Chargeback Fraud: What It Is & How to Prevent It

Chargebacks occur when a cardholder disputes a transaction. Chargeback fraud is a major problem for online businesses. If you sell any type of goods via an e-commerce portal, then you are at risk. Unfortunately, instances of fraud and chargeback are becoming increasingly common.

• Worldwide chargeback losses are projected to rise from $33.79 billion in 2025 to $41.69 billion in 2028.
• Global chargeback volume is expected to hit 324 million transactions by 2028.
• Chargebacks can cost a business anywhere from 2.5 to 3.5 times the amount of the initial loss.
• Card-not-present (CNP) transactions now make up 63% of merchants’ transactions, creating more opportunities for disputes.

Chargebacks can severely impact the finances and reputation of a company. Fraudsters often do not return the goods or services. Businesses also have to pay additional fees to dispute the chargeback, and their credibility may be damaged by repeated instances of chargeback fraud.

Knowing what chargeback fraud is will help you to defend your business from scammers. Keep reading to learn how chargeback fraud works, how it impacts businesses, and how to prevent it.

What are chargebacks?

A chargeback is when a customer disputes a charge on their account statement and has the money refunded. Chargebacks can be applied to debit cards or credit cards.

A merchant may instigate the chargeback process. For example, if a customer’s card has been mistakenly charged or has been charged the incorrect amount. In most cases, the customer takes the matter up directly with their financial institution.

Chargebacks are often requested if a person’s credit or debit card details have been used without permission. Legitimate victims are often unaware until they check their statements and notice one or several unauthorized transactions, after which they will file a chargeback request with their financial institution.

The financial institution will then investigate the issue and if they believe the charge is incorrect, they will reverse it. The merchant is given an opportunity to dispute the chargeback, although this can be difficult, especially for online retailers who have no direct contact with their customers. Typically, financial institutions will find in favor of their customer and not the merchant.

Legitimate chargebacks are a form of dispute resolution. Chargebacks are also sometimes initiated to prevent fraud.

What’s the difference between a chargeback and a refund?

Although chargebacks result in money being returned to a customer after a transaction, they are not classified as refunds.

A refund is when the customer returns a product because it was not what they expected, they were unsatisfied, or it was faulty. In a refund scenario, the merchant will get back the goods in question. Refunds are handled by the merchant and customer. No third party is involved in the process, and it is usually up to the discretion of the merchant as to whether or not to issue a refund.

What is chargeback fraud?

Chargeback fraud is when a customer intentionally disputes a legitimate transaction. In a chargeback transaction fraud scenario, the customer deliberately chooses not to contact the merchant directly for a refund. Instead, the customer will contact their financial institution and request the charge be reversed.

The most common reason given for chargebacks is that the charge was unauthorized. In many cases, scammers get back the cost of the purchase and keep the goods for themselves or to resell.

There are different types of chargeback fraud. The most common forms are:

Friendly fraud

The term “friendly fraud” is used to describe chargebacks that look like they were initiated in good faith. A friendly fraud chargeback can often be the result of a simple mistake on the part of the cardholder. A person may forget that they purchased an item or don’t recognize the business name on their account statement. Since many online retailers operate as subsidiaries, this is a common occurrence and often an honest mistake on the part of the customer.

However, this type of fraud chargeback can also be intentional. Some fraudsters will pretend the card was stolen, others will say the card was used without their knowledge by a friend or family member. Fraudsters will also claim that the purchased goods did not arrive, or that the product arrived but was damaged or defective.

Return fraud

A return fraud scenario is where a customer returns purchased goods to a retailer, claiming they were in an unsatisfactory condition, defective, or damaged. In reality, the product has been used, altered, or tampered with by the fraudsters themselves. A chargeback request is usually initiated before the return to bypass the merchant’s refund processes.

Digital goods chargebacks

Digital goods chargebacks occur when a customer disputes the purchase of a digital product or service, such as an online learning course, a software subscription, or the purchase of a video game. Fraud relating to digital goods chargebacks is difficult to detect, as it can be hard to know if the customer has downloaded the product or service.

Subscription fraud

Subscription fraud refers to when a customer subscribes to an online service, uses it for some time, and then disputes the transaction. A fraudster may state that the recurring automatic charges were not authorized or that they canceled the service but were still charged. As with digital goods fraud, it can be difficult to ascertain whether or not these types of chargebacks are legitimate or fraudulent.

What businesses are most impacted by chargeback fraud?

Technically, every business that has an e-commerce site or accepts credit or debit cards can be impacted by payment fraud. Some sectors, however, are much more likely to be targeted by fraudsters or scammers. The following businesses are highly susceptible to chargeback fraud:

Online retailers

Retail e-commerce businesses are highly vulnerable when it comes to chargeback fraud. Retailers that operate solely via an e-commerce model never interact with their customers in person, which makes it difficult to verify exactly who is making a purchase or if the customer received the goods they paid for.

