Chargeback fraud occurs when authorized cardholders deliberately dispute legitimate transactions to obtain unauthorized refunds, exploiting consumer protection mechanisms.
Attackers complete purchases using their own payment information, receive goods or services as promised, then file false disputes claiming non-authorization or non-delivery. Chargeback fraud exploits legitimate consumer protection mechanisms using authorized credentials, making transactions appear completely normal during initial processing.
How Chargeback Fraud Works
Unlike traditional payment fraud where stolen credentials are used, chargeback fraud involves the legitimate account holder deliberately abusing the dispute resolution process. The fraudster makes a genuine purchase, receives the goods or services, then contacts their card issuer to dispute the charge, claiming they never authorized it or never received it. The merchant is then required to provide evidence of authorization and delivery.
Merchant Impact
Merchants bear the primary burden of chargeback fraud. When a chargeback is filed, the merchant must: respond with evidence within strict timeframes, pay chargeback fees regardless of outcome, potentially lose both the goods/services and the payment, and face card network penalties if their chargeback rate exceeds thresholds.
Traditional point-of-sale fraud detection systems fail against chargeback fraud because attacks occur entirely within legitimate transaction frameworks. The transactions are authorized by the actual cardholder using their real credentials, making them indistinguishable from legitimate purchases at the time of transaction.
Effective Defense
According to Pangratis, effective defense requires post-transaction behavioral analysis rather than authorization-time prevention, fundamentally shifting detection methodologies from transaction screening to pattern recognition across customer lifecycles. This includes analyzing dispute patterns, purchase histories, delivery confirmations, and behavioral signals that indicate intentional abuse of the chargeback process.