How to Fight Chargeback Fraud (2024)

Chargebacks have become a nuisance for businesses rendering services or supplying customers with products online or in person. Consider this example, a client goes to a mechanic for an oil change, the mechanic then changes the oil and the client pays, but then the client asks their credit card to issue a chargeback. Most of the time businesses lose chargeback claims because credit card companies tend to side with their clients. What options are left for businesses dealing with chargeback fraud? The business can sue the person who issued the chargeback in small claims. Why? Because the business performed the service and they should get paid for their work.

In this article, we cover what chargebacks are, what friendly fraud is, how to fight chargeback fraud in small claims, and the chargeback process.

Did you know we have a free tool powered by AI that helps you create a demand letter to a customer that has filed a chargeback?Check out our demand letter tool.

What is a Chargeback

A chargeback is the return of money used to make a purchase, sometimes referred to as credit card disputed charges or a payment dispute. For example, a customer buys a new purse online and the online store charges their credit card. The customer waits the standard shipping time but the purse never arrives. Since the online store never gave the customer the purse they purchased they issue a chargeback to get their money back. Another reason a customer may issue a chargeback is if the customer does not recognize the purchase on their account.

How do chargebacks hurt businesses?

Chargebacks, directly and indirectly, hurt businesses. First of all, chargebacks come with fees. Secondly, banks and credit networks check a business’s chargeback ratio (the number of monthly chargebacks divided by total monthly transactions) and decide whether or not to work with a business based on this ratio.

So even if you own a business that successfully fights chargebacks you are still losing every time you have to pay chargeback fees and your chargeback ratio is still affected.

Is a chargeback illegal?

A chargeback is not illegal, however, fraud is and can occur if a customer abuses the chargeback process or engages in fraudulent behavior. If a customer is issuing chargebacks for items and services provided by a business then chargeback fraud has occurred.

Can a Customer Go to Jail for Disputing Charges?

Customers who initiate chargebacks based on false claims that a business did not deliver a product or render services are committing a form of fraud. Not only can chargeback fraud lead to lawsuits, but depending on the circ*mstances a customer who engages in chargeback-related fraud can face criminal charges and jail time. You may want to reach out to the district attorney’s office nearest to you or to where your client is located to see if they investigate chargeback fraud claims.

What is Friendly Fraud

Friendly fraud is often used interchangeably with chargeback fraud. However, sometimes you might see friendly fraud used to distinguish incidents where a customer issues a chargeback by mistake. For example, a customer initiates a chargeback because they did not recognize a transaction on their bank account statement.

Here are some examples of chargeback fraud:

How Does the Chargeback Process Work

The credit card chargeback dispute process is referred to as representment. Once your customer or client initiates the chargeback process with their bank (referred to as the issuing bank) your business will receive an initial chargeback notice.

This notice includes a reason code used to classify the type of chargeback your customer has initiated. This reason code corresponds with the reason that the customer is requesting a chargeback. For example, the chargeback reason code could say that items were never delivered to the customer.

After a customer initiates a chargeback, you as the business owner decide whether or not to dispute the chargeback. If you do decide to dispute the case because you believe some type of chargeback fraud has occurred you must prove this. If you take no action your customer will win the chargeback by default.

How Does a Business Fight a Chargeback?

As part of the representment process, businesses can fight chargebacks by submitting a rebuttal letter. A rebuttal letter is a letter that clearly and concisely summarizes why the customer’s credit card dispute should be denied. The letter doesn’t have to be long, but it should explain why the customer’s claims are either wrong or fabricated. After the rebuttal letter has been sent the customer’s bank (the issuing bank) will review the case and make a decision.

What is compelling evidence?

In the representment process, compelling evidence refers to all evidence a business includes with its rebuttal letter. Compelling evidence can include delivery confirmation, purchase order information, and generally all records of the disputed transaction.

Below is a sample checklist of potential evidence to help you fight chargebacks. However, no two banks are the same so check any chargeback guidelines the issuing bank may have:

  • Shipping and delivery confirmation. These tend to be really important when showing that the goods were delivered—for example, USPS tracking numbers, FedEx tracking, or UPS.

  • Correspondences between yourself and your customer or client.

  • A transaction receipt or the order invoice specifying what product was sold or what services were provided.

