If you’ve ever had to deal with a chargeback, you know how frustrating, and costly it can be. You’re not just losing a sale. You’re facing fees, lost inventory, and the very real risk of getting labeled as high-risk by your payment processor. It feels unfair, especially when you’ve done everything right.
Chargebacks were meant to protect customers from fraud, but more and more, they’re being used in ways that hurt businesses like yours. That’s why chargeback prevention is so important. It’s not just about fixing problems after they happen. It’s about setting up smart systems that help you avoid disputes in the first place—so you can focus on growing your business without worrying about lost revenue.
For businesses, managing and preventing chargebacks is an ongoing challenge, and one that’s only predicted to get worse. A 2025 Davos Insights and Microsoft report projects chargebacks to increase by 24% by 2028, costing North American merchants and online companies $41.6 billion.
The good news? Many chargebacks are avoidable. Understanding the different types of chargebacks, implementing measures to prevent them, and formalizing a plan to dispute them will help lessen their negative impact on businesses.
What are Chargebacks?
A chargeback occurs when a customer successfully disputes a transaction with their bank or credit card company instead of seeking a refund directly from the merchant or online business that provided the product or service.
Chargebacks typically fall into one of three categories: criminal fraud, merchant error, and friendly fraud.
Criminal Fraud
The numbers on online fraud are hard to comprehend. In 2024, online scammers stole a record $16.6 billion – up 33% from 2023 – according to the FBI’s 2024 Internet Crime Report. The sharp rise of card-not-present (CNP) transactions is one trend worth noting, with research indicating these transactions made up 73% of all credit card payment fraud in the U.S. last year.
What does credit card fraud look like? Today’s malicious actors are using sophisticated methods to commit fraud. Here are just a few examples.
- Account takeover fraud: accounts are compromised and used to make purchases
- Identity theft: criminals pose as genuine customers
- Card testing fraud: purchases are made to verify stolen card details
- Synthetic identity fraud: purchases are made under new identities created with both fake and real information
- Clean fraud: stolen cards are used and the transactions are undetected by fraud prevention tools
- Triangulation fraud: real customers make a purchase from a third-party marketplace, like eBay or Amazon, but the seller purchases the product from another merchant
These criminal activities lead to legitimate chargebacks when cardholders discover unauthorized charges on their accounts, or, in the case of triangulation fraud, when a fraudulent product arrives.
Merchant Error
Chargebacks can result from a myriad of issues within the merchant’s own operations. These can be actual mistakes made by the merchant or business, or practices that lead to customers receiving damaged products or the wrong ones altogether. Here are some of the more common examples of merchant error.
- Processing duplicate transactions for one order
- Sending orders to incorrect addresses
- Processing transactions without proper credit card authorization
- Charging the wrong amount during payment
- Shipping delays or tracking mixups
- Shipping wrong or defective items
- Publishing inaccurate product descriptions
These errors are often the most preventable causes of chargebacks.
Friendly Fraud
The most challenging chargebacks to prevent occur as a result of friendly fraud, where customers accidentally or intentionally dispute transactions they made. Unfortunately, it’s also the most common – Visa reports that friendly fraud now accounts for up to 75% of all chargebacks.
Here are some common reasons that lead consumers to dispute charges with their bank or credit card companies vs. directly with merchants.
- Billing descriptors on statements are unclear
- Purchases are made by family members without the cardholder’s knowledge
- Customers forget about a recurring subscription or are unclear about its terms
- Customers falsely claim dissatisfaction after fully using a product
- Customers sign up for free trials with no intention of paying for the service
- Customers use buyer’s remorse as an excuse for a refund
H4: It’s worth elaborating on return fraud. According to the NRF and Happy Returns 2024 Consumer Returns in the Retail Industry, 13.5% of all returns – worth $101 billion – were cases of return fraud last year.
Chargeback Prevention Strategies
The good news is that many chargebacks are preventable with the right approach. Here are some strategies for merchants and businesses to consider.
Authenticate Customers
Strong customer authentication methods ensure that the person making the purchase is the legitimate cardholder. Some considerations include 3D Secure 2.0, two-factor authentication, Address Verification Service (AVS) verification, Card Verification Value (CVV) verification, device fingerprinting, and behavioral biometrics. While these methods add layers of security, it’s important to ensure they don’t significantly impact the customer experience.
