How To Prevent and Reduce Chargebacks for Your Business

Chargebacks are a common concern for business owners, especially because they can be costly when they become a chronic issue. If your business has a high chargeback ratio, you may face revenue loss, higher fees, reputational damage, or even the closure of your merchant account. Perhaps even more worrisome is that this is an ever-growing issue for business owners: Mastercard anticipates the global volume of chargeback transactions will reach 337 million by 2026, a 42% increase from 2023’s chargeback levels. ^[1]Payments Cards and Mobile. “Chargeback trends and outlook 2023 Report.” Accessed April 28, 2025. A chargeback occurs when a customer contacts their bank and disputes a transaction, prompting a review of the claim. While there are legitimate reasons a customer may initiate a chargeback, fraudulent transactions, and unfounded disputes are all too common. Fortunately, there are proven chargeback prevention strategies you can implement to reduce the number of legitimate or fraudulent chargebacks you face to minimize long-term payment risks.

• Implementing chargeback prevention strategies can significantly improve your chargeback ratio.
• Effective methods include providing clear return and refund policies, utilizing fraud detection software, and disputing chargebacks quickly with strong evidence.
• Some chargebacks are legitimate, but chargeback fraud is a real concern, especially if you do business in a high-risk industry.
• Businesses with high chargeback rates may face increased banking fees, loss of time and revenue, and reputational damage. If your business incurs too many chargebacks, you may even lose your merchant account.
• You can reduce the risk of chargebacks and manage them successfully by working with a merchant services provider with chargeback management solutions and experience in high-risk industries.

Types of Chargebacks: Fraudulent vs. Friendly Fraud

While some chargebacks are legitimate and occur due to a merchant error, chargebacks can also be fraudulent. There are generally two types of fraudulent chargebacks: true fraud and friendly fraud.

Fraudulent Chargebacks

A fraudulent chargeback, or “true fraud,” occurs when a purchase is made without the consent and/or knowledge of the cardholder. In these cases, the cardholder is the victim of theft and initiates a chargeback dispute with their financial institution or card issuer. If your business incurs frequent fraudulent chargebacks, it may be due to insufficient authorization measures and poor chargeback fraud prevention.

Chargeback fraud is a particular concern for businesses deemed high-risk. Because they can be specifically targeted by bad actors committing fraudulent chargebacks, high-risk businesses are best served by working with an experienced merchant services provider to sidestep this prevalent issue.

Friendly Fraud Chargebacks

Friendly fraud chargebacks occur when a customer disputes a legitimate transaction. Some customers may do so maliciously (to recoup their money after having received the product or service) or mistakenly (if they don’t recognize the charge on their bank statement). Visa estimates that up to 75% of all chargebacks fall into the friendly fraud category, so focusing on preventing friendly fraud chargebacks is essential for those looking to lower their chargeback rates. ^[2]Visa Perspectives “What every merchant needs to know about friendly fraud.” Accessed April 28, 2025.

Causes of Chargebacks

While merchant-error chargebacks account for fewer than half of all chargebacks, it’s important to understand why customers initiate these types of chargebacks. Typically, these are the easiest chargebacks to guard against, as they often result from ineffectiveness within your business operations.

Common Reasons Customers Initiate Chargebacks 

Common reasons customers initiate merchant-error chargebacks include:

• Unauthorized charges
• Duplicate charges
• Unclear subscription terms
• Missing or defective merchandise 
• Unresolved refund requests
• Unfamiliar billing descriptors

Now that you’re more familiar with the reasons customers initiate chargebacks, evaluate the chargebacks in your own business. If you can pinpoint a recurring reason for your chargebacks, you can address the underlying issue and limit chargebacks in the future.

Impact of Chargebacks on Businesses

Here are some of the most significant implications of chargebacks for businesses:

• Loss of Revenue: Money will be deducted from your merchant account if you can’t prove the transaction was legitimate after a chargeback.
• Waste of Product: If a customer’s chargeback is successful, you’re not likely to receive the product they purchased back.
• Loss of Time: Disputing a chargeback takes time, time that could be spent on other, more productive business responsibilities.
• Chargeback Fees: Your bank or payment processor may charge a non-refundable chargeback fee for each chargeback initiated against your account.
• Reputational Damage: A high chargeback rate can negatively impact how customers and financial institutions perceive you.
• Risk of Merchant Account Termination: If your bank or payment processor deems your account too at risk for recurring chargebacks, your account may be terminated.

In fact, it’s reported that for every $100 in chargebacks, a business loses $240 in total from merchandise loss and chargeback fees.  ^[3]Forbes. “Chargebacks: The $125 Billion Problem Affecting Every Business.” Accessed April 28, 2025. A business overrun with chargebacks faces steep and preventable revenue losses, not to mention reputational damage and potential payment processing issues.

