Learn about the operational challenges and risks associated with the fraud & dispute process for banks and explore strategies and best practices benefitting both banks and their cardholders.

Fraud & Disputes

According to new studies by Ethoca, Verifi and Datos Insights, chargebacks continue to roil the global financial ecosystem. Charting an uptick in fraud and first-party misuse (FPM), the reports examine trends in dispute management and consumer behaviour.

, cited refund/policy abuse and first-party misuse (FPM) as top fraud trends in 2023, noting that both involve post-purchase efforts by customers or fraudsters to obtain free goods or services. Researchers found merchants use multiple tools throughout the transaction lifecycle to mitigate these disputes. For example, 67% of the 1,166 merchants surveyed routinely review and analyse non-fraud chargebacks to counter FPM, and 65% look for unusual patterns in customer order histories.

Effectiveness of tactics used to combat first-party-misuse

Fight First-Party Misuse

Source: Verifi 2024 Global Fraud & Payments Report

Consistent with Ethoca’s findings, the 

, produced by the Merchant Risk Council, Verifi, and Visa Acceptance Solutions, named refund/policy abuse and first-party misuse as the top two threats in 2022 and 2023, with FPM rapidly rising. Based on a survey of over 1,100 merchants in North America, Europe, Latin America, and Asia-Pacific regions, the report indicated that merchants reject approximately 6% of e-commerce orders due to fraud concerns, leading to false positive rates of between 2% and 10% and win rates of below 20% on fraud-related cardholder disputes.  

“For the second consecutive year, more than 60% of merchants in the survey say they experienced an increase in FPM over the past 12 months,”

 researchers wrote, noting that 31% of survey respondents had seen 

 in the past year alone. These findings provide further evidence of FPM’s meteoric rise 

Change in first-party misuse over the past year

Change in first-party misuse over the past year (2024)

will contact a bank first to resolve a transaction issue. 

“Half of consumers who didn’t recognise a purchase transaction contacted their bank while 

researchers wrote, urging organisations to implement more cost-effective approaches to customer service, as each live service interaction can cost more than $7 USD. 

Ethoca researchers pointed out that customers appreciate the ease and efficacy of opening a claim with an issuing bank and will continue to use this financial tool. Banks need to meet these claims in near real-time, they stated, by providing customers with self-service tools at all points of interaction. Chatbots on websites and banking apps can provide rich transaction data to customers in a friendly way to address and resolve complaints and inquiries.

“These improvements influence an issuer’s Net Promoter Score® and Customer Satisfaction Score (CSAT) — underscoring the importance of [prioritising] the customer experience,”

“Providing more information via text, email, chatbots or by phone is helpful, but many consumers seek out reviewing their transaction details in their digital banking app. Extending your brand’s presence and making information available in multiple places, like a digital bank app, helps reduce transaction confusion and potential disputes upfront.

Verifi researchers assessed a variety of strategies to combat first-party misuse and found 

 In fact, fewer than 35% of survey respondents had success with fighting and filing. 

Chargebacks - Effectiveness of strategies

“These data show merchants view reviewing and [analysing] non-fraud chargebacks as the most effective single tactic for countering FPM, closely followed by checking customer purchase and order histories and monitoring transaction data for unusual patterns,”

“Requiring CVV values to process card payments and working with providers to jointly prevent or identify fraudulent transactions round out the top five.”

Ethoca researchers agreed that implementing multiple tools can minimise fraud, identify good customers throughout the purchase journey, and increase authorisation rates. 

“Consider building a better cardholder experience that makes it easier to recognize transaction details,”

“Offer digital self-serve features that will put more information and control at consumers’ fingertips.”

Ethoca predicted that different regions will experience varying chargeback growth rates until more countries mandate strong customer authorisation (SCA) tools. 

“Disputes and chargebacks will grow as consumers increasingly make purchases using smartphones in-store, online and with mobile apps,”

“Global chargeback volume is projected to reach 337 million transactions in 2026, a 42% increase from 2023 levels.”

