Long gone are the days of bartering for goods and services, and cash continues to lose ground to cards, digital wallets and one-click checkout. Consumers expect buying to be fast and frictionless, and they expect getting their money back to be just as easy.
When a purchase goes wrong, many customers contact the merchant and work it out. But this is changing. Increasingly, customers are skipping the merchant and going straight to their card issuer in search of “frictionless refunds”. We’ve seen no-call rates on chargebacks as high as 90% among a large sample of card not present (CNP) merchants. The issuer files a chargeback, and the merchant loses any chance to make the sale right.
The most damaging chargebacks are those coded as fraud, and they come from two very different places. Some are genuine: a criminal used stolen card data. Others are not: the cardholder made the purchase, then claimed they didn’t. Or a significant other or family member did and didn’t inform the cardholder. Knowing the difference, and having the right tools for each, is what keeps merchants out of card network monitoring programs.
The real cost of a fraud chargeback
Large merchants generally have dedicated teams managing chargebacks. Smaller merchants may never have dealt with one, which makes them attractive targets. Restaurants offering online ordering and delivery learned this the hard way when fraudsters discovered they could get a proverbial “free lunch” by ordering food and then disputing the charge.
The moment a chargeback is filed, the transaction amount is debited from your account and credited back to the cardholder. In most fraud cases, you’re out both the merchandise and the money you collected for it.
You’ll also pay a chargeback fee to your payment processor, typically $15 to $100 depending on your processing agreement. And every dispute counts against you in card network monitoring programs such as the Visa Acquirer Monitoring Program (VAMP), which measures fraud reports and disputes against your sales. Exceed the thresholds and you face fines, higher costs or even the loss of your merchant account.
True fraud vs. friendly fraud
The two most common categories of chargebacks are fraud and customer disputes. Within fraud, merchants face two distinct problems. True fraud occurs when a criminal uses stolen card data or a compromised account to make a purchase the cardholder never authorized. Credit card fraud is consistently among the most commonly reported forms of identity theft in the U.S.
Most true fraud occurs in the card not present (CNP) space, where the merchant never sees the physical card. Card present (CP) fraud still happens, but EMV chip technology has made it far harder to commit.
Friendly fraud, also called first-party misuse, is different. The actual cardholder makes the purchase, receives the goods and then tells their issuer the transaction was fraudulent or unrecognized. Sometimes it’s buyer’s remorse. Sometimes a family member made the purchase, or the cardholder simply didn’t recognize the merchant name on their statement. And sometimes it’s deliberate.
Consumers have learned that the fastest route to a refund is often through their card issuer, so friendly fraud now makes up a significant share of fraud chargebacks. Because the real cardholder made the purchase, traditional fraud screening usually can’t catch it at checkout.
Stopping true fraud at checkout
The first step is to examine the data you already collect to understand where fraudulent orders are coming from. Are there patterns in products, order values, shipping addresses, devices or time of day?
Third-party fraud prevention providers such as Kount, ClearSale and Sift can help. Using models developed through the analysis of millions of transactions, they screen orders in real time and filter out suspicious ones before the transaction is processed and you ship your product. Stopping fraud before the card is charged nips the chargeback in the bud.
Basic controls still matter. Always capture the card’s CVV code, whether orders are online or processed through a call center. It helps confirm the customer is in possession of the card at the time of purchase.
Use Address Verification Service (AVS) whenever possible. AVS checks the billing address the customer provides against the address on file with the issuer.
Reducing fraud chargebacks with 3DS, CE3 and Order Insight
CVV, AVS and fraud screening reduce risk, but they don’t shift liability. A fraudulent order can pass every check and still come back as a chargeback. The card networks now offer tools that go further, and each one targets a different part of the fraud chargeback problem.