  • Any checkout information such as receipts or order confirmations.

  • AVS (address verification system) and CVV (card verification value) match.

  • Your website's terms and conditions; the specific sections that pertain to the chargeback dispute. Highlight selected passages if need be.

Timeframe for fighting a credit card chargeback

Each bank has different chargeback dispute rules and timeframes, but typically the timeframe may be 20 to 45 days after the business is notified. The entire chargeback process can take up to 120 days or more.

The arbitration process for chargebacks

In some cases, the customer or the business may seek arbitration because they were not happy with the outcome of the chargeback or a decision could not be made.

Arbitration is a form of dispute resolution and involves a neutral third party making a decision, like a judge. In the case of chargebacks, the card network (Visa, Mastercard, etc.) for the customer will step in as arbitrator and make the final decision.

If you lose a chargeback dispute at arbitration can you sue in small claims court? Most card networks do not provide appeals after a losing arbitration award. However, suing in small claims court is still an option.

Chargeback Process Chart

Below is a chart that visually illustrates the chargeback process. Please note that this is a general chargeback process and depending on the card network your customer uses to handle their chargeback this process is subject to change.

How to Fight Chargeback Fraud (1)

Suing a Customer in Small Claims Court After a Chargeback

What options do you have after losing a chargeback dispute? You can consider suing your client in small claims court.

What to do before suing in small claims for a chargeback?

Send your client a demand letter. A demand letter outlines to your customer that you would like them to reimburse you for the chargeback, otherwise, you intend to escalate the problem to a lawsuit. Most businesses send a demand letter before suing as it is an affordable way to resolve the problem.

Did you know we have a free tool powered by AI that helps you create a demand letter to a customer?Check out our demand letter tool.

Here is a video on how our demand letter tool works:

How much can you sue for in small claims?

Each state has a different limit on how much you can sue for in small claims. Most of the time the limit varies between $3,000 - $25,000. For example, in California small claims, you can sue a customer for up to $12,500 while in New York small claims, the limit varies from county to county and can be between $3,000- $10,000.

In general, if your customer owes you more than the amount you can sue for, you can still sue for the maximum amount allowed, but you will need to waive any additional amount over the limit.

How much does it cost to take a customer to small claims court?

The amount you will pay to file a small claims lawsuit against your customer for money owed varies from state to state but generally is between $15- $75. If you cannot afford to pay court fees, you can ask the court if they have waivers for court fees.

You may also need to pay to notify your customer you are suing after you file suit. This is called “serving” and ranges from $0- $125. The rules around serving are very specific in each state so make sure to review them.

What is a small claims court hearing like?

Small claims hearings are meant to be quick and informal. Here is what you can expect when you sue a customer in small claims court:

  • Right before the hearing, the judge will ask you and your customer to show each other the evidence you both have brought to the hearing. Consider using some of the same documents you used in the chargeback process.

  • The Judge will ask why you are suing your customer in small claims court. This is when you will tell the judge that your client issued a chargeback when they shouldn’t have. The judge will then turn to your customer and ask them to state their side of the story.

  • The hearing could last around 15 minutes but every case is different and this depends on many factors.

  • Very rarely will a judge tell you in court their decision immediately after the hearing. Instead, the judge will probably tell you and your customer that the decision will be mailed to you both (which usually takes a few weeks).

How do I prepare for the small claims hearing?

To prepare for your small claims court hearing:

  • Research the law. If you are unsure about any of the claims you want to make in court consider consulting with an attorney.

  • Prepare what to say. During the hearing, the judge will ask you and your client questions about the case. Be prepared to discuss the chargeback dispute, how much money your customer owes you, and why you think your customer owes you that amount.

  • Prepare your evidence. You want to have your evidence organized with titles, dates, and why that piece of evidence is important. Include the compelling evidence you used during the chargeback process. For example, delivery information (including tracking), a transaction receipt, or an order invoice specifying which product you sold.

How to Fight Chargeback Fraud (2)

Camila Lopez

Legal Educator @ People Clerk. Camila holds a law degree and is a certified mediator. Her passion is breaking down complicated legal processes so that people without an attorney can get justice.