, can help issuers meet these growing case volumes, working hand-in-hand with Mastercom and VROL to manage disputes and arbitrations across the entire dispute lifecycle. Using curated chatbot skills, Amiko communicates with cardholders online and in apps and portals. Its digital skills and rule-based AI capabilities optimise efficiencies and reduce human error across case creation, merchant collaboration, and fraud reporting.

Ethoca researchers acknowledged that not all first-party disputes are intentionally fraudulent. For example, a cardholder may not recognise a charge or be aware of a friend or family member’s unauthorised purchase. Issuers and merchants can share additional data elements, such as purchase history, device, delivery information, identity elements, and geolocation, issuers and merchants to resolve issues stemming from unintentional first-party fraud.

As issuers, merchants, cardholders, and third-party service providers continue to navigate disputes across multiple channels and geographic regions, balancing dispute management with optimal customer experiences will foster relationships based on respect, profitability, and trust.

Leveraging rule-based chatbots and automated technologies to resolve cardholder inquiries before initiating a chargeback is crucial in addressing issues with FPM. These solutions can provide transactional data to cardholders who may question billing descriptors or unclear charges and can answer simple questions before these concerns escalate into formal chargeback cases.

Additionally, rule-based chatbots can guide cardholders to contact the merchant directly for a refund, rather than immediately filing a formal complaint. A chargeback should be the last resort, only when no other alternatives are available. Pre-dispute collaboration platforms like Ethoca (by Mastercard) and Verifi (by Visa) also enable transactions to be refunded directly by the merchant, avoiding the need for a chargeback altogether.

, combines the power of rule-based chatbots with the collaboration platforms of Ethoca and Verifi. This allows issuers to prevent or resolve unjustified cardholder disputes or refund requests from merchants before escalating to the chargeback process.

According to new studies by Ethoca, Verifi and Datos Insights, Chargebacks continue to roil the global financial ecosystem. Charting an uptick in fraud and first-party misuse (FPM), the reports examine trends in dispute management and consumer behaviour.

2024 Chargeback trends: Insights from Industry Experts

Blog Chargeback Trends

2024 Chargeback trends: insights from industry experts

Solving the complex issue of first-party fraud has been a top concern for issuers and merchants. Also known as 

, these events occur when customers dispute their own transactions, for reasons ranging from unrecognised transactions, misuse of their payment credentials by others, and other service-related issues. Recent studies indicate that first-party fraud is rising, heightening the risk of false declines for issuers and chargebacks for merchants.  

 attributed the rise of friendly fraud to converging trends, such as the growing adoption of e-commerce and digital payments, “transaction confusion” when consumers do not recognise descriptions on billing statements, and a growing population of connected devices with stored payment credentials where people other than authorised users can initiate purchases. 

“When it comes to fighting friendly fraud, it’s critical that merchants and issuers work together to put more clarity and information at customers’ fingertips—before they decide to dispute a legitimate charge,” Mastercard wrote, advising that clearly displayed merchant names and logos can provide useful insights to customers and customer service representatives. 

Mastercard described dispute management as time-consuming, labour-intensive and costly. Issuers may turn away a legitimate dispute, creating a false decline that results in reputational damage and revenue losses. Merchants may file a report and fight a dispute, only to see it become a chargeback requiring additional fees and refunds. Customers may file a legitimate dispute, only to become unhappy by lengthy questionnaires and time delays. 

These difficulties further impact the bottom line and customer experience, according to the 

, published by The Merchant Risk Council (MRC), Cybersource, and Verifi, which called first-party fraud a growing issue for 6 in 10 merchants, fueled by “attempts to obtain free goods and transaction descriptor confusion.”

Researchers identified five strategic approaches that merchants around the world use to combat first-party misuse (FPM):

MRC survey respondents ranked “flagging and checking transactions,” and “notifications and visibility” as top strategies for reducing FPM. 

Ethoca advised issuers to include merchant names, logos, and digital receipts in transaction details, and to share information quickly to help customers recognise charges on billing statements. 

