3 Types of Chargebacks Merchants Need to Know

Table of Contents

  1. What are Merchant Error Chargebacks?
  2. What are True Fraud Chargebacks?
  3. What are Friendly Fraud Chargebacks?
  4. Does the Type of the Chargeback Impact the Merchant?
  5. Conclusion
  6. Frequently Asked Questions

Chargebacks are a menace for e-commerce merchants. If businesses do not focus on preventing or fighting chargebacks, merchants risk losing money and valuable resources.

What are some of the reasons for chargebacks? Well, there are several reasons, some that can be tied to fraud, some to error on the merchant's part, and some due to fraudsters looking to abuse the system. Because of this, banks, merchants, and card networks often classify chargebacks into three distinct categories to determine how they should be approached. 

These can be classified into three types of chargebacks. Most chargebacks occur due to merchant error, true fraud and friendly fraud.

What are Merchant Error Chargebacks?

New call-to-actionMerchant error chargeback is the most common type of chargebacks.

Even though your business personnel might not commit errors intentionally, the effects of merchant errors are deleterious to your bottom line. These chargebacks could be caused due to system errors or problems arising from your business process such as poor customer service, unwanted recurring payments, authorization errors or faulty product fulfillment.

Customers could file chargebacks related to recurring payments if you bill them regularly without their knowledge or consent. Recurring billing chargebacks could also be filed against businesses that accept payments in installments.

Authorization errors can occur when the merchant attempts to override a declined transaction, especially if this override is done with a voice authorization. Authorization error chargebacks can also result from multiple deposits made to complete a single authorization.

What are True Fraud Chargebacks?

This chargeback involves actual fraud. Individuals could purchase your product or service using stolen credit card information and the legitimate owner of the credit card would file a chargeback regarding the transaction.

The cardholder would claim that his/her credit card was charged without their knowledge. Such a transaction is illegal and the perpetrator of this crime can be severely penalized.

Occasionally, you could incur this chargeback due to a misunderstanding. Sometimes, a family member could make a purchase using a family credit card and another member of their family may not be aware of that transaction and could file a claim against your business.

What are Friendly Fraud Chargebacks?

After receiving the product, some customers may claim that they were unaware of the purchase or say that they never received the product or say that they returned the product without receiving credit for their return. Simply put, the customer could be looking to use the product or service without paying for it.

Occasionally, this type of fraudulent chargeback is used to navigate around interacting with the merchant in order to receive a refund. Instead, the customer could file a chargeback directly with the bank.

If you are involved in an e-commerce business and your transactions involve 100% card-not-present purchases, you would most likely deal with plenty of friendly fraud chargebacks.

Does the Type of the Chargeback Impact the Merchant?

Yes and no. 

More broadly, chargebacks are intended as a consumer protection tool. Cardholders who are facing potential theft of their card or personal information through true fraud need support, and both the law and financial institutions have made changes so that they can get their money back effectively and efficiently. This goes for merchant errors as well. If a merchant makes a mistake and charges a customer for something incorrectly, it benefits everyone to have a system in place to manage those issues without requiring the cardholder to have to count on the merchant to do the right thing. 

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

However, a chargeback is a chargeback is a chargeback. This means that whether their issue is due to true fraud, merchant error, or friendly fraud, it still counts as a chargeback against the merchant. Even if a merchant disputes a chargeback and wins, it still counts against their ratio. 

That seems unfair, but it makes sense. If a merchant runs into chargebacks throughout their business, everyone knows that it happens. But if they have a lot of chargebacks (usually above 1% - 1.5% of all monthly transactions), then it signals one of two things:

  1. The merchant is facing several errors that they are not correcting, resulting in chargebacks, or 
  2. The merchant is not adequately preventing fraud or chargebacks, bringing more work and more costs to the banks and the card network.

In either case, it is up to the merchant to make changes to address chargebacks, even if they are not at fault for the majority of them.


Rest assured that your competitors also probably face similar fraudulent chargebacks. Customers may file such fraudulent chargebacks without realizing how severely their actions affect your business. Clearly stating your return policies, tracking your shipments and acquiring signature confirmation upon delivery of your product are great methods to fight and win friendly fraud chargebacks.


What is the most common chargeback type??

According to Global Risk Technologies, the estimated most common kind of chargeback is the friendly fraud chargeback, accounting for up to 86% of all chargebacks..


What happens if you lose a chargeback?

if you lose a chargeback, you lose the revenue from the transaction, any fees associated with the chargeback, andy any overhead costs associated with the transaction and with fighting the chargeback.


Why do company hate chargebacks?

Because chargebacks cost time and money. Additionally, a chargeback can count against the merchant’s ratio and merchant account regardless of whether they win or lose.

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

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