Feb 09, 2023
5 min read

4 Ways to Protect Your Business from Chargeback Claims

Finding yourself struggling to stop false transaction claims? Here you’ll find several ways to stop them and free your business of fraud.

Сhargebacks negatively affect businesses through costly fees, lost shipping, transaction processing costs and the time wasted on disputes. Moreover, excessive chargebacks can lead to reputational damages or merchant account termination. Realizing this problem, we at Sumsub have prepared a complete guide to chargeback claims.

What are chargebacks?

Chargebacks (also known as “disputed transactions”) are credit card charges that customers request to be refunded over alleged disputes. This could be an honest user returning something they didn’t intend to buy, or a fraudster seeking to trick the system.

Types of chargeback claims

Here are the three main chargeback types:

  • Criminal fraud refers to transactions made using stolen card information, after which the actual cardholder files a chargeback claim.
  • Company error refers to erroneous transactions made by a company (e.g. incorrect transaction amount).
  • Friendly fraud is when cardholders request fraudulent chargebacks for items they intended to acquire. For example, a person purchases an iPhone 14 on Amazon, receives the package, and then files a chargeback claiming that they never made the purchase. . 

All businesses can face these three types of chargeback claims, which risk costly fees and time wasted on disputes.

What is chargeback fraud?

Chargeback fraud is when a customer purposefully lies about the status of a purchase. This is typically done with the sole intention of getting a refund and keeping the item. Customers may falsely claim that they’ve never received the order or never even authorized the transaction. 

How does this affect eCommerce businesses?

Chargeback claims have a substantially negative effect on eCommerce businesses. Since the pandemic, the number of such claims has been growing exponentially. In 2021, 75% of eCommerce companies saw an increase in fraud attempts. In 2023, merchants are expected to face $100 billion in chargeback claims.

Due to additional hidden expenses, companies have to pay almost four times the price of the disputed product. In 2023, the average cost of a single chargeback claim will reach $190.

Chargeback claims can also lead to reputational damage. If payment processors notice an overwhelming chargeback ratio, they may limit the merchant’s monthly volume of payments, terminate their account entirely, or place them in a Terminated Merchant File (TMF), which designates them as an above-average risk customer. Once placed in a TMF, the merchant may have no choice but to use a “high-risk” payment processor, or even create a new legal entity to restart their business.

How to Reduce Chargebacks

Since chargeback claims are a complex problem, businesses should use a variety of tools to combat them. Below, we list the four main approaches businesses can take.

Approach #1: Manual payment method verification

When a customer wants to make their first payment, they’re asked to take a selfie with their bank card. This procedure aims to ensure that the customer actually owns the payment card and isn’t making multiple transactions using dozens of cards stolen from other people.

However, this check relies on humans to determine if the payment card is fake or if the customer is an imposter, which isn’t always possible. Moreover, this check can slow down payment processing as it requires the transaction manager to look through every suspicious payment.

Although not perfect, this approach can be useful for companies that process a small number of transactions. However, for big corporations with thousands of transactions per day, it’s virtually impossible to process all customers manually. Besides, manual checks would be too costly to implement as they require a greater workforce to execute.

Approach #2: Automated review

Automatic chargeback reviews require users to pass the transaction monitoring procedure. This is an ongoing security process that helps companies detect suspicious transactions by detecting unusual patterns, dubious transfers and transactions made in digital or fiat currencies. Companies can simplify this process by implementing an automated transaction monitoring solution, which will save them time and money.

Besides chargebacks, transaction monitoring can help companies detect other types of criminal activity, such as:

  • Money laundering
  • Terrorist financing
  • Fraud
  • Identity theft
  • Drug trafficking
  • Corruption
  • Bribery

Automated transaction monitoring solutions detect abnormal patterns in customer transactions, including: 

  • Unusual transaction amounts
  • Unusual series of transactions 
  • Unusual destination or origin of a payment
  • Known threats or typologies

Approach #3: Big data analysis of devious patterns

In addition to verifying personal data, companies might use big data analysis to detect fraud attempts. This approach uses various tools to ingest data from checkout flows, card networks, and bank data to detect anomalies and predict fraud risk. The data is commonly found on various fraud databases, which can be hosted locally, eliminating any network delays and seamlessly integrating into a company’s workflow. This helps companies detect chargeback frauds in a timely manner. 

  • IP geolocation and device location 

Exposes the geolocation of an IP address or device based on where the purchase was made and spots unusual patterns. This helps improve compliance by excluding IP addresses identified as proxies, concealed users and other anonymizers.