Considering the time, effort, and human capital required to manage first-party fraud disputes, wouldn’t it be preferable to stop disputes before they happen, by automating strategies and recommendations? Domain-specific chatbots can address customer inquiries in various languages, using card network rules while providing customer-requested information and transaction details on demand. In fact, Rivero recently disclosed that Amiko’s Virtual Agent 

successfully deflected 80% of first-party fraud claims

, noted that first-party fraud is not always intentional. 

“A customer may open a banking app and see an unfamiliar transaction on a card that is used on a daily basis,”

“If the app displays only a misleading merchant’s name and amount billed, it might be difficult for the customer to recall a month-old transaction.” 

Unintentional first-party fraud, also known as family or friendly fraud, may occur on smartphones and connected devices, she added, providing the example of a child buying a game on a parent’s phone. In cases like these, Virtual Agents can curate and share contextual data from authorisation flows to help family members recognise a transaction’s specific details and provenance.  

Whether willful or unintentional, first-party disputes can be managed at scale by Amiko’s Virtual Agent, Nikayin explained, which outperforms legacy dispute software. With deep knowledge of scheme rules and ability to aggregate fraud-related transactions into a single case, Amiko’s Virtual Agent can be integrated into banking apps via APIs to provide banks’ customers with self-service options. 

When a cardholder clicks a button, effectively claiming to not recognise a transaction, Amiko’s Virtual Agent responds immediately, initiating a conversation in the customer’s native language and fetching pertinent details, such as the location, time, currency, and digital platform where a transaction occurred. Beyond providing information quickly, the chatbot is personable and responsive to basic questions, without involving a customer service representative at the bank.

Unlike traditional exchanges between a customer and a card issuer, no humans are involved. Customers do not have to call a bank, only to be referred to an agent, who would then have to research the transaction further. The virtual agent can ask the cardholder relevant questions and provide all the information needed to remember or recognise the transaction in question:  a truly zero-touch first-party fraud deflection before cases are even opened. 

By providing access to transaction data wherever and whenever customers need it, deflecting false claims and chargebacks, and improving issuer efficiencies, zero-touch fraud resolution deflects first-party fraud at the start, benefitting the entire commerce value chain. 

Solving the complex issue of first-party fraud has been a top concern for issuers and merchants.

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Solve first-party fraud with zero-touch resolution

Customer trust in financial institutions has never been higher, according to a recent survey of over 32,000 bank customers in 28 countries. The 2024 Edelman Trust Barometer found trust levels highest among high-income earners and developing countries, which also support banks’ use of LLMs, AI and advanced technologies to improve security, operations and customer experience. 

Despite these positive indicators, the 2024 

 found security a top concern in financial services, due to growing use of stolen credentials and fraudulent identities on banking and e-commerce sites. The survey of 1,845 executives, conducted by Forrester, found 49% of respondents concerned about creating friction by introducing tougher security measures. 

Warning that gaps in fraud coverage create vulnerabilities, researchers recommended taking a risk-based and data-driven approach to fraud management, by applying different levels of security based on risks associated with each transaction. 

“Raise customer awareness about emerging threats – especially in areas like scams, mobile transaction fraud, and QR code fraud – and the potential impact they have on their own security to help them understand the necessity of security measures,”

 they wrote, adding that these measures will help stakeholders adapt to PSD3’s higher authentication requirements. 

Sully Perella, senior manager at Schellman, agreed with researchers that AI-powered tools are effective at fighting fraud and enhancing the customer experience. He noted, however, that service providers do not always clearly explain AI’s features and benefits. 

Perella pointed out that AI is not the first line of defense in a typical transaction flow, which begins with consumer checkout, followed by a bank verifying basic account details, such as IP address, location and time of day. After the bank confirms all checkpoints, a rule-base fraud detection sytstem gathers more granular details, such as browser version, smartphone orientation, last website visited, and how many times a transaction was attempted from a particular location or device. 

The ML algorithms use this meta data to build a risk profile and determine if a transaction looks suspicious. For example, it might ask why a request is coming in from Thailand from a cardholder who lives in Fort Worth and has never used this card online. An issuer or service provider can set these threat metrics, for example based on the data received as part of the  

 protocol, originally established by Visa in 2001. 