Effective Strategies for Reducing Chargebacks

Because chargebacks may result from merchant error, true fraud, or friendly fraud, there are many underlying issues contributing to the prevalence of chargebacks in today’s payments landscape. Below are seven strategies that, if used in tandem, can combat all of the most frequent types of chargebacks. 

1. Maintain Transparent Communication With Customers

Developing trust with your customers is the best way to avoid chargebacks caused by merchant error or merchandising issues. So, make sure your products are described thoroughly and accurately. Customers are far more likely to initiate chargebacks if they feel the merchant is being deceptive or unclear in their communication. It’s also important to have reliable customer service, ensuring interactions with customers are prompt, polite, and transparent.

2. Have Clear Return and Refund Policies

A refund is almost always preferable to a chargeback. It’s important to maintain clear refund policies and make them easily available for review on your company website. Here are some tips for crafting an effective refund policy:

• Have a “returns and refunds” page on your website with step-by-step instructions on how to initiate a refund.
• Keep your policy concise and free of confusing language.
• Be clear about terms (timeframes, eligibility, etc.).
• Offer multiple refund options (partial and full refunds, cash refunds, store credit, etc.).

As many as 72% of consumers consider a chargeback a viable alternative to requesting a refund.  ^[4]The Paypers. “The flywheel effect of chargebacks cost US merchants USD 243B in 2023.” Accessed April 28, 2025. Providing customers with clear return and refund policies can not only help you avoid chargebacks in lieu of refunds, but it can also help you win chargeback disputes of this nature should they get to that point.

3. Evaluate Your Chargeback Ratio Regularly

Be sure to conduct frequent chargeback evaluations. This will help you determine your chargeback ratio, understand the common reasons your business incurs chargebacks, identify payment security weaknesses, and ultimately prevent chargebacks going forward. Every business is unique, so understanding the unique reasons your business receives chargebacks is an essential step in successfully combatting them.

4. Use Fraud Detection Tools

Businesses operating in high-risk industries (gambling, firearms, digital downloads, etc.) face significantly higher rates of chargeback fraud. Consider the following chargeback fraud prevention tools to help reduce the risk of fraudulent transactions:

• Address Verification Systems (AVS): These tools verify the customer’s billing address via their card issuer.
• Card Verification Value (CVV) Tools: For card payments, these tools require customers to input the 3-4 digit security code on their credit or debit card.
• 3D Secure (3DS) Authentication: This security protocol adds an extra authentication layer for online payments.
• Fraud Monitoring and Detection Software: Monitoring services will notify you before chargebacks are finalized, giving you time to resolve disputes.

Most of these fraud detection tools are designed primarily for credit card chargeback prevention, but many can also be used for handling ACH chargebacks. As subscription services often utilize ACH payments, these fraud detection systems can be especially useful to subscription-based businesses looking to lower their chargeback rates.

Additionally, some payment gateways and processors utilize built-in fraud prevention software. For example, PayPal Seller Protection is designed to help protect merchants against PayPal chargebacks.

5. Address Disputes Promptly

Responding to chargebacks quickly can help reduce revenue loss, chargeback fees, and reputational damage to your business. By maintaining detailed records of transactions, you can quickly provide proof of the transaction approval, customer authorization, and shipping confirmation to negate malicious-friendly fraud chargebacks before they’re finalized. As malicious-friendly fraud is a growing trend — with nearly half of Gen Z consumers admitting to committing malicious-friendly fraud — it’s increasingly important merchants keep accurate records and quickly dispute chargeback filings. ^[5]Fast Company. “42% of Gen Z admit to committing ‘friendly fraud.’ Here’s how to protect your business.” Accessed April 28, 2025.

6. Make Billing Details Clear

One of the most common causes of chargebacks is unclear or inaccurate billing information. In fact, 35% of consumers reportedly initiated a chargeback simply because they did not recognize the transaction on their banking statement. ^[6]Ethoca. “First-party fraud.” Accessed April 28, 2025. Make sure your business billing descriptor (how your business transactions are displayed on customers’ bank statements) is accurate and easily recognizable. This will help prevent misunderstandings that lead to accidental friendly fraud.

You should also avoid manipulative pricing systems, such as difficult-to-cancel subscriptions or hidden fees. This prevents customers from feeling deceived during any part of the billing process.

7. Work With a High-Risk Merchant Services Provider

While no company can offer a 100% chargeback fraud prevention guarantee, merchant services providers with experience in high-risk industries tend to offer more robust security and chargeback prevention tools. Some providers will even manage chargebacks for you with advanced chargeback protection management and fraud prevention services.

Leveraging Technology for Chargeback Prevention

Unfortunately, chargebacks are a common frustration among today’s merchants. Implementing the above strategies helps you manage chargebacks more effectively, but you don’t have to manage your business’s chargebacks alone. When you work with a trusted merchant services provider like PaymentCloud, you can rest assured you have a partner committed to defending your business from chargeback risk. We offer comprehensive chargeback prevention services, including cutting-edge monitoring solutions and compliance tools. Apply today to streamline and strengthen your payment systems.

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