All Types of Chargebacks Compared & How to Prevent Them

As someone who owns an e-commerce store, I’ve dealt with a few chargebacks. That inspired me to write this guide on all the different types of chargebacks businesses may face or customers may initiate.

I’ll explain each chargeback type, provide examples of when they occur, and offer tips to prevent them. Then, I’ll provide refreshers on different aspects of chargebacks in general.

Let’s learn about different types of chargebacks.

Key Takeaways

• Chargebacks fall into 3 main categories: true fraud, friendly fraud, and merchant error.
• Friendly fraud, where the customer disputes a legitimate charge, is most common.
• Merchants generally have the most success in disputing true fraud chargebacks.
• Businesses should prioritize clear communication and accurate descriptions to prevent merchant errors.
• Understanding chargeback reason codes helps businesses identify the root cause of disputes.

3 Main Types of Chargebacks

The following sections will compare these types of chargebacks:

• True Fraud: Customer disputes valid charge due to theft.
• Friendly Fraud: Customer claims purchase not made.
• Merchant Error Chargeback: Business mistake leads to a chargeback.

I’ll explain what each chargeback is, what businesses can do about them, examples of the chargeback, and how to prevent said chargeback.

Let’s get to it.

1. True Fraud Chargeback

True fraud happens when an unauthorized person uses a stolen card or account information to make a purchase. Criminal fraud makes up for 1–10% of all chargebacks. In this case, the legitimate cardholder did not make or authorize the transaction.

Other terms used for true fraud include:

• Criminal fraud
• Identity theft fraud
• Third-party fraud
• Chargeback fraud (actually a form of friendly fraud)

Evidence gathering for true fraud disputes differs for merchants and customers:

• Merchant Evidence: Order details, IP address/location of purchase, shipping information (if applicable), any communication with the supposed customer, and proof of the item’s delivery.
• Customer Evidence: Bank statement showing unauthorized charges, police report if the card was reported stolen, and contact attempts with the merchant (if relevant).

Merchants have a much higher success rate in disputing true fraud chargebacks.

Banks expect merchants to have fraud detection tools in place. If a seller can show they took reasonable steps to prevent fraud (e.g., Address Verification, CVV checks). With these tools in place, the bank views them as less responsible for the fraudulent transaction.

Moreover.

Card networks (like Visa, Mastercard) have rules determining who bears the financial loss in cases of fraud. If a merchant followed security protocols, the bank can likely recover the disputed funds from the cardholder's issuing bank.

Summary: True fraud occurs when a criminal uses stolen payment information. Merchants typically have greater success in fighting these disputes with banks.

1. Challenges of True Fraud

Here are the key challenges businesses face regarding true fraud:

• Financial Loss: Businesses lose revenue from the fraudulent purchase and may also see chargeback fees.
• Increased Security Measures: Implementing robust fraud prevention tools and processes requires investment in technology and staff training.
• Order Processing Delays: If there’s suspected fraud, additional checks may delay order fulfillment, impacting customer satisfaction.
• Chargeback Disputes: Even with strong evidence, there's still a chance the business may lose a true fraud dispute.
• Reputational Damage: Frequent fraud attempts can make a business appear less secure and discourage legitimate customers.

2. Examples of True Fraud

• Card Not Present Fraud: A criminal uses stolen card details to make purchases without the card actually being present.
• Account Takeover Fraud: Someone gains access to a customer's account login information and uses it to make unauthorized purchases.
• New Account Fraud: Fraudsters use stolen personal information to create fake accounts and make online purchases.
• Friendly Fraud Rings: Organized criminal groups specialize in tricking customers into making purchases and then filing fraudulent chargebacks.
• Refunds Without Returns: Fraudsters claim they returned an item but keep it, while receiving a refund through a chargeback dispute.