Set clear rules on when to apply machine intelligence

, advocates implementing rule-based machine intelligence when it comes to automating customer support and when offering customer self-serving. These technologies deliver a more consistent and reliable customer experience than large language models (LLMs), which he noted can be prone to hallucinating and making things up.  

“There’s a lot of excitement about AI but people who see beyond the hype appreciate our approach and recognie the need to map problems to solutions in a secure, predictable way,”

“I would urge banks and card issuers not to expose their customers to a large language model and not to work with a fintech partner that uses LLM for customer service.”  

 learned this the hard way, Müller noted, when a chatbot made up a refund rule that didn't exist. When the consumer went to claim that refund, the airline was held liable for the chatbot’s actions and had to refund the flight. This highlights why LLMs are not ideal for building virtual agents and apps, he said.  

Regulators are also taking a hard look at AI, Müller noted, citing the 

, enacted in March 2024, a regulatory framework designed to be phased into law over a two-year period. This new law will make it more difficult for banks and B2B fintechs to build products on top of machine learning models that are not deterministic or explainable, he said, adding that he agrees with and supports these protections. 

Rule-based virtual assistants are a powerful fraud deterrent for issuing banks, Müller noted, because they respond rapidly to customer requests in clear, understandable language. 

“It’s actually quite difficult to distinguish between real payment card fraud versus cardholders trying to gain a financial benefit by wrongfully claiming non-receipt or a problem with merchandise, or pretending not to recognize a transaction,”

 he said, noting that first-party fraud has been a growing concern for banks and fintechs. 

Sharing transaction details or requesting missing documentation, a rule-based virtual agent engages directly with customers to resolve or deflect a dispute, Müller said, and connects customers with merchants to solve problems before they become chargebacks. Throughout these conversations, the virtual agent remains attentive and supportive, he added, while staying within the boundaries of established threat metrics and card brand rules.

bd789a70-efe1-409b-a0cf-f3beffa70620_2912x2096.jpg

Build on customer trust with next-gen fraud management

Deciding whether to build an in-house dispute management tool or to buy an established system is pivotal for any financial institution today. Join us on 

Dispute Management Solutions: Should Issuers Build or Buy?

" and gain insights from industry experts on what’s best for your bank.

: Thor brings 28 years of experience in the card payments industry, including 12 years with an international card scheme and extensive experience with various processors on both the issuing and acquiring sides. His career has spanned both operational roles and product development.

: Erik brings 23 years of experience in payments and fintech, with expertise in payments issuing, embedded finance, and banking. His career has spanned roles in market expansion, strategic development, and client advisory. At Flagship Advisory Partners, Erik advises clients on growth strategies and Mergers and Acquisition.

: Kevin has seven years of experience in card fraud and disputes, spanning operations, compliance, and project management. He possesses a deep understanding of card scheme rules and industry-standard practices, as well as firsthand experience in solving the challenges of creating effective internal tools. Kevin's background covers both the issuing and acquiring sides of the industry.

Don’t miss out on the opportunity to gain expert insights that could significantly influence your strategic decisions regarding dispute management.

We look forward to welcoming you to what promises to be a thought-provoking and informative session.

Deciding whether to build an in-house dispute management tool or to buy an established system is pivotal for any financial institution today. Join us on June 20 at 15:00 CEST for our webinar, "Dispute Management Solutions: Should Issuers Build or Buy?" and gain insights from industry experts on what’s best for your bank.

[Webinar] Dispute management solutions: should issuers build or buy?

Payment card disputes and inquiries are as nuanced and various as the individual cardholders who initiate them. Card issuing banks need data, skills and advanced technologies to respond to each unique situation quickly and at scale. A recent study by Arizent found global banks are exploring AI’s potential to improve efficiencies, resolve issues and deflect fraud by automating dispute management and other manual processes.  

“Unleashing the Power of AI,” authored by Matt Kuhrt and sponsored by 12C Inc., found increased interest in AI among global banks with more than $100 billion in assets. While AI has been around for decades, it is more accessible to consumers than ever before, Kuhrt noted. 

