Despite New Safeguards, Chargebacks Are Rising

As fraudsters’ tactics grow more sophisticated, merchants must fight back with a combination of vigilance and better technology—including AI.

Chargebacks are currently the worst they have ever been for merchants. As Chargebacks911’s annual Cardholder Dispute Index shows, there was a staggering $65.21 billion in chargebacks last year in the U.S. alone, with an average of 5.7 claims per cardholder, each valued at $76.

This significantly impacts merchants’ costs when inflation is high and margins are tight, causing a vicious cycle of increasing prices, damaged customer relations, and more disputes. Variables like unrecognizable billing descriptors and convoluted return processes emerged as the key reasons for consumers to file disputes. However, Visa has suggested that up to 75% of all chargebacks are “friendly fraud,” meaning that there is a desperate need for merchants to fight back.

In a recent announcement to its members, the Merchant Risk Council (MRC) is sounding the alarm on a troubling trend: a significant rise in organized fraudulent chargeback claims, often referred to as friendly fraud. Over the past several months, merchants have reported a major spike in these attacks, resulting in “significant financial loss” across various sectors, according to the MRC.

With word spreading on how consumers can take advantage of the chargeback system, friendly fraud will have a major effect on the “Golden Quarter,” when chargebacks are always exceptionally high.

As a leading authority in dispute management, I’m here to offer insights on how merchants can protect themselves against friendly fraud and an increasingly hostile commercial environment.

Understanding the Spike

According to both our own studies and the MRC’s recent advisory, there has been a marked increase in refund-policy abuse, first-party misuse, and overall chargeback volumes. This rise isn’t entirely unexpected, given the already upward trend of online shopping and card-not-present transactions. According to Chargebacks911’s 2024 Chargeback Field Report, 72% of surveyed merchants reported an average increase of 18% in the friendly fraud cases they received.

This spike suggests that while some chargebacks are still filed in error, many malicious consumers and professional fraudsters are becoming more organized and sophisticated in their efforts to game the chargeback system.

One of the most concerning aspects of the current surge is the lack of a unique profile among the perpetrators, indicating that they are not individual consumers but rather professional outfits using automation.

This widespread abuse suggests that the fraud is not only systemic but possibly orchestrated through organized networks, possibly using fraud-as-a-service (FaaS) platforms. Fraudsters are exploiting loopholes across all card types, customer demographics, and merchandise categories.

Spikes like this are unpredictable, but there are times of the year when we know that there will be major surges in chargebacks. The “Golden Quarter” that runs from Black Friday through to the holidays and the months immediately following is the most significant period, and can put major dents in a merchant’s profits.

According to Adobe Analytics, 2024’s Cyber Monday hit a record $13.3 billion in sales, supplanting Black Friday as the single busiest shopping day of the year. With the majority of holiday shopping this year taking place online, where chargebacks are more prevalent, we could see a correlated rise in disputes, and profits from holiday shopping being leeched away.

Sophisticated Scams

The MRC announcement highlights several advanced techniques being employed by organized criminal groups and opportunists. These include falsifying documents and emails that appear to originate from within a merchant’s company, such as fake customer service emails promising refunds or discounts.

Fraudsters are also using doctored photographs to claim that goods arrived damaged, prompting merchants to send out replacement products. Fraudsters on the dark Web term this technique “refund fraud.” This abuse of the “goods not received” and “goods damaged” claims is particularly worrying, as it takes advantage of merchants’ good-faith efforts to maintain customer satisfaction.

These scams are not just sophisticated. They are alarmingly effective. Merchants, following their established policies and procedures are often left with little choice but to issue refunds or send replacement products, only to discover later that they have been defrauded. The financial impact of these activities can be devastating, especially for small-to-medium-size businesses that may not have the resources to absorb such losses.

Merchants Must Respond

In light of this alarming trend, we have several recommendations for merchants that want to better protect themselves against the rising tide of fraudulent chargebacks. These include ensuring that existing key performance indicators (KPI), rules, and velocity checks are watertight.

For example, merchants should monitor metrics such as the refund rate, repeat refund requests, and the refund amount as a percentage of sales. These indicators can help identify patterns that may suggest fraudulent activity.

Also, we would advise merchants to re-evaluate their customer return policies and thresholds. Implementing verification steps can help reduce the risk of fraud, such as requiring more detailed proof-of-purchase or delaying refunds until products are returned and verified.

Lastly, we can’t over-emphasize the importance of an active approach to fraud prevention. Because the consequences of chargebacks are often irreversible, addressing disputes before they turn into chargebacks is critical. In addition to reviewing policies, implementing tools like chargeback alerts can warn merchants of an impending dispute, giving them the opportunity to resolve the issue with the cardholder before the issuing bank elevates the dispute to a chargeback.

While these measures may seem cumbersome, they are necessary to safeguard against increasingly sophisticated fraud tactics. Merchants should also ensure that all relevant stakeholders, from customer service to finance, are informed and involved in the effort to combat friendly fraud.

Activating AI

I believe that evolving technology plays a crucial role in helping merchants stay ahead of fraudsters. Machine learning and artificial intelligence (AI) can be leveraged to detect anomalies in transaction data and identify potential fraud before it results in a chargeback. These technologies can analyze vast amounts of data in real-time, spotting patterns and behaviors that may be missed by human analysts.

One of the key protections that can help safeguard merchants from chargebacks is the ability to prevent them before they happen. Chargebacks are not always instantaneous—there can be a 48-to-72-hour delay before they are filed—and, in this time, a merchant could issue a refund rather than go through the much more expensive and time-consuming chargeback process.

This may mean that some people are given refunds that they don’t deserve. But refunds will cost a lot less than trying to fight every chargeback, depending on the price of the transaction.

A Call to Arms

The recent spike in fraudulent chargebacks is a clear warning that merchants cannot afford to be complacent. The tactics used by fraudsters are becoming more sophisticated, and the financial stakes are higher than ever. It is crucial that merchants take immediate action to protect themselves, their customers, and their revenue.

That said, we’re committed to helping merchants navigate this challenging landscape. We urge all merchants to review our recommendations and implement the necessary changes to their fraud-prevention strategies.

By staying vigilant and leveraging the right tools and technologies, merchants can mitigate the impact of friendly fraud and ensure that their businesses remain secure.

—Monica Eaton is the Founder and CEO of Chargebacks911 and Fi911.