3. How to Prevent True Fraud

Card Not Present Fraud:

• CVV verification: Implement mandatory CVV code verification during checkout to ensure thieves cannot use stolen card details for online purchases.
• Address Verification Service (AVS): Utilize AVS to compare billing and shipping addresses, identifying discrepancies that might suggest fraud.
• 3D Secure: Use 3D Secure (3DS) authentication protocols to require additional verification steps (like passwords) from the cardholder's issuing bank.

Account Takeover Fraud:

• Strong password policies: Enforce strong password requirements for customer accounts and encourage regular password changes.
• Multi-Factor Authentication (MFA): Implement MFA for logins and account changes, requiring a second factor beyond a password.
• Account login monitoring: Monitor login attempts for suspicious activity, like unusual locations or repeated failed logins.

Regarding MFA/2FA.

SMS/Email is the least secure MFA method. This authentication method involves sending a one-time code via SMS text message or email to the user's phone number or email address associated with the account. 

While it adds a layer of security compared to passwords alone, SMS and email are susceptible to interception. Hackers can hijack phone numbers or spoof email addresses to receive the codes and bypass login security.

Time-based One-Time Password (TOTP) uses a software application (like Google Authenticator or Authy) on the user's phone. The app generates unique, time-sensitive codes that change every minute.

Even if a hacker steals the user's password, they would need the user's phone with the authenticator app to access it. Thus, it’s much more secure.

Security keys (e.g., YubiKey) are physical devices, often resembling USB sticks. They offer the highest level of security for MFA. The user inserts the key into their device or touches it (depending on the type) during the login process.

Since physical possession of the key is required, it's harder for hackers to bypass security, even with a stolen password.

New Account Fraud:

• Device fingerprinting: Use device fingerprinting tools to identify suspicious patterns in account creation attempts, like originating from known fraudulent IP addresses.
• Email verification: Require email verification during account creation to confirm the legitimacy.
• Manual review: Implement manual review processes for high-risk transactions or new accounts with suspicious characteristics.

Friendly Fraud Rings:

• Velocity checks: Monitor for unusual purchase patterns, like a high volume of orders in a short time frame, which might indicate organized fraud attempts.
• Order history analysis: Analyze customer order history to identify red flags like frequent returns or disputes from the same account.
• Negative reviews: Monitor customer reviews for complaints suggesting fraudulent activity and take appropriate action.

Refunds Without Returns:

• Clear return policy: Outline your return policy and require proof of return (tracking numbers) before issuing refunds.
• Return merchandise authorization (RMA): Implement an RMA system to track authorized returns and prevent fraudulent claims.
• Photographic documentation: Require customers to take photos of returned items to discourage claims of non-returned goods.

2. Friendly Fraud

Friendly fraud occurs when a customer receives a product or service but then initiates a chargeback with their bank. It makes up 60–80% of all filed chargebacks. During this type of chargeback, customers claim the charge was unauthorized, though they made the purchase themselves.

Sometimes they accidentally do this. And other times on purpose.

Other names for friendly fraud include:

• Cyber shoplifting
• First-party fraud
• Chargeback fraud

Here’s the evidence both sides would need to gather for friendly fraud:

• Evidence for Merchants: Proof of purchase, order confirmation, delivery confirmation (with signature if possible), clear return policy, communication with the customer demonstrating they knew about the transaction.

• Evidence for Customers: Statements showing the charge, any misleading communication from the merchant, evidence of reaching out to the merchant.

It's difficult for merchants to win friendly fraud chargeback disputes. Banks often side with customers unless there is overwhelming evidence of deliberate fraud.

Summary: Friendly fraud occurs when customers dispute legitimate charges, often claiming they're unauthorized, and presents challenges for businesses as banks typically favor customers in these disputes.

1. Challenges of Friendly Fraud

Here are the key challenges businesses face regarding friendly fraud:

• Difficult to Detect: Friendly fraud often appears as a legitimate transaction, making it hard to distinguish from real fraud.
• Customer Claims: The customer disputes the charge, forcing the business to disprove the claim, which can be time-consuming and expensive.
• Burden of Proof: The merchant needs strong evidence to win a friendly fraud dispute, while the customer needs to show they didn't recognize the charge.
• Customer Protection: Banks prioritize customer protection, and may approve the chargeback without a thorough investigation, especially if the customer is persistent.