Adopt Technology Tools
Depending on needs, transaction complexity, and budget, businesses can implement specific tools or a full suite of solutions to provide a layer of protection. Aurora Security’s comprehensive security solutions are an example. These tools can be adopted individually or as needed to provide real-time chargeback alerts, instant refunds to resolve issues before chargebacks are filed, and even digital receipts and financial support in the event of disputes.
Confirm Orders
A formal order confirmation process can prevent many chargebacks. This can be as simple as a detailed email that clearly specifies what the customer has purchased and when it’s expected to be delivered and follow up emails with shipping notifications and confirmation of delivery. This communication trail reduces customer confusion – and serves as valuable evidence should a dispute arise.
Ensure Digital Payment Security
Adopting the latest card security practices helps prevent unauthorized transactions. One example of this is network tokenization, which replaces sensitive card data with a unique identification token. It’s just one of the security features built into the ARISE Payment platform. Other measures worth implementing include maintaining strict PCI DSS compliance, utilizing end-to-end encryption, implementing fraud screening rules, and enabling velocity checks to detect unusual patterns, such as multiple purchases in rapid succession from a single account.
Manage Shipping Expectations
The more information businesses can provide to customers during the fulfillment process, the better. Best practices include providing realistic delivery timeframes, using tracking numbers to monitor progress, communicating delays, requiring signature confirmation for high-value items, and maintaining accurate inventory management to ensure you’re not selling products that are out of stock. When customers know when to expect their purchase, they’re less likely to file chargebacks out of frustration or confusion about order status.
Obtain Proof of Receipt
Documentation is your best defense against friendly fraud as it provides essential evidence in the event of a dispute. Beyond requiring signatures for valuable items, consider photographing packaged items before shipping to document condition and contents, especially for fragile or valuable products. Merchants can also consider using delivery services with proof-of-delivery options.
Optimize Billing Descriptors
Confusing or unrecognizable billing descriptors were the leading cause of chargebacks, according to the 2024 Cardholder Dispute Index. Ensure it identifies your business in a recognizable way, matching your store name or website rather than a corporate entity name. Some other best practices include providing contact information to allow customers to inquire about charges, keeping your descriptors consistent across all channels, and including a brief purchase description to help customers recognize the charge.
Make Your Return, Refund and Cancellation Policies Clear
Transparent policies help set appropriate customer expectations. Make them easy to understand to eliminate any potential for misunderstanding, and include them prominently on the website and within all order communications. Some merchants also require customers to acknowledge the policies by checking a box during the online checkout process as well. When customers understand your policies before purchasing, it makes it more likely that they initiate a refund directly through approved channels rather than filing chargebacks.
Be Accessible to Customers
Don’t underestimate the value of great customer service. Oftentimes customers request refunds from their bank or credit card company only after being unable to get their issue resolved with a merchant or business. Offer multiple contact channels including phone, email, and online chat to accommodate different customer preferences, provide 24/7 online support, and respond to customer inquiries promptly.
Cancel Recurring Transactions Promptly
We’ve all been frustrated at one time or another while trying to cancel a subscription. Making it difficult to do so can force customers’ hands to file chargebacks – and ensure they never buy your product or service again. Subscription-based businesses should process cancellations – and document doing so – immediately upon request, rather than waiting until the end of a billing cycle. This can help preserve your brand reputation and leave the door open to future business.
Post-Chargeback Action Plan
Despite all of these prevention efforts, some chargebacks are inevitable. When they occur, merchants and online businesses typically have 7-10 days to respond. To dispute a chargeback effectively, follow this four-step process.
- Review the chargeback reason code
- Gather relevant evidence specific to that reason code, which might include transaction receipts and invoices, delivery confirmation or proof of service, customer communication records, agreed-upon terms and conditions, and the IP address and device information
- Write a rebuttal letter that clearly addresses the specific dispute reason
- Submit all documents through your payment processor’s portal before the deadline, as late submissions are often automatically rejected
Chargebacks represent a significant threat to businesses. Merchants must navigate the complex dispute resolution procedures, potentially face financial penalties, and manage the administrative burden of responding to chargeback claims. However, with a comprehensive prevention strategy and a clear action plan for when disputes arise, merchants can be ready to face the challenge head on.
