Flevy Blog is an online business magazine covering Business Strategies, Business Theories, & Business Stories.

A Simple Guide for Reducing Fraud by Managing Chargebacks

Featured Best Practice on Retail Strategy

103-slide PowerPoint presentation
This presentation is a report for a global electronics firm which was executing a digital growth strategy in the US. Although it had great products and a rejuvenated brand, the firm lacked a good understanding of the retail channel and thus lacked a channel strategy and relevant capabilities to [read more]

* * * *

When starting a business your responsibilities never really stop.

One of the many aspects of running your own company is keeping your customers happy after they spend money on your product. Even then there is still time for them to regret their purchase.

The thing is, any kind of chargeback can cost you time, money, rating, or even reputation. And, it makes a convenient opportunity for anyone with fraudulent intentions.

At the end of the day, any kind of income loss is not good for business. So, in order to reduce the risk of fraud, it is essential to get familiar with handling chargebacks and the best methods of their prevention.

What are chargebacks

The easiest way is to define a chargeback as an online transaction that is disputed by the buyer.

In that regard, it is similar to the refund, with one crucial difference.

With the chargeback, the customer doesn’t contact the seller, but the issuing bank, taking the potential problem to another level.

The bank, not the seller, decides on the issue after the investigation period. If the decision is in the favor of the buyer, the seller loses revenue.

Different reasons for chargebacks

Not every chargeback is requested in the same manner or for the same reason. Here are the three main examples of customers initiating the chargeback process:

Seller’s error – a problem that occurs on your end. It can be some sort of technical mistake, shipping issues, delivery problems, etc. These are legitimate cases that can affect your revenue.

Clear fraud – purchases that have been made with a stolen credit card or bank account information. In some cases, they can operate for an extensive period of time until their fraudulent activity is detected.

Friendly fraud – also known as a liar buyer or as chargeback abuse. This is a fast-growing problem in the industry and requires additional attention.

So, researching it even further the friendly fraud can be divided into three different types:

  1. Accidental friendly fraud – in certain situations a buyer made an accidental purchase. Don’t forget, simple and innocent mistakes can happen to anyone. Another example of this type of fraud (also known as family fraud) is an unauthorized purchase made by a child, without their parent’s knowledge.
  2. Opportunistic friendly fraud – in some cases a buyer simply regretted the purchase, in others, the buyer can be disputing an existing chargeback policy in some way.
  3. Malicious friendly fraud – a very frequent example is buyers trying to get merchandise without paying for it by exploiting and manipulating the chargeback process. In other words, this is, plain and simple, an intentional fraud.

It is important to understand chargeback frauds as much as possible in order to know how to handle it in the most effective way since they can require different approaches.

How much does it cost

For starters, the chargeback costs more than a regular refund simply because in that situation the seller pays a certain fee (the amount itself varies).

Chargeback fraud can then collect additional expenses such as standard transaction fees, operational costs, marketing expenses, high chargeback ratios, etc.

Altogether, global statistics show a definite increase in payment frauds of various sorts.

How to calculate the ratio?

You can calculate the chargeback rate by dividing total monthly chargebacks by total monthly transactions.

How to deal with fraudulent chargebacks

Some methods are quite effective in reducing the chances of chargebacks by optimizing the whole purchasing process

Consistency and proper advertisement

It is quite simple, advertise your products exactly as they are. The more honest you are when describing your products, the less likely you will have to deal with unsatisfied customers.

And keep in mind, consistency is key. Once you’ve established an advertisement policy maintain it throughout your marketing plan.

Customer service

Get to know your customers. The more you know about them and their purchasing habits the more efficient you are with reducing the risk of any potential chargeback fraud.

This also means establishing customer service to provide quick solutions or explanations for any uncertainty.

Luckily, there are numerous customer service tools to help you stay on top of things, no matter how hectic business gets.

Minimizing shipping errors

Errors in shipping and packaging are rather common problems and usual reasons for chargeback requests.

It is up to you (and your company) to make sure that the products are safely packaged and shipped on time (punctuality is crucial) and to the right address.

There are, of course, occasions where the delivery delays (being a matter of a larger scale) are not your fault.