One of the biggest challenges in tackling friendly fraud is the delay in reporting by customers.

Unlike third-party fraud, where thieves might use stolen cards immediately by a stranger, friendly fraudsters often wait 40% longer before disputing the charge [1]. This delay makes it harder for businesses to gather evidence to counter the claim.

As businesses may have already shipped the product or delivered a service, Making it difficult to prove the customer did indeed receive what they paid for.

This time difference gives the customer a chance to claim they never received the item or service, while the business struggles to demonstrate otherwise due to the passage of time.

2. Examples of Friendly Fraud Chargebacks

• Unauthorized User: A customer claims their child or family member made a purchase without their permission. This might involve in-app purchases on a phone or digital content bought on a shared device.
• Not Recognizing a Charge: The customer forgets about a purchase or doesn't recognize the billing descriptor from the merchant, leading them to believe it's unauthorized.
• Item Dissatisfaction: The customer is unhappy with the product but doesn't want to go through the hassle of a return, then they file a chargeback instead.
• Warranty Claims: A customer claims the product isn't working properly but might not have contacted the merchant for troubleshooting or a warranty replacement before initiating a chargeback.
• Subscription Services: A customer forgets to cancel a subscription service before they are charged again and disputes the charge.

3. How to Prevent Friendly Fraud Chargebacks

Unauthorized User:

• Parental controls: Promote parental control software for devices used by children to limit access to purchase options or require authorization.
• Purchase authentication: Implement multi-factor authentication (password + SMS or email code) for online purchases and in-app purchases.
• Age verification: For products/services with age restrictions, require age verification before purchases can be completed.

I have a scenario for this prevention.

This is a big one if a business runs a mobile app on microtransactions. Because imagine this. A customer lets their 5-year-old nephew play a mobile game—while forgetting a debit card is connected to that game.

The nephew ends up blowing $30 on microtransactions in said game because there aren’t enough barriers to prevent a 5-year-old from pressing a few buttons and blowing a lot of money. For instance, requiring a password or biometrics (e.g., fingerprint) before enabling a purchase would work fine.

Now, I (I mean the customer) have contacted the mobile game and demanded a refund, though it was partially the customer’s fault for leaving a debit card connected to the Google Play Store. If said app refused the refund, that could have led to a chargeback.

Not Recognizing a Charge:

• Consistent billing descriptors: Use a descriptor that links the charge back to your business and the type of purchase.
• Descriptive order emails: Include order summaries, itemized costs, and shipping details in confirmation emails to help with recall.
• Post-purchase follow-up: Send a follow-up email after some time (weeks or a month) reminding customers of recent purchases.

Item Dissatisfaction:

• Realistic product descriptions: Avoid exaggerated claims, and clearly describe product specifications to manage expectations.
• Customer reviews: Enable customer reviews and ratings sections to provide transparency and manage potential issues.
• Responsive support: Prioritize excellent customer support to address concerns and offer solutions before issues escalate.

Warranty Claims:

• Accessible warranty terms: Include warranty details on product pages, invoices, and packaging inserts.
• Straightforward claim process: Provide clear instructions on how to initiate a warranty claim with multiple contact options.
• Warranty support line: Designate a specific contact method or channel for customers seeking warranty support.

Subscription Services:

• Pre-renewal notifications: Send reminders several days before a subscription is set to renew with clear cancellation options.
• Easy cancellation process: Provide a 1–2 click option for cancellation or at least clear instructions in account management.
• Post-cancellation confirmation: Send a confirmation email immediately upon a canceled subscription.

3. Merchant Error

A merchant error chargeback occurs when a customer disputes a charge because of a mistake the business made. 20–40% of chargebacks happen because of merchant errors [2]. This mistake could stem from false marketing, bad communication, or the processing and fulfillment stages of the order.