“As the benefits of a new generation of AI tools spread, consumers will expect AI-enhanced experiences across the board,” Kuhrt wrote. “And banks won’t be immune to that expectation. As organisations across industries pursue AI applications, standards and best practices will evolve quickly, and talent capable of integrating AI innovations will likely be in short supply.”

Amid early-stage AI pilots and implementations, the European banking community is seeing a notable proof of concept in Rivero’s Amiko Virtual Agent, a solution designed to automate dispute management while making the process simple, easy and friendly for all stakeholders. 

Thomas Mueller, Co-Founder and CEO of Rivero, pointed out that the Amiko Virtual Agent can handle a dispute from start to finish, from analysing transactions and requesting information when needed to preparing documents and submitting claims for customers and even following up when necessary. 

“The Amiko Virtual Agent is created by humans for humans,” he said. “And most importantly, it delivers a consistent experience in a repeatable, explainable way.” 

Unlike generative AI and other large language models (LLMs), which are dynamic, unpredictable and even error-prone, the Amiko chatbot is a stable, rules-based solution that banks can fully control, he stated, crediting its proven success and growing following to these five design principles: 

In a world of customer-centric commerce, consumers are accustomed to self-service options when shopping in stores, online and in mobile apps. Transactions have evolved from single-click checkouts into fluid conversations between customers and brands. Text messages, email offers and unattended kiosks have enabled retailers and service providers to expand their reach and meet customers wherever they shop. Card-issuing banks can use this playbook to answer disputes and inquiries in real time and meet customers at their most urgent time of need. 

Banks that have launched the Amiko Virtual Agent have migrated customers to the self-service channel while keeping traditional inbound channels in place, achieving a 75% adoption rate in as little as 2 months. This purely organic transition has enabled participants to gradually phase out legacy phone, paper and email systems. 

Due to the time-sensitive nature of cardholder disputes, card issuers must respond quickly to incoming requests and facilitate meaningful communications between customers and merchants. The Virtual Agent provides pre-checked, pre-filled fields that simplify pre-dispute procedures, with parameters that indicate if customers meet qualifying criteria and full documentation that reduces errors and lightens back-office agent workloads. 

Participating banks have found customers who choose the self-service option are very likely to be completely served by the Virtual Agent without the need to call or email their bank. In addition to removing friction and improving communications among all parties, these conversations have resolved or deflected 20% of dispute claims, according to recent reports.

By connecting customers and merchants to resolve issues and using advanced analytics to identify anomalous behaviour and deflect fraud, the Virtual Agent de-escalates disputes and closes loopholes that exist in proprietary systems. These capabilities are essential for detecting the many different scenarios and motivations behind customer disputes. 

Consider an online dispute application on a bank’s website. Consumers could put any values in the fields of that online form and game the system, knowing that if a merchant doesn’t respond within the appropriate window of time, they might win a chargeback. This type of scenario would not happen with Amiko. The Virtual Agent would not accept gibberish on an online form and brings a level of intelligence and engagement to a previously flat experience. 

When customers do not recognise transactions, card issuers and merchants will typically ask if they have checked with members of their family. More and more customers are affected by what is sometimes called family fraud, especially in households where children may use a family member’s payment card data for in-app, online, and in-store purchases. 

The Virtual Agent can help cardholders navigate these situations and understand that the transactions were, in fact, legitimate by presenting relevant data, such as an authenticated e-commerce transaction or a Chip+PIN in-store transaction. These conversations, backed by transactional data, have successfully solved and deflected 80% of fraudulent disputes, whether opportunistic or unintentional. 

Issuers that have experienced the Amiko Virtual Agent can attest to the power of zero-touch revenue recovery, which has resulted in a 35% reduction of scheme disputes, in which funds flow back to card accounts without any human intervention. 

Mueller mentioned that some financial institutions have taken a phased-in approach to implementation, initially by placing Amiko in the back office and then gradually integrating the self-service agent into their mobile banking apps. Even as it coexists with legacy dispute management systems, the Virtual Agent wins over clients and customers, he said, in a natural, organic way. Eventually, when just a handful of disputes are coming through the old paper, PDF or online form, banks may shut down the old systems and begin directing customers to mobile apps. 

