Chargeback fraud occurs when a cardholder (or a bad actor using their details) disputes a legitimate transaction to obtain a refund from the issuer after goods or services have been received. It can also involve organised groups exploiting merchant errors or policy gaps to reverse payments at scale. For compliance teams, chargeback fraud overlaps with anti–money laundering (AML) risk because repeated, high‑velocity refunds can become a conduit for illicit funds.
Chargeback Fraud Definition
Chargeback fraud is the deliberate misuse of card scheme dispute rules to claw back funds without a legitimate basis. Examples include falsely claiming non‑receipt, denying transaction authorisation despite delivery evidence, or abusing generous refund windows to double‑dip (keep goods and recover funds). In contrast, true disputes involve billing errors or unauthorised use that should be resolved under consumer protection rules.
How Chargeback Fraud Works
Understanding the mechanics helps separate genuine disputes from abusive patterns.
Typical steps include:
The fraudster makes a purchase (sometimes using synthetic or compromised identities) and receives the goods or services.
A dispute is filed with the issuer alleging fraud, non‑delivery, or defective goods, despite evidence to the contrary.
If the merchant cannot supply compelling evidence on time, the issuer reverses the transaction, debiting the merchant.
Across ecommerce, repeat claims, coordinated address reuse, and tight timing around delivery windows are common markers that transaction monitoring can detect.
Common Types Of Chargeback Fraud
Before implementing controls, it helps to recognise the main typologies:
Friendly Fraud: A legitimate cardholder disputes a purchase they or a family member made, often citing non‑recognition.
Item‑Not‑Received Abuse: The buyer falsely claims non‑delivery even when carrier and device logs show receipt.
Refund And Chargeback Double‑Dip: The buyer secures a merchant refund and then files a chargeback for the same order.
Account Takeover Disputes: Criminals use compromised credentials to transact, then victims raise genuine unauthorised claims; criminals may trigger multiple disputes to mask activity.
Triangulation Schemes: Fraudsters resell goods bought with stolen cards; downstream buyers later dispute transactions, creating layered claims.
AML And Compliance Implications
Persistent chargeback abuse can indicate organised fraud and potential laundering. Compliance functions should correlate disputes with identity risk signals and payments telemetry:
Screen customers during onboarding with customer screening to spot synthetic identities and known risk indicators.
Apply payment screening to evaluate risky funding sources and sanction exposure.
Monitor refund and dispute patterns with transaction monitoring, using velocity checks and behavioural models.
Preventing Chargeback Fraud: Practical Controls
A layered control stack reduces losses while protecting legitimate consumers:
Compelling Evidence Playbooks: Standardise evidence capture (delivery scans, IP/device, usage logs) and deadlines by dispute reason.
Strong Customer Authentication (SCA): Use step‑up challenges for high‑risk transactions or address changes.
Post‑Purchase Alerts: Notify customers of orders, delivery, and refunds to prevent confusion‑driven disputes.
Refund Governance: Prevent double refunds, reconcile RMA systems with payment gateways, and implement negative lists.
Collaborative Data Sharing: Where lawful, share fraud signals with processors and acquirers to identify serial abusers across merchants.
Rights, Rules, And Guidance
Consumers have clear rights to dispute billing errors and unauthorised transactions. The Federal Trade Commission explains time limits and documentation requirements in its guidance on using credit cards and disputing charges. In the UK, the Financial Ombudsman Service outlines when chargeback may apply and how it compares to Section 75 protections.
For merchants and payment providers, card scheme rules govern dispute processes. Mastercard provides a central resource for rules and chargeback materials that acquirers and merchants should follow alongside local regulation.