Evidence gathering for merchant error disputes differs between merchants and customers:

• Merchant Evidence: Detailed transaction logs, proof of delivery (if applicable), customer receipts, website terms of service, and any communication with the customer.
• Customer Evidence: Order confirmation showing the correct item or services, credit card statements highlighting the incorrect charge, and any attempts to resolve the issue with the merchant.

Merchants rarely win chargebacks due to merchant error. If a mistake is clear, the bank generally sides with the customer. Banks prioritize protecting consumers and ensuring fair treatment, especially when businesses are at fault.

Summary: Merchant error chargebacks arise due to business mistakes in processing or fulfilling orders. Merchants rarely win these disputes, making prevention crucial.

1. Challenges of Merchant Error Chargebacks

Here's a rundown of the major challenges faced by businesses with merchant error chargebacks:

• Poor Customer Experience: They leave customers frustrated and dissatisfied, potentially damaging the business's reputation.
• Difficulty Fighting Disputes: Unlike true fraud, banks side with customers in merchant error chargebacks.
• Identifying the Root Cause: Pinpointing the error that led to the chargeback can prove difficult, complicating prevention efforts.
• Operational Inefficiencies: Dealing with chargeback disputes is time-consuming and pulls staff away from other tasks, increasing operational costs.
• Increased Scrutiny: A high rate of merchant error chargebacks can lead to the business being classified as "high-risk" by acquiring banks, resulting in higher fees and stricter monitoring.

2. Examples of Merchant Error Chargebacks

Processing Errors:

• The seller mistakenly charges the customer twice for the same item.
• The merchant charges the customer more than the agreed-upon price.
• Customer initiates a refund, but it's never processed by the merchant.

Shipping Errors:

• The customer receives a different item than what they ordered.
• Merchant ships the order to a wrong address, resulting in non-delivery.
• Items arrived damaged due to mishandling or bad packaging.

Marketing Errors:

• Product features are advertised that are not present in the actual product.
• Photos don’t accurately represent the size, color, or functionality of the item.
• Marketing language promotes benefits of the product that are unrealistic or unsubstantiated.

Bad Communication:

• Customer’s can’t find or understand the return policy, leading to disputes.
• Recurring charges are not disclosed, surprising the customer.
• Customer attempts to resolve an issue about an order but receives no response, leading to frustration.

Product Descriptions:

• Product description misrepresents material, size, or key features of the item.
• Important specifications about the product are not listed.
• Description doesn't specify compatibility limitations, and the product doesn't work with the customer's intended setup.

3. How to Prevent Merchant Error Chargebacks

Preventing Processing Errors:

• Order review: Implement a double-check system before processing charges to catch duplication or pricing errors.
• Automated systems: Use reliable payment software to minimize manual entry mistakes.
• Staff training: Educate staff on correct charge processing procedures and refund policies.

Preventing Shipping Errors:

• Address verification: Use address verification tools during checkout to reduce typos and incorrect address entries.
• Secure packaging: Invest in proper packaging materials and techniques to prevent damage during shipping.
• Order confirmation: Provide customers with a detailed order confirmation stating the item(s) ordered and shipping address.

Preventing Marketing Errors:

• Accuracy: Ensure all marketing materials (website, ads, etc.) accurately describe product features and avoid exaggeration.
• Proofreading: Proofread product images and descriptions before publishing to catch misleading details.
• Customer reviews: Allow customer reviews for social proof and identification of areas where product descriptions may be falling short.

Preventing Bad Communication:

• Clear policies: Display return, refund, and subscription policies prominently on your website.
• Responsiveness: Prioritize timely customer support across multiple channels (phone, email, social media).
• Proactive communication: Send shipping updates and order confirmations with tracking information.

Preventing Product Description Errors:

• Detail-oriented: Provide thorough product descriptions including specifications (size, material, compatibility, etc.).
• Multiple images: Use clear product photos from different angles to give a full picture of the item.
• Clarity: Write descriptions in an easy-to-understand manner, avoiding technical jargon if possible.