“In the end, it's still machine intelligence with the machine doing exactly what the human told it to do, which makes it predictable,” he said. “You can’t place a rules-based engine in a self-driving car because the world is way too complex, but if you operate on very clear rules set by Mastercard and Visa, you can build a fully automated dispute management solution without the risks and shortcomings that would come from using an LLM-based approach."

Payment card disputes and inquiries are as nuanced and various as the individual cardholders who initiate them. Card issuing banks need data, skills and advanced technologies to respond to each unique situation quickly and at scale. A recent study by Arizent found global banks are exploring AI’s potential to improve efficiencies, resolve issues and deflect fraud by automating dispute management and other manual processes.

The case for always on, always connected dispute management

In today’s digital age, global interest in chargebacks has surged due to the exponential growth of online commerce. Cardholders are increasingly aware of their rights and are quick to initiate chargebacks in cases of dissatisfaction or suspicion of fraud. As consumers grow savvier, banks and financial firms face complex challenges when addressing their rights.

As mentioned, we see a growing trend in the soaring popularity of chargebacks. This mechanism allows credit card users to dispute charges on their accounts and get refunded on their transactions for goods and services that didn’t meet their expectations or weren’t received. 

Chargeback chaos – 2 in 5 Undisputed by Merchants

A report from Mastercard shows that chargeback volumes will reach 

, three-in-four Americans and Brits filed a chargeback last year and more than 

 reported seeing as many or more chargebacks compared to 2022. 

Unsurprisingly, the cost of settling these transaction disputes is huge, costing the payments industry

. The burden of these costs, which will continue to rise each year, is split between banks and merchants.  Yet the burden of debt recovery is often carried by the banks.

Typically, if there’s an issue with a purchase, the cardholder will first try to fix the problem directly with the merchant. If the merchant does not agree to refund or resolve the issue, the cardholder can then initiate a chargeback request with their bank, which will look into and possibly reverse the transaction.

This process is supported by the rules of major credit card networks like Visa and Mastercard. The customer’s bank will request the funds from the merchant’s bank, not the merchant directly. Therefore, the funds can still be recovered even if the merchant has gone out of business.

The Financial Impact and Strategic Response

With the rise of chargeback requests, banks now find themselves at a crossroads, tasked with the challenge of streamlining processes and operational costs while steadfastly safeguarding consumer rights. On a more positive note, the rise in consumer awareness also provides a unique opportunity to refine their chargeback processes. By enhancing their systems and moving away from manual procedures – which require a lot of resources and money, banks can improve customer loyalty and bolster the appeal of card payments.

An effective response to these challenges requires a multifaceted approach:

Banks should invest in educating both merchants and consumers about the chargeback process to reduce the number of chargeback requests that come through. For merchants, this would include guidance on personalizing the customer experience, such as live, round-the-clock service, offering free no-questions-asked return policies, and ensuring accurate descriptions for goods and services. For consumers, education efforts would focus on when a chargeback is appropriate and the consequences of fraudulent disputes.

Financial institutions must continue to enhance their fraud detection capabilities. This includes leveraging artificial intelligence and machine learning to identify patterns indicative of chargeback fraud. Fortunately, cutting-edge fintech technology is available that can help financial institutions manage fraud detection more effectively and improve their operational efficiencies.

Simplifying the dispute resolution process can benefit all parties involved. For consumers, a more straightforward process reduces frustration and builds trust. For merchants, a more efficient system means quicker resolutions and less time spent contesting chargebacks. At the moment, most banks have outdated software in place to manage this process; it’s still manual and people-driven. The rapid growth in card payments (and therefore also disputes and rule updates) is fuelling demand for a digital compliance solution that can help banks save money and keep customers loyal.

Banks should work closely with merchants to share data and insights related to chargeback fraud. This collaboration can help identify common vulnerabilities and develop industry-wide strategies to combat fraudulent disputes.

Financial institutions may need to reconsider their policies around chargebacks. This could involve stricter guidelines for initiating a dispute and enhanced verification processes to confirm the legitimacy of a claim.