3-D Secure (3DS). 3DS authenticates the cardholder with the issuer during online checkout. Today’s EMV 3DS shares rich device and transaction data with the issuer, so most legitimate customers pass in the background while riskier transactions get a passcode or biometric check. The key benefit: when a transaction is successfully authenticated, liability for most fraud chargebacks generally shifts from the merchant to the issuer. The trade-off is some added checkout friction, so many merchants apply it selectively to higher-risk orders. One caveat: 3DS authenticated transactions may result in lower authorization rates for merchants in higher risk MCCs as issuers elect not to accept the liability shift 3DS mandates.
Compelling Evidence 3.0 (CE3). Visa’s CE3 rules target friendly fraud. When a cardholder disputes a card-not-present purchase as fraud (Visa reason code 10.4), the merchant can show that the same cardholder made at least two prior, undisputed purchases 120 to 365 days earlier, with matching data such as IP address, device ID, shipping address or account login. If the evidence qualifies, liability shifts back to the issuer. Without stored device and IP data, you can’t use CE3. Mastercard offers a similar approach through its First-Party Trust program. However, for subscription merchants, CE3 can have limited utility as the majority of your fraud transactions will occur within the 120-day window. Confirm whether this is true for your business.
Order Insight. Order Insight, from Visa-owned Verifi, works before a dispute is ever filed. When a cardholder calls their issuer or looks up a charge in their banking app, the issuer pulls order details directly from the merchant: what was purchased, when, where it shipped and a receipt. That’s often enough to end the inquiry. Order Insight can also deliver CE3 evidence at the inquiry stage, stopping qualifying friendly fraud disputes before they become chargebacks. Mastercard’s Ethoca offers comparable tools, including alerts that let merchants refund confirmed fraud before it becomes a chargeback.
Used together, these tools cover both sides of the problem. 3DS shifts liability for true fraud, while CE3 and Order Insight stop friendly fraud before it becomes a chargeback or return liability to the issuer when it does.
A strong customer service process remains an important defense, especially against friendly fraud, because it can defuse a problem before it becomes a chargeback. Subscription billers should make cancellation easy and send clear renewal reminders, since customers billed after they believe a subscription has ended often dispute the charge.
See your business the way customers do
Many friendly fraud chargebacks start with confusion, not malice. Make a purchase through your own store and interact with your business as a customer would:
Check the merchant descriptor that shows up on your card statement, both online and on paper.
Does the merchant descriptor clearly match the business name your customers know?
Is your phone number on the descriptor, and most importantly, is it the correct number?
Call the number. Is the IVR easy to navigate, and can callers quickly reach the right person?
These may seem like obvious things, but what makes sense to you may not make sense to your average customer. An unrecognized descriptor is one of the most common triggers of “I don’t recognize this charge” fraud disputes.
Fighting back with representment
Even after a chargeback is filed, you have rights as a merchant. You can fight the chargeback through your payment processor by going through the process of “representment.” In simplest terms, a representment is a merchant’s dispute of a customer’s dispute.
The process of representment varies by card network (e.g., Visa, Mastercard) and by how the transaction was processed (CP or CNP).
The chargeback reason code tells you why the cardholder disputed the charge and what evidence you’ll need. For fraud disputes, compelling evidence can include AVS and CVV results, 3DS data, IP addresses, device IDs, delivery confirmation and customer communications.
No free lunch
If you plan to fight a chargeback through representment, there are a few things to know:
The process is not free. You will pay a fee, in addition to your time. For low-ticket items, it may not be worth the cost.
Time is limited. You usually have only a few weeks to respond before your representment rights expire.
Winning doesn’t erase the dispute. Even a chargeback you win generally still counts toward your dispute ratio in card network monitoring programs, which is why prevention matters more than recovery.
Your acquirer or ISO is watching these numbers too. Many now use continuous monitoring platforms like Slyce360, rather than periodic reviews, to spot rising fraud and chargeback trends early. Merchants who manage fraud proactively make those conversations far easier.
Fraud chargebacks are a cost of doing business, but they don’t have to be a growing one. Understanding true fraud versus friendly fraud, and using the right tools for each, is one of the best ways to protect your revenue, keep your merchant account in good standing and stay profitable.