3 Categories of Chargeback Causes

Table of Contents

  1. What is True Fraud?
  2. What is Friendly Fraud?
  3. What is Merchant Error, and is it Fraud?
  4. How Do Chargeback Categories Impact Merchants?
  5. Conclusion
  6. Frequently Asked Questions

Card networks assign a specific reason code to every single chargeback they process.  And though each unique network has their own set of codes, they all exist to do one thing: tell merchants and their acquiring banks what the “reason” behind the chargeback was.
Unfortunately, issuing banks always take the consumer’s word without question.  They accept the cardholder’s explanation for the chargeback at face value and assign a reason code based on that account.  Because many times the consumer is not being truthful, the reason code doesn’t quite line up with the real, true cause of the chargeback.

New call-to-actionThis hurts merchants and their ability to prevent and fight future chargebacks.  Many assume that every chargeback with a fraudulent or not authorized reason code equals true criminal fraud or identity theft is at work.  But this assumption can cost a merchant up to 25 percent more in lost revenues due to chargebacks.

As a merchant, conducting your own analysis of the root causes of your chargebacks is crucial to fighting and preventing them in the future.

We’ve found that those causes fall into one of three common categories: true fraud, friendly fraud and merchant error.  Let’s look at all three in more depth.

Chargeback Types

What is True Fraud?

True fraud is the result of hacking or identity theft.  It means the charge was made via a stolen card (or card number) and without the cardholder’s prior knowledge or authorization. 

Merchants are liable in cases of true fraud, as they should have processes and protections in place to safeguard their customers from hacking or theft. 

True fraud typically accounts for just 10 to 15 percent of all chargebacks

What is Friendly Fraud?

Manage Chargeback In-House Or OutshoreAnywhere from 60 to 75 percent of all chargebacks are the result of “friendly” fraud, which occurs when a cardholder disputes a charge they knowingly and intentionally made.  They might want their product for free, be unhappy with their purchase or service, or simply not want to go through a difficult refund process.  Verifying the cardholder's identity during your checkout process can help prevent these types of fraud – or at least give you the evidence you need to fight a chargeback should one be filed.

Family fraud is also considered a type of “friendly” fraud and happens when a spouse, mother, father or other family member uses a card without their loved one’s permission. 

The transaction shows up on the cardholder’s bank account or card statement as unrecognizable, and they dispute the charge, fearing true fraud is at work.  To prove a chargeback is due to family fraud, you’ll need to provide evidence that the purchaser is related to the cardholder

What is Merchant Error and is it Fraud?

Another 15 to 35 percent of all chargebacks are caused by merchant error, which means a charge was accidentally or erroneously made by the business.  Merchant errors can include duplicate charges, wrong transaction amounts, incorrect invoicing or even just a failure to issue a refund on an agreed-upon timeline. 

Merchants are liable for chargebacks stemming from their own errors, so disputing them is not an option in these scenarios. 

Fortunately, realigning back-office operations and ensuring better quality control in payment processing can help prevent them.

Merchant error is not fraud in and of itself. Accidents happen, and if the mistake is because of the merchant then the chargeback is warranted. But be warned that if it is your fault that is a ding against your merchant chargeback ratio.

How Do Chargeback Categories Impact Merchants?

Depending on the type of chargeback, there are different approaches to prevent and recover from them. 

In cases of true fraud, the best course is to accept the chargeback. The customer has been a victim and that is what chargebacks are for.

In cases of friendly fraud, you should have prevention efforts in place to help with recovery. This includes extensive documentation, security measures and working with a chargeback recovery service.

Note that no matter the root cause of a chargeback, you will feel the impact from it on your chargeback ratio and your merchant account, should you pass the chargeback threshold for your credit network. 

Determine the Root Cause of Your Chargebacks

Getting down to the root cause of your chargebacks is the first step to fixing internal issues and preventing future chargeback disputes.

The truth is that chargebacks can tell you a lot about your business. By uncovering the root causes of your chargebacks, you can determine some of the gaps in your operations, including poor customer service, bad security and fraud prevention, or improper training. 

By uncovering root causes, you will improve your business everywhere. 


Who is responsible for chargebacks?

Typically it is the merchant. During a chargeback, liability will fall on the merchant unless proven otherwise.


How common are chargebacks?

Chargebacks are relatively common, and cost the retail industry Billions of dollars a year. Friendly fraud chargebacks account for up to 86% of these.


Can you go to jail for chargebacks?

Cardholders can go to jail for fraudulent friendly-fraud chargebacks.

Thanks for following the Chargeback Gurus blog. Feel free to submit topic suggestions, questions or requests for advice to: win@chargebackgurus.com

Get the guide, Chargebacks 101: Understanding Chargebacks & Their Root Causes

Ready to Start Reducing Chargebacks?