Chargebacks are designed as a safety net for consumers, but for UK merchants, they can be a costly headache—especially when fraud is involved. With friendly fraud now accounting for up to 75% of all chargebacks and global volumes set to reach 324 million transactions annually by 2028, understanding chargeback fraud and how to prevent it is more important than ever.

What is a Chargeback?

A chargeback is a reversal of a credit or debit card transaction, initiated by the cardholder’s bank. It’s meant to protect consumers against unauthorised transactions, undelivered goods, or misrepresented services. However, it also opens the door to abuse—known as “chargeback fraud” or “friendly fraud”—where customers dispute legitimate transactions to claw back funds while keeping the goods or services (SEON).

How Does a Chargeback Work?

Here’s the typical process:

1. Dispute Raised: A customer contacts their bank to dispute a transaction.
2. Bank Investigation: The bank contacts the merchant’s acquiring bank, often via the card network (Visa, Mastercard, etc.).
3. Merchant Notification: The merchant receives a chargeback notification and, in some cases, a request for evidence.
4. Funds Debited: Unless the merchant successfully disputes the claim, the transaction amount (plus fees) is deducted from their account.

Examples of Chargeback Fraud

Chargeback fraud comes in several forms, including:

• “Item Not Received” Scam: The customer claims non-delivery despite tracking evidence
• “Defective Item” Scam: The customer falsely claims a product was faulty after use.
• “Unauthorized Transaction” Scam: A family member uses the card, but the cardholder disputes the charge.
• Buyer’s Remorse: The customer regrets a purchase and disputes it instead of requesting a return

Who’s Involved in the Chargeback Process?

• The Cardholder (customer)
• The Merchant (you)
• The Acquiring Bank (your payment provider)
• The Issuing Bank (customer’s bank)
• The Card Network (Visa, Mastercard, etc.)

How Chargebacks Differ from Section 75 Claims

Chargebacks are part of card scheme rules, offering protection for both debit and credit card payments. Section 75 of the Consumer Credit Act 1974, however, is a legal protection for credit card purchases between £100 and £30,000 (MoneyHelper). Section 75 makes the credit card provider equally liable for a breach of contract or misrepresentation by the merchant.

Key Differences:

• Chargebacks: Not legally required; available for both debit and credit cards; time limits apply (typically 120 days from when the issue is discovered, up to 540 days from the transaction date) (Dojo).
• Section 75: Legal right; credit cards only; covers supplier insolvency and misrepresentation.

Why is Chargeback Fraud a Problem for Merchants?

• Financial Losses: Merchants lose the sale value, plus chargeback fees (which can be £15–£25 per case or more).
• Increased Processing Costs: High chargeback rates can result in higher processing fees or even loss of card processing privileges (Mastercard).
• Reputational Damage: Excessive chargebacks can label your business as “high risk” to banks and payment providers.
• Operational Disruption: Time and resources spent managing disputes instead of growing your business.

How Can Merchants Prevent Chargeback Fraud?

Here’s how to stay one step ahead:

1. Provide Clear Product Descriptions

Make sure your product and service descriptions are accurate and detailed to avoid misunderstandings.

2. Use Strong Proof of Delivery

Always use tracked shipping and require signatures for high-value goods.

3. Maintain Excellent Communication

Respond quickly to customer queries and complaints—many disputes can be resolved before they escalate.

4. Implement Robust Payment Security

Use secure payment gateways, 3D Secure, and fraud detection tools to spot suspicious transactions.

5. Make Returns Easy

A straightforward, visible returns policy encourages customers to contact you before their bank.

6. Keep Meticulous Records

Store proof of delivery, transaction details, and customer communications. This evidence is crucial if you need to dispute a chargeback.

7. Educate Your Team

Train staff on how to spot red flags, handle disputes, and communicate your policies clearly to customers.

8. Regularly Review Your Payment Provider

Not all providers are created equal—some offer better support and fraud tools. Nexpay can help you compare your options and secure the best fit for your business.

What To Do If You Receive a Chargeback

• Act Fast: There are strict deadlines to respond, sometimes as little as 20 days (Chargebacks911).
• Gather Evidence: Proof of delivery, correspondence, and transaction records.
• Submit Your Case: Follow your acquirer’s instructions for submitting evidence.
• Learn and Adapt: Analyse patterns in chargebacks and update your processes to prevent repeats.

Final Thought

Chargeback fraud is on the rise, but with the right knowledge and systems in place, you can protect your business, your cash flow, and your reputation.

Need advice on card payment solutions, backup options, or PCI compliance? Contact Nexpay or call us on 0333 305 2270—because every transaction matters.

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