Service providers

Online service providers are a favorite target of fraudsters, but are also likely to experience high volumes of legitimate chargebacks as well. Separating the scammers from honest customers is a difficult and sometimes impossible process.

Businesses selling high-value products

Any type of industry that sells high-value goods or services is a prime target for chargeback fraudsters. Luxury goods retailers and the travel industry both experience high levels of fraudulent activity. Fraudsters will purchase luxury items, state that they never received the goods, initiate a chargeback dispute, and then resell the products for profit. Scammers often book flights or hotel rooms and then dispute the charges by stating the services were overbooked, canceled by the operator, or unsatisfactory.

How do chargebacks hurt businesses?

Chargebacks can be a major source of lost revenue for businesses, particularly when fraudsters receive the item or items they have purchased with stolen card details.

The extent to which a chargeback can finally impact a business depends on the sector it operates in. In general, understanding chargeback prevention and merchant fees is important for all business owners.

• Mastercard estimates that 45% of global merchant chargeback volume is fraudulent. 
• Global chargeback volume is projected to increase by 24% between 2025 and 2028. 
• U.S. merchants lose an estimated $4.61 for every $1 in chargebacks, reinforcing the need for chargeback prevention.

Chargeback fraud doesn’t just result in loss of revenue. There are several ways that a business can be negatively impacted by chargeback fraud:

Revenue loss

Of course, the most obvious impact of chargeback fraud is a loss of revenue. Firstly, a merchant loses the purchase price of the goods or services in question. However, there are also other related expenses. Refunding the amount of the transaction will usually incur additional fees from the bank. If the goods are not returned, the merchant also loses the wholesale value of the goods.

Reputational damage

If a business suffers repeated amounts of chargebacks, then customers or partners may start to view them as being untrustworthy. In the case of retailers or service providers who operate completely online, being seen as having a site that is untrustworthy and not secure is a major problem. 

Increased operational costs

Disputing a chargeback can be a lengthy process that takes staff and resources away from their core duties. Contesting a fraudulent chargeback can result in fees for consultants or legal advice. If a business sustains repeated chargebacks, then its financial institution or payment processing company may categorize the company as being high-risk and increase payment processing fees.

Increased fraud prevention costs

Chargeback fraud raises the costs associated with fraud prevention. Staff must be trained to identify fraudulent chargebacks and deal with disputes. Return and refund policies may need to be revised and reimplemented. If there is a surge in fraudulent activity, a business may have to comply with additional legal and regulatory standards. Sophisticated fraud detection software will be needed to combat chargeback fraud.

How prevalent is chargeback fraud?

Instances of chargeback fraud are on the rise, largely due to to a rise in digital purchases without a physical card present. Additionally, with inflation is driving up the cost of living, some turn to criminal activities that are seen as low-risk, such as chargeback fraud.

Mastercard reports that merchants identify nearly half of their chargebacks as fraudulent.

How to prevent chargeback fraud

It may seem that combating chargeback fraud is an almost impossible task. However, there are several actions businesses can undertake to prevent chargeback fraud:

Establish clear, sensible return & refund policies

Chargeback fraud can occur because businesses make it difficult for customers to return or exchange goods or services. Streamlining your return policies and processes can drastically reduce chargeback rates.

Upgrade customer service processes

Focusing on improving your service is also an effective way of stopping customers from initiating a chargeback. Customers should be able to easily contact staff to ask questions. Employees should always be open and accommodating to resolve customer disputes before they result in chargebacks.

Leverage fraud prevention tools

Dealing with fraudulent activities is a part of doing business. Implementing a strong and sophisticated fraud prevention tool such as DataDome can help you to identify suspicious transactions.

Scentbird, a leading perfume subscription service, implemented DataDome to combat automated payment fraud: 

“For fraudulent orders, we have to pay merchant fees, cover the cost of lost goods, and sometimes pay chargebacks,” said Andrei Rebrov, CTO & Co-Founder of Scentbird. “In the early days, we saw a couple of scraping, fake account creation, or fraud attacks almost every day. Now, [with DataDome] we barely see one every two, three, or four days.” 

With DataDome, the Scentbird team is able to shift their attention from blocking attacks to more business-related activities.

How DataDome can help combat chargeback fraud

DataDome’s specialized cyberfraud protection platform delivers real-time bot and agent trust management to protect your business against chargeback fraud. DataDome automatically analyzes and processes every request in under 2 milliseconds, detecting malicious bots, stolen credentials, and fraudulent transaction patterns targeting your payment flows before they become chargebacks.

DataDome’s multi-layered AI engine leverages thousands of models and analyzes intent, not just identity, to stop sophisticated fraud attempts across all endpoints—websites, mobile apps, and APIs—without adding friction for legitimate customers.

Test your site with a free Vulnerability Scan to see if defenses are vulnerable to bad bots and malicious AI agents, or book a demo with our team to learn more.