Chargeback fraud: how to prevent chargebacks and keep more revenue

You process a legitimate transaction. The customer gets the product. Then weeks later, a chargeback hits your account. The customer claims they never authorized the purchase, and suddenly, you’re out of the product and the revenue, and stuck with a chargeback fee.

This scenario plays out far too often in online businesses, costing them billions of dollars annually. 

According to Mastercard, the value of global chargebacks is expected to grow from $33.79 billion in 2025 to $41.69 billion in 2028. Fraudulent chargebacks account for 45% of this amount.

Chargeback fraud or friendly fraud (when customers dispute legitimate charges) has become one of the fastest-growing threats to revenue. And most merchants don’t even realize how much it’s costing them until they’re already in trouble with their payment provider.

Here’s what you need to know about chargeback fraud, why it targets your business model specifically, and how to stop losing revenue to fraudsters who’ve figured out how to game the chargeback system.

What types of businesses are affected by chargeback fraud?

Chargeback fraud doesn’t discriminate, but specific business models get hit harder than others. If you sell digital products or run a subscription service, you’re dealing with a perfect storm of risk factors that fraud exploits in multiple ways.

App and software sellers

Digital products create unique vulnerabilities in the chargeback process. 

There’s no physical shipping confirmation. No signature on delivery. When a chargeback dispute comes through, you’re fighting an uphill battle to prove the customer received and used your software, ebook, or online course.

Fraudsters know this. They’ll make a purchase, download everything, then file a fraudulent chargeback saying they never received the product or didn’t authorize the charge. 

By the time you’re notified of the chargeback claim, they’ve already extracted the value and moved on to the next target.

The chargeback system was designed for physical goods. It assumes merchants can provide tracking numbers and delivery confirmations. Digital goods sellers don’t have that luxury, which makes every illegitimate chargeback harder to contest. 

This type of chargeback abuse has become so common that some fraudulent actors specifically target software companies, knowing the odds favor the customer in friendly fraud disputes.

Recurring payments & subscriptions

Subscription businesses face a different problem. 

A customer signs up, uses your service for months, then suddenly disputes multiple charges at once.

Maybe they forgot they subscribed. Perhaps they’re deliberately gaming the system through return fraud. Either way, you’re dealing with chargeback fraud that compounds over time.

The recurring nature of subscriptions means higher exposure to fraud. 

One fraudulent transaction can trigger multiple chargebacks across different billing cycles before you even catch the pattern. And because subscription disputes often involve smaller disputed amounts, businesses sometimes write them off rather than fighting back. 

That’s exactly what fraudsters count on when they commit chargeback abuse.

Accidental vs. deliberate chargeback fraud

Understanding the difference between accidental and deliberate fraud helps you build better chargeback fraud prevention strategies.

Friendly fraud chargebacks happen when customers dispute legitimate transactions without criminal intent. 

It could be that they didn’t recognize the charge on their credit card statement. Or they forgot about a trial subscription that converted to a paid one. Or their kid made an in-app purchase they didn’t authorize.

These customers aren’t trying to commit credit card fraud, but the financial loss is identical to deliberate fraud.

The challenge with accidental fraud is that it’s often a communication problem disguised as a fraud problem. Better transaction descriptors, clearer billing practices, and easier access to customer support can prevent many of these illegitimate chargebacks before they escalate to the bank level. 

When customers can quickly verify their transaction records and understand what they purchased, accidental fraud drops significantly.

Paddle’s approach to improving billing communication helped Master English reduce its chargeback rate by over 50% in just two months. 

The company was surprised to discover rising chargebacks despite having a 4.9-star rating and strong retention. Working with Paddle’s risk team, they analyzed data, A/B tested subscription lengths in the US market, and improved billing communication. 

The result? Chargebacks dropped from 1.12% to 0.53%.

Then there’s actual fraud. Criminal fraud involves the use of stolen credit card information, identity theft, or deliberate chargeback abuse. These fraudulent actors know what they’re doing. They understand the Fair Credit Billing Act protections, know how to phrase chargeback requests to maximize approval odds, and systematically target businesses with weak fraud detection tools.

Wire fraud and unauthorized charges from compromised accounts fall into this category. So does the growing trend of “cyber shoplifting,” where customers intentionally make purchases, use the product or service, then file false chargeback claims to get their money back while keeping what they bought. This unauthorized transaction pattern has become increasingly sophisticated as fraudsters share tactics.

Both types drain revenue. Both trigger chargeback fees. Both damage your chargeback ratio with payment processors. The difference is that accidental fraud can often be prevented through better customer experience. In contrast, criminal fraud requires robust fraud-prevention systems that can identify fraudulent activity before it results in a financial loss.

How to prevent chargeback fraud

Chargeback fraud prevention isn’t about eliminating every single fraudulent chargeback. That’s impossible. Instead, it’s about building layers of chargeback protection that make fraud harder to execute and easier to catch early.

Here’s how.

Simplify return & refund policies

The easier you make it for customers to get refunds directly from you, the fewer will go through their bank to dispute charges. That’s not intuitive for many businesses, but it’s one of the most effective fraud-prevention tactics for reducing friendly fraud.

Think about it from the customer’s perspective. 

Customers typically have two options when they have a problem with a charge. 

They can either:

• Navigate your website to find support contact information, wait for a response, explain their issue, and hope for a resolution. 
• Call their credit card company and file a chargeback request in five minutes.

When your refund process creates friction, you’re actively pushing customers toward chargebacks. 

Even legitimate customers who would have been happy with a refund become chargeback statistics because the path of least resistance ran through their bank. 

This turns what should have been a simple customer service issue into a fraudulent chargeback from the payment processor’s perspective.

Clear return policies posted prominently on your site also reduce friendly fraud chargebacks. 

Many disputed amounts stem from customers who genuinely didn’t understand your billing terms. If your trial-to-paid conversion happens automatically and isn’t clearly communicated, expect chargeback claims. 

If your cancellation process requires customers to email support instead of clicking a button, you’re setting yourself up for disputes.

Monica AI, a productivity platform experiencing hypergrowth, which recognized this