misunderstandings that lead to disputes.

Keep your merchant descriptors consistent:

• Use the same, easy-to-recognise name on all statements.
• Unclear or confusing names can trigger chargebacks when customers don’t recognise the charge.

Respond to complaints quickly:

• Encourage customers to contact your support team first.
• Fast and friendly service can solve problems before they turn into disputes.
• Offer easy contact options such as chat, email, or phone.

Watch for unusual transaction patterns:

• Check your transaction data often.
• Look for trends like sudden increases in large orders or foreign purchases.
• Early detection helps stop fraud before it grows.

By following these prevention steps, you can reduce both genuine and fake chargebacks. This protects your revenue and keeps your customers happy.

Long-Term Strategies to Reduce Chargebacks

Reducing chargebacks isn’t a one-time task – it needs consistent effort. To stay protected, update your processes as fraud trends evolve. Here are key long-term strategies:

Review your fraud systems often:

• Fraud tactics change constantly.
• Regularly update your fraud prevention tools so they match the latest risks.
• AI-based or machine-learning systems can automatically detect new fraud patterns.

Stay PCI compliant:

Work with trusted ISOs or banks:

• Partnering with a reliable Independent Sales Organisation (ISO) or acquiring bank gives you expert guidance.
• They can provide fraud prevention tools, advice, and early warnings about new threats.

Make refund and cancellation policies easy to find:

• Clear, visible policies reduce customer confusion and frustration.
• When customers know how to solve problems, they’re less likely to request a chargeback.

Train your employees regularly:

• Keep your staff updated on fraud warning signs and dispute-handling steps.
• Well-trained employees can stop issues before they become serious.

Track your chargeback data:

• Review your chargeback reports often to spot repeating issues.
• Understanding why disputes happen helps you fix root problems faster.

Ask for customer feedback:

• Listen to what customers say about your service.
• Their feedback helps you improve and reduces the chances of friendly fraud or mistakes.

Using these long-term strategies strengthens your defences against fraud. You’ll protect your income, build a stronger reputation, and maintain customer trust.

Quick Reference Table: Common Chargeback Causes and Solutions

Understanding why chargebacks happen helps you react faster and prevent them in the future. Here’s a simple table showing common chargeback types, their causes, and how to stop them:

How Merchant Category Codes (MCCs) Affect Chargebacks

Every business has a Merchant Category Code (MCC) set by its payment processor. This four-digit code shows what type of goods or services you sell.

You can’t change your MCC, but it still plays a key role. Banks and payment providers use it to:

• Assess your risk level
• Set your processing fees
• Handle disputes

Some MCCs are seen as high-risk, especially for businesses with frequent refunds or subscription payments. If your business falls into one of these categories, chargebacks may be harder to dispute successfully. To protect yourself:

• Use fraud prevention tools
• Keep your refund policy clear
• Offer quick and helpful customer support

These simple actions can lower your chargeback rate and improve your chance of winning disputes.

If chargebacks still cause problems, consider using solutions like Visa’s Verifi or Mastercard’s Ethoca. These tools let you respond to disputes in real time, often before they turn into full chargebacks.

Even if your MCC is high-risk, you can still protect your revenue by applying the right strategies. Review your fraud prevention efforts regularly to avoid penalties or restrictions from payment providers.

Partnering with Independent Sales Organisations (ISOs)

An Independent Sales Organisation (ISO) offers valuable resources, guidance, and technologies to effectively manage chargebacks and prevent fraud. By partnering with an ISO, your business gains access to industry-specific expertise and advanced fraud mitigation tools.

ISOs can:

• Spot suspicious transaction patterns early
• Provide access to better fraud tools
• Help lower your payment processing costs

A trusted ISO can also connect you with acquiring banks that understand your industry, helping you maintain steady and secure payment operations.

Partnering with the right ISO means fewer chargebacks, less fraud, and more control over your payment systems.

Conclusion: Protecting Your Revenue and Reputation

Knowing what a chargeback is – and how to manage it – helps your business avoid costly disputes. Strong fraud prevention protects both your income and your customer relationships.

Stay compliant with payment standards, keep your systems updated, and train your team regularly. These steps greatly reduce your risk of chargebacks and fraud.

By handling disputes proactively, you’ll protect your revenue, reputation, and long-term success.

Regular prevention and quick response keep your business strong in an ever-changing payment landscape.