As the popularity of digital payments increases globally, consumer-initiated chargebacks will also continue to grow as more people become aware of their financial protection rights.  Banks are now urged to be more alert and proactive in handling these increases to protect both their operations and their customers in an e-commerce environment.

Managing chargebacks requires investment in technology and the involvement and collaboration of all parties and stakeholders within the payment ecosystem. By putting strong preventative strategies in place, banks and financial institutions can lessen their vulnerability, enhance their services and create a more secure space for the digital age. Achieving this will not only boost customer satisfaction but also strengthen consumer confidence in digital payment platforms.

The rise in chargeback awareness and its impact on banks

Deciding between building an in-house dispute management solution or outsourcing can be a pivotal choice for financial institutions. Each option carries its unique set of benefits and challenges, which not only influences operational efficiency but also customer satisfaction and bottom-line results.

Our FAQ document addresses the crucial questions and considerations faced by financial institutions when evaluating whether to build a custom dispute management solution or procure a service from an external provider.

You will discover discussions on several key factors, including:

Our comprehensive FAQ aims to equip you with the knowledge needed when weighing each option, ensuring that you consider all aspects crucial to maintaining and enhancing your operational capabilities.

Build or buy? Evaluating dispute management solutions for banks

Chargeback fraud has become a significant challenge in the digital age of commerce. It occurs when a cardholder makes a purchase with their credit or debit card and then requests a chargeback from the issuing bank after receiving the goods or services, claiming that the transaction was fraudulent or the product was never delivered. ​​

In some cases, the consumer might have forgotten about the transactions, or a family member might have performed the transaction without their knowledge, the so-called “friendly fraud” or “family fraud”. However, in other cases, fraudsters might misuse the cardholder protection rules of the schemes to dispute legitimate charges to their cards. 

Such dishonest practice is most likely to strike during peak shopping periods such as the holiday seasons, Black Friday, and Cyber Monday. During these times, transaction volumes surge, providing a cover for fraudsters to dispute legitimate charges. Retailers, already dealing with increased sales activity, may not have the time or resources to scrutinise these requests as closely, leading to higher instances of chargeback fraud.  

This not only results in a loss of revenue for the merchant but also in additional fees and operational costs for card issuers and banks to process those claims.

The rise in chargeback fraud is worrying and hurting the whole payment ecosystem. First, it undermines the trust between consumers, merchants, and banks. Second, it increases operational costs for banks and merchants as they have to spend resources to process those chargebacks. Lastly, it potentially inflates prices for all consumers, as businesses often pass these costs on to their customers.

Card issuers and banks are at a critical juncture with the increasing prevalence of chargeback fraud. While the growing consumer awareness of chargeback rights has been beneficial in empowering customers, it has also opened the door to fraudulent disputes. Processing payment disputes is increasingly a burden on banks. We have observed small to medium-sized banks in central Europe with a team of 20-30  solely dedicated to managing fraud and cardholder disputes.

This situation calls for a careful balancing act. Banks and card issuers need to protect their customers from genuine fraud while also safeguarding themselves and merchants from illegitimate chargebacks. What can be done? 

#1 Streamline fraud and dispute management process 

Most issuers agree that their existing internal processes and chargeback solutions do not allow for process automation or efficiency gains. Without improvement in their processes and internal tooling, there is a risk of having a huge backlog of claims that cannot be processed in time (chargeback is a time-sensitive process). Therefore, banks have to write off such fraud claims (refund the cardholders) without being able to analyse them.

By making the process more efficient and leveraging modern solutions to automate repetitive parts, banks can better allocate their resources and reject unjustified claims with no chargeback rights (e.g., an authorised Card Not Present transaction has no chargeback right).

To circumvent the costs and operational challenges of unjustified/fraudulent chargebacks, it is important to examine transactions and cardholder statements for signs of chargeback fraud. One way to do this is to leverage domain-specific chatbots that are built based on the dispute rules of payment networks. Such chatbots can challenge cardholders when they want to dispute a transaction that has chargeback fraud indicators, such as repeat transactions at the same merchant without previous disputes, card-on-file transactions, and purchases of digital goods on e-commerce platforms like app stores.