  • Device fingerprinting 

Identifies a device by analyzing its unique attributes, such as its operating system, the type and version of its web browser, the browser’s language setting and its IP address. The uniqueness of the fingerprint makes repeat fraudulent requests stand out as it shows the requests are made from the same device.

  • Negative database 

Checks cardholders for previous fraud history. Negative databases give businesses access to global lists of suspicious IPs, mailing and email addresses. Whenever fraud is detected, these databases get updated. Accordingly, businesses are informed if their existing users are detected as fraudsters.

  • Social network data analysis 

Investigates individuals, relationships, and other social structures for links to fraud. If the customer shows suspicious behavioral patterns, such as highly frequent location changes over time, the system reports them for possible fraud signals.

  • Fraud scoring services (e.g. Experian, Mastercard, Sage Pay)

Rank all transactions with a fraud score/rating reflecting the level of risk posed to the business. These services can also adjust fraud scores to a company’s risk level.

Approach #4: Implement a clear refund policy

The previous steps are meant to minimize the risk of criminal fraud. However, the possibility of friendly fraud is still present. While a business can dispute friendly fraud in court, it’s less expensive to stop a chargeback before it gets filed in the first place.

Instead of initiating a chargeback, which can incur losses several times more than the original cost of the purchase, the business can encourage its customers to apply for a refund. Yes, it’s true that refunds also imply losses for the business (such as shipping), but they’re less financially and reputationally damaging.

To avoid chargebacks, businesses should implement a clear refund policy that’s easily accessible to customers when they’re purchasing a product. This policy can be relatively strict, but it still should be understandable to the customer. Moreover, if there are any additional charges during the refund process, it will be more convenient for customers to learn about them upfront. Otherwise, they might simply file a chargeback.

Fraud Prevention Solution

Although you can never guarantee total protection against fraud, taking the steps discussed in this article can minimize the risks. It’s important to remember that, before taking any action, businesses should identify the type of chargeback they face. 

For instance, in case of criminal fraud, businesses can use machine learning algorithms that defend against fraudulent logins and payments. However, there are still some blind spots that these systems can’t cover. In this situation, businesses may combine machine learning algorithms with big data analysis. To do so, companies can implement flexible transaction moniroting technology that can be built for one’s specific needs. Thus, before choosing a transaction monitoring solution, companies need to ask providers the following questions:

  • How does the solution enable companies to implement a risk-based approach to customers and transactions? 
  • What are the money laundering/terrorist financing typologies that the system addresses?
  • How quickly can new typologies be implemented in the system?
  • How can the solution be tested prior to activation in the system?

Interested? Click here to learn more about transaction monitoring.


  • How common is chargeback fraud?

    Chargeback fraud has been on the rise for the last few years. In 2023, merchants are expected to face $100 billion in chargeback claims.

  • What are the three types of chargebacks?

    The three types of chargebacks include:

    • Criminal fraud
    • Company error
    • Friendly fraud

  • Is friendly fraud the same as chargeback fraud?

    Friendly fraud happens when a customer requests a refund after making a transaction. For example, a customer may detect a purchase that they is when cardholders request fraudulent chargebacks for items they intended to acquire. For example, a person purchases an iPhone 14 on Amazon, receives the package, and then files a chargeback claiming that they never made the purchase.

  • How do I report a fraudulent chargeback?

    Companies affected by chargeback fraud can submit a rebuttal letter to the bank. In the letter, they need to provide evidence that a customer’s claim is fraudulent. Then, the issuing bank has to make a decision regarding the dispute. Information that companies can submit with the letter includes:

    • Transaction receipt
    • Terms and conditions agreement with the customer’s signature
    • The order invoice
    • Tracking information

  • How do you fight chargeback fraud?

    Possible approaches include:

    • Manual payment verification
    • Automated review
    • Big data analysis of devious patterns
    • Clear communication of policy refunds
    It’s generally recommended to combine these approaches to minimize chargebacks.

  • How do you detect chargeback fraud?

    The most important aspect of detecting chargeback fraud is collecting necessary customer data and preparing evidence in case a dispute occurs. When reviewing purchases, companies should always look out for anomalies. They may include deviations in customer behavior, unusual types of items ordered (e.g., commonly stolen ones) or a high frequency of orders. If suspicions arise, it’s necessary to get in touch with the customer and ensure that their card information isn’t stolen.

AutomationChargeback FraudCustomer OnboardingFraud PreventionMachine LearningRisk ManagementTransaction Monitoring