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How to Fight Chargeback Fraud (2024)

FAQs

How do you defend fraud chargeback? ›

Compelling Evidence. Providing compelling evidence is key to defending chargeback, because it proves that users participated in the transaction, received the goods or services, or benefitted from the transaction. The most common situations and their respective compelling evidence are listed here.

What are the highly recommended evidence needed for fighting fraud chargebacks? ›

Make sure you include the following evidence when responding to any type of dispute: Customer name – guest name and cardholder name (in case of third-party payments). Customer email address – the email the client used to make the booking. Billing address – address that you see in the customer's profile.

How to successfully dispute a chargeback? ›

The following are recommended steps to dispute chargebacks effectively.
  1. Understand the chargeback process. ...
  2. Have accurate and complete transaction records. ...
  3. Review the reason code. ...
  4. Draft a rebuttal letter. ...
  5. Take action and dispute the chargeback.

How do you respond to a fraud chargeback? ›

What should a chargeback response letter contain?
  1. Chargeback reason code. This will be referenced in the chargeback notice you received.
  2. Terms and conditions. ...
  3. Proof of delivery. ...
  4. A cover letter. ...
  5. Transaction information. ...
  6. Order details. ...
  7. Order history and customer service records. ...
  8. Images from your ecommerce site.

How do you disprove a chargeback? ›

Try to collect all your interactions with the customer to help disprove the chargeback claim. For instance, if the cardholder claims they didn't take part in a transaction, you could provide: evidence of their previous undisputed purchases. proof of delivery at the cardholder's address.

Can you win a chargeback dispute? ›

Most chargebacks are illegitimate, and illegitimate chargebacks can be reversed. In order to achieve this, you'll need to gather compelling evidence that the transaction was valid and authorized. You'll also need to prove that you fulfilled your end of the sales agreement and the cardholder got what they paid for.

What is compelling evidence for chargebacks? ›

Compelling evidence is documents that a merchant submits with a chargeback response to prove the transaction is valid or otherwise contradict the chargeback. Each chargeback has a reason code. The reason code determines which forms of compelling evidence the merchant should submit with the chargeback response.

How do you investigate chargeback fraud? ›

The only way for businesses to deal with chargeback fraud after the fact is through chargeback disputes. This means disputing each fraudulent chargeback that comes along with sufficient and compelling evidence to prove that a customer did, in fact, authorize a purchase.

What is the burden of proof for chargebacks? ›

In chargeback cases, the burden of proof falls on the merchant. In order to win back their lost revenue, the merchant must prove that their charge was authorized, and that the goods or services were delivered.

How do you write a rebuttal for a chargeback? ›

A good rebuttal letter will start by addressing the reason code for the chargeback. It will quickly and clearly explain why the reason the cardholder gave for the dispute is incorrect and what evidence you have to prove it.

What evidence do I need for a chargeback? ›

Signed and dated contracts. If the document is digitally signed, a signature log or certificate is required. This should include access records, IP logs, timestamps, and other verifiable information. Signed credit card authorization forms from the cardholder.

What is an example of chargeback fraud? ›

Common examples of chargeback fraud

The item they bought was never delivered. Someone used their credit card without their permission. The transaction made was never made by them. A subscription or recurring transaction wasn't canceled on time.

Who pays for chargeback fraud? ›

The merchant is liable for the acceptance of any fraudulent order and the cardholder's issuing bank will collect the customer's refund from the merchant should a cardholder request a chargeback.

How do you resolve chargeback issues? ›

Start by trying to get in touch with the customer. If you can resolve the problem with the customer, then you should tell the customer to contact their bank and say that they want to drop the chargeback. You should also send evidence to the credit card company that the customer agreed to drop the charge.

What happens if you commit chargeback fraud? ›

Chargeback fraud, in law, can sometimes be considered a form of payment card fraud or wire fraud. So can chargeback fraud result in jail time? Technically, yes, but usually only in extreme circ*mstances where it's used to steal very high values or volumes of products and services.

How do you prove chargeback? ›

Sample chargeback notice

Proof of shipping (usually in the form of a tracking number, shipping receipt etc.) Sales or transaction receipt. Matching bill-to and ship-to addresses. Proof of delivery (usually in the form of a delivery receipt from a shipping provider, a confirmation email etc.)

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