Chargeback solutions

There are some additional and valuable systems in dealing with chargebacks:

  • 3D-Secure – an added layer of protection that allows a seller to verify and share data with the bank
  • Credit Card Verification code (CCV) – a code of three or four number that validates the transaction between the seller and the credit card company
  • Address Verification Service (AVS) – service that compares the billing address of the buyer with the one that is registered with the bank
  • Payment Services Directive 2 (PSD2) – is a set of laws for payment services created to protect the users from fraud
  • Chargeback notifications and analysis – it is important to have real-time notifications that help you deal with the potential problem as soon as possible. No matter the results, continue to analyze metrics since there is always room for improvement
  • Delivery confirmation – provides more detailed information about the delivery status such as the exact time that the order has been made and the product shipped, how it is being delivered, etc. Tracking the delivery process can be reassuring for the customer.


All and all, running a business is a full-time commitment and it doesn’t come without its risks.

However, with the proper measures and actions, you can improve the buyer’s experience by making sure that the transactions go smoothly and efficiently.

Not only will you drastically reduce the risks of chargeback frauds, but also establish an ever-growing base of satisfied customers.

44-slide PowerPoint presentation
The e-commerce market continues to grow exponentially. More consumers are opting for the convenience of online shopping. This trend has been accelerated by COVID-19. The future of e-commerce is Omni-channel Retailing. A single channel is no longer enough. The challenge is to find a seamless [read more]

Do You Want to Implement Business Best Practices?

You can download in-depth presentations on Retail Strategy and 100s of management topics from the FlevyPro Library. FlevyPro is trusted and utilized by 1000s of management consultants and corporate executives.

For even more best practices available on Flevy, have a look at our top 100 lists:

These best practices are of the same as those leveraged by top-tier management consulting firms, like McKinsey, BCG, Bain, and Accenture. Improve the growth and efficiency of your organization by utilizing these best practice frameworks, templates, and tools. Most were developed by seasoned executives and consultants with over 20+ years of experience.

Readers of This Article Are Interested in These Resources

Excel workbook
Financial model presenting a development scenario for Shopping Center. The main purpose of the model is to enable users to get into details of every step of a shopping center project from the construction stage, to operating analysis, projection of cash flows, and a potential future sale. It [read more]

Excel workbook
18-slide PowerPoint presentation

About Shane Avron

Shane Avron is a freelance writer, specializing in business, general management, enterprise software, and digital technologies. In addition to Flevy, Shane's articles have appeared in Huffington Post, Forbes Magazine, among other business journals.

Complimentary Business Training Guides

Many companies develop robust strategies, but struggle with operationalizing their strategies into implementable steps. This presentation from flevy introduces 12 powerful business frameworks spanning both Strategy Development and Strategy Execution. [Learn more]

  This 48-page whitepaper, authored by consultancy Envisioning, provides the frameworks, tools, and insights needed to manage serious Change—under the backdrop of the business lifecycle. These lifecycle stages are each marked by distinct attributes, challenges, and behaviors. [Learn more]

We've developed a very comprehensive collection of Strategy & Transformation PowerPoint templates for you to use in your own business presentations, spanning topics from Growth Strategy to Brand Development to Innovation to Customer Experience to Strategic Management. [Learn more]

  We have compiled a collection of 10 Lean Six Sigma templates (Excel) and Operational Excellence guides (PowerPoint) by a multitude of LSS experts. These tools cover topics including 8 Disciplines (8D), 5 Why's, 7 Wastes, Value Stream Mapping (VSM), and DMAIC. [Learn more]
Recent Articles by Corporate Function






The Flevy Business Blog (https://flevy.com/blog) is a leading source of information on business strategies, business theories, and business stories. Most of our articles are authored by management consultants and industry executives with over 20 years of experience.

Flevy (https://flevy.com) is the marketplace for business best practices, such as management frameworks, presentation templates, and financial models. Our best practice documents are of the same caliber as those produced by top-tier consulting firms (like McKinsey, Bain, Accenture, BCG, and Deloitte) and used by Fortune 100 organizations. Learn more about Flevy here.

Connect with Flevy:


About Flevy.com   /   Terms   /   Privacy Policy
© . Flevy LLC. All Rights Reserved.