Why Does Chargeback Type Matter for Businesses?

Different chargeback types require different prevention strategies (as we’ve discussed). The type of chargeback also determines the kind of evidence a business needs to assemble for the dispute.

A fraud-related chargeback might require contacting authorities or gathering proof signaling that no one stole a customer's card. Merchant error would instead need evidence that the transaction details were correct.

The chargeback type impacts the effort and resources needed to fight a dispute.

And in the end, the level of effort and resources correlates with a business’s bottom line.

Summary: Chargeback types impact a business's finances, reputation, and the need for different preventative solutions, making understanding them crucial for success.

What Are Chargeback Reason Codes & Why Are They Important?

Chargeback reason codes are numbers or codes that card networks assign to disputes. These codes tell a merchant and customer the specific reason for the chargeback. Reason codes help businesses figure out the root cause.

Knowing this code lets businesses take action to prevent problems in the future.

Understanding reason codes can help determine whether the chargeback is likely fraud, a misunderstanding, or a merchant error. For example, Visa reason code 76 indicates that a merchant processed a transaction using the wrong currency or an inappropriate transaction code.

This points to a merchant error rather than fraud.

Merchants and customers can use the reason codes to help them determine what type of evidence they’ll need to gather for the chargeback process. For instance, a merchant would want to collect a transaction record for this scenario.

We talk about all the reason codes in a separate guide. There are too many codes to explain.

Summary: Chargeback reason codes are assigned by banks and signal the cause of the dispute, helping businesses improve their processes to prevent future chargebacks.

What is a Chargeback?

A chargeback is a reversal of funds for a card transaction (not a refund). This process happens when a customer disputes a charge with their bank (the issuing bank). Once the claim goes through, the bank reviews it.

If the bank favors the customer, they take money back from the business. Businesses also pay a chargeback fee ($25–$100) for each chargeback they receive. This amount increases if they reach and surpass a card network’s chargeback threshold.

Customers could initiate a dispute because they might not recognize a charge on their statement. They might have been a victim of fraud. Or they might be unhappy with a product or service received.

Sometimes, they’re trying to play the system and score free items.

Summary: A chargeback surfaces when a cardholder asks their bank to reverse a card payment, forcing the business to refund the money and pay a fee.

Chargeback Process & Actors Explained

Before explaining the chargeback process, let’s discuss who’s involved:

• Issuing Bank: Customer's bank that issues the payment card.
• Acquiring Bank: Merchant's bank that processes card payments.
• Merchant: Business selling goods or services to the customer.
• Card Network: Company that facilitates the transaction.

And here are the different phases businesses and customers will encounter during the chargeback process:

• Dispute: Customer contacts their bank to contest a charge.
• Provisional refund: Bank temporarily returns money to the customer.
• Bank assigns a reason code: Bank categorizes the dispute.
• Option to fight dispute: Merchant can challenge the chargeback.
• Gather evidence and documents: Merchant collects proof the charge is valid.
• Submit documents and evidence: Merchant sends proof to the bank.
• Bank reviews documents and evidence: Bank decides if chargeback is upheld.
• Arbitration: Card network may resolve if parties disagree further.

2% of chargebacks will reach the arbitration stage. Since this stage results in higher fees for businesses due to the resources card networks require to arbitrate a chargeback.

There’s a lot more to know about all these steps. We cover all the information in a separate guide.

FAQs for Chargeback Types

What is the Most Common Type of Chargeback?

Friendly fraud chargebacks are the most prevalent chargeback type. They make up 60–80% of total filed chargebacks.

Conclusion

Businesses need to understand the distinct causes of true fraud, friendly fraud, and merchant error chargebacks to implement appropriate countermeasures.

True fraud involves criminal activity, friendly fraud stems from customer disputes, and merchant errors result from business mistakes.

If you’re a business and believe you’re at risk for chargebacks, we offer a tool that’ll help prevent disputes from leading to chargebacks. Learn more now.