Striking a balance between rigorously investigating potential fraud and maintaining a positive cardholder experience is key. Therefore, offering in-depth transaction insights can serve as a powerful tool in identifying more concrete signs of friendly fraud, thereby facilitating a more effective and nuanced approach to dispute resolution.

#3 Provide in-depth transaction data sharing and security

Cardholders might initiate unjustified disputes over charges they don’t recognize due to forgetfulness, confusing merchant identifiers, or transactions made by relatives without their knowledge. To mitigate such claims, issuing banks can offer comprehensive transaction details, facilitating easier identification by the cardholder or prompting discussions among family members.

 (owned by Visa), it’s now feasible to equip cardholders with extensive transaction insights. This can include presenting an alternate name for the merchant, showcasing the merchant’s logo, and providing contact information, physical address, or specifics about the purchasing device. For certain retailers, it’s also possible to access a digital receipt outlining the purchased items or services. Such measures can jog the cardholder’s memory about the transaction, reducing the likelihood of unfounded disputes.

As digital transactions continue to grow, the potential for chargeback fraud also rises. By proactively addressing the challenges of this crime, banks can safeguard their operations, minimise losses and protect their cardholders.

The battle against chargeback fraud requires collaboration from all stakeholders in the payment ecosystem. By implementing these recommendations, issuing banks can not only mitigate the risks associated with chargeback fraud but also enhance their service offerings, fostering a safer and more trustworthy environment for digital transactions and a happier, more loyal customer base. 

Chargeback fraud has become a significant challenge in the digital age of commerce. It occurs when a cardholder makes a purchase with their credit or debit card and then requests a chargeback from the issuing bank after receiving the goods or services, claiming that the transaction was fraudulent or the product was never delivered. ​​



How banks can effectively manage chargeback fraud

An article published by McKinsey & Company highlights the critical opportunity for banks to enhance customer relationships while reducing operational costs. 

Although payment disputes occur in less than 1% of transactions, their impact on customer trust and loyalty is profound. The article mentions that by reimagining the dispute resolution process, banks can not only mitigate the frustration and inconvenience associated with these disputes but also seize a valuable chance to strengthen their bond with customers.

➤ Complex Operating Models: Traditional structures create a fragmented chain of responsibility, leading to customer dissatisfaction and inefficiency.

➤ Overprocessing of Disputes: A one-size-fits-all approach to disputes, regardless of context, increases volumes and pressure on teams, affecting efficiency and regulatory compliance.

➤ Over-reliance on Case-Management Systems: While case-management systems were expected to reduce costs, their effectiveness is limited without integration into broader systems for a streamlined resolution process.

➤ Increasing Regulatory Focus: Tightened regulations demand quicker dispute resolutions, pushing banks towards faster credit provision without addressing root causes.

According to McKinsey, leveraging automation can reduce dispute-resolution cycle times, boost operational efficiency, and improve the overall customer experience. Here is how:

➤ Dispute Management: Automation can streamline the entire process, from initial complaint to resolution, ensuring a smoother, more efficient pathway.

➤ Dispute Processing: Automated systems (e.g., Virtual Agents/Chatbot) can gather necessary information and prepare cases for human processing, streamlining the initial stages of dispute resolution.

➤ Post-Dispute Processing: Handling the issuance of credits and communicating updates to customers, improving the post-resolution experience.

➤ Dispute Support: Intelligent support tools, such as virtual agents or chatbot functions in the bank’s app or portal, to resolve customer queries during the dispute-research process.

Furthermore, McKinsey underscores the financial and relational benefits of refining the dispute resolution process. Quick resolutions and provisional funds can transform negative customer experiences into loyalty-building moments. This not only solidifies customer relationships but also offers substantial cost reductions. The top 15 US banks spend about $3 billion annually on dispute processing, and McKinsey suggests that implementing next-generation operating models could reduce these costs by 25 to 40 percent. By simplifying and automating the process, banks can achieve better outcomes, reducing the incidence of incorrect dispute resolutions, which affect up to 10 percent of cases for some banks.

Redesigning the dispute resolution process, though challenging, holds the potential to significantly enhance customer loyalty, operational efficiency, and financial performance.