When people hear "fraud," they often think of stolen credit cards or identity theft. However, around 75% of all chargebacks are likely due to first-party misuse^[1]—meaning they come from the customer who reported the issue, eitherintentionally or unintentionally. 

Chargeback fraud can harm a business financially, damage your credit, or result in account suspension. While transparent communication with merchants may help you resolve chargeback-related issues, understanding the nuances of chargeback fraud can help you avoid unnecessary disputes in the first place and foster smoother transactions. 

In this article, we’ll explore the details of chargeback fraud, its potential consequences, and practical ways to avoid it. We’ll also show you how virtual cards can help reduce the risk of payment disputes by securing your online transactions. 

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What Is Chargeback Fraud?

Chargeback fraud occurs when a customer disputes a legitimate payment, falsely claiming it was unauthorized or incorrect. In these cases, the customer's goal is to receive a refund while keeping the item, often taking advantage of lenient return policies.

Unlike traditional fraud, where a third party initiates the fraudulent transaction, the customer is the one who initiates the chargeback fraud.

However, not all charge disputes have fraudulent intentions behind them—a customer may also dispute a legitimate transaction, believing it to be unauthorized or incorrect. Chargeback fraud can also arise from misunderstandings, like when a customer forgets about a purchase or doesn’t recognize a charge.

About 58% of respondents in a survey said they often get confused by the merchant’s billing description^[2], which is a common reason for disputing a transaction. Another common case is when someone from the household makes a purchase without informing the cardholder.

Types of Chargeback Fraud

Based on the cardholder's intent or specific circumstances, chargeback fraud can take many forms, including:

• Return fraud—The customer returns an item, claiming it’s defective or damaged when, in reality, it may be in good condition or someone may have tampered with it. This type of fraud often occurs when the merchant’s return policy is unclear, which makes it easier to dispute the charge.
• Digital goods fraud—After purchasing digital products like software or online courses, the customer disputes the charge, claiming they haven’t received it. This is challenging for businesses to manage, as the customer may have already accessed and downloaded the product.
• Package redirection fraud—Fraudsters sometimes manipulate shipping labels to divert deliveries to incorrect addresses. They may claim they haven’t received the product and initiate a chargeback, even though the merchant believes the package was delivered correctly.

Other Types of Fraud

Like chargeback fraud can be intentional or unintentional, a few other types of fraud may result from misunderstandings just as often as misconduct. These frauds can also lead to complicated disputes, and they include:

1. Credit card fraud
2. Account takeover fraud
3. Double refund chargeback fraud
4. Friendly fraud

1. Credit Card Fraud

Sometimes, an unauthorized purchase may result from fraudsters stealing and misusing your credit card.

In many cases, you may not immediately realize your information has been compromised. You may discover the fraud only when reviewing your credit card statements or receiving alerts for unusual transactions, which may lead you to immediately file a charge dispute with your bank.

2. Account Takeover Fraud

Account takeover frauds occur when a fraudster gains unauthorized access to your account on an eCommerce platform and uses it to make purchases. To gain access to your account, fraudsters usually resort to methods like the following:

• Attempting multiple password combinations until they find the correct one
• Using stolen login details from one breach to access accounts on other platforms
• Tricking you into revealing your login credentials through deceptive emails or websites

3. Double Refund Chargeback Fraud

Double refund chargeback fraud happens when you successfully request a refund from a merchant and dispute a charge with your bank, receiving a refund and a chargeback for the same transaction. This might happen due to misunderstanding of either processes, or unawarness of their timelines.

4. Friendly Fraud

Friendly fraud is different from intentional chargeback abuse in that the disputes in this case are typically unintentional. You may mistakenly believe a charge is unauthorized or unfamiliar and initiate a dispute without malicious intent. 

Common reasons for friendly fraud include:

• Forgetting about the transaction in question
• Seeing confusing billing descriptions from the merchant
• Failing to recall a purchase made by someone else in the household
• Impulse buying and later regretting the purchase
• Experiencing delayed response from the merchant

Is Chargeback Fraud a Crime?

Yes, chargeback fraud is illegal and can lead to legal action against the cardholder if a pattern of fraud is detected. In such cases, the merchant may file a lawsuit to recover their lost funds. 

A classic example of actions taken against a cardholder for committing chargeback fraud is the recent viral case of a customer who asked for 26 illegitimate chargebacks in seven months^[3]. As a result, their accounts were closed, and they faced reputational damage.

Chargeback Fraud Consequences

Even if you don’t end up paying hefty fines for unknowingly committing chargeback fraud, it can still lead to consequences that affect your financial well-being. These include:

• Being blacklisted by merchants and networks—Businesses affected by chargeback loss and repeated disputes can get you banned from purchasing with them or even other businesses in the same payment network.
• Facing financial penalties—While you may not be directly fined, some banks may require you to cover the merchant’s losses if a chargeback is reversed, meaning you could still be responsible for the disputed amount.
• Suffering a credit score impact—Frequent chargebacks, especially if they result in unpaid balances or disputes with your bank, can hurt your credit rating, making it harder to qualify for loans or credit cards in the future.
• Having your banking privileges revoked—If your bank sees a pattern of chargeback requests, they may revoke certain services (like the ability to dispute future transactions), limit your spending, or even close your account.

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How To Report Chargeback Fraud

Once you realize that your payment dispute was based on a misunderstanding and is a mistake on your end, it’s important to act fast to avoid any financial repercussions to the merchant or yourself. Here’s what you can do:

1. Contact the customer service department of your bank or credit card issuer. Inform them about the dispute and request that the chargeback be canceled if it hasn't been processed yet.
2. Provide any relevant information or documentation that can help clarify the situation, such as receipts, communication with the merchant, or proof of the legitimate transaction.
3. Follow up to ensure the chargeback has been canceled and your account is in good standing.

Remember, canceling a chargeback that has already been processed may take a little longer, but addressing the issue as soon as possible can help avoid further consequences.

Additionally, if you suspect fraudulent activity on your card, you should file a police report to officially document the incident. Contact your local attorney general’s office and the Federal Trade Commission ^[4] to further address the situation. As your case becomes part of the public record, it helps show your bank that you’re committed to your claim and you didn’t mean to defraud anyone.

How To Avoid Chargeback Scams

As an online shopper, you hold significant power when initiating disputes and filing charge claims. However, illegitimate charge disputes—even those caused by fraudsters exploiting the system—can have serious consequences, impacting both the merchant and your credit portfolio.

To ensure fairness and protect both parties, take proactive steps to safeguard yourself from unauthorized charges and reduce the risk of unintentionally filing false or unnecessary chargeback claims. Here’s what you need to do:

• Communicate with the merchant regarding any concerns before directly disputing a charge with your bank.
• Make sure you understand the business’ return and refund policies and, if possible, initiate your return and refund request from their website or app.
• Retain receipts, order confirmations, and any correspondence related to your purchases.
• Regularly review your credit card statements to ensure all charges are recognized.
• Secure your online transactions by using a virtual card to shield your payment details from fraudsters and avoid potential unauthorized charges.

Downsides of Shopping Online and Handling Payment Disputes

Shopping online offers convenience, but it also opens you up to risks like unauthorized transactions and identity theft, leading to complicated payment disputes.

The process of filing a charge dispute can be challenging due to:

• Strict timelines for filing
• Complex forms, unclear guidance, and communication channels
• Difficulty in gathering receipts or proof of non-delivery, especially for older transactions or third-party purchases
• No guarantee of a positive outcome

To help you avoid some of the consequences of online payments, shop with virtual cards from independent providers like Privacy. Virtual cards add a layer of bank-level security to help protect your real payment card details.

Avoid Dispute-Filing Complications With Privacy

Privacy is a BBB^®-accredited virtual card provider with over 250,000 satisfied users. With the platform, you can connect your debit card or bank account as a funding source and generate virtual cards with 16-digit card numbers, expiration dates, and CVVs. These cards function just like regular cards at checkout while acting as a shield for your real card information and helping you avoid the stress of chargebacks and refunds.

Privacy offers three types of virtual cards, each designed to cater to different needs:

1. Single-Use Cards—Perfect for one-time purchases, these cards automatically close shortly after their first transaction. They provide added security for shopping on unfamiliar or less-trusted websites.
2. Merchant-Locked Cards—These cards are ideal for recurring payments like subscriptions. They “lock” to the first merchant you use them with, so any attempt to use them elsewhere will be automatically declined.
3. Category-Locked Cards—These cards are restricted to specific spending categories, such as retail or fitness. They’re excellent for budgeting, as transactions outside the designated category are declined.

With Privacy, you can also set custom spending limits to help avoid billing issues like hidden fees or duplicate charges, as transactions exceeding the set limit are automatically declined.

You can pause or close your virtual cards at any time, and Privacy will decline all payments on them. This helps protect you against accidental charges. If you run into any problems—like receiving damaged goods or not getting a refund—you can file a dispute. Privacy will investigate your claim and initiate a chargeback against the merchant if there are grounds for it.

Additional Convenience Features Offered by Privacy

Privacy provides additional features designed to simplify virtual card usage and management, as outlined in the table below:

Getting Started With Privacy

To join Privacy, follow these steps:

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References

^[1]Visa USA. https://usa.visa.com/visa-everywhere/blog/bdp/2022/06/15/what-every-merchant-1655330664445.html, sourced January 21, 2025

^[2]Chargebacks 911. https://chargebacks911.com/accidental-friendly-fraud/, sourced January 21, 2025

^[3]Chargebacks 911. https://chargebacks911.com/chargeback-abuse-goes-viral/, sourced January 21, 2025

^[4]Federal Trade Commission. https://consumer.ftc.gov/articles/using-credit-cards-and-disputing-charges#complaints, sourced January 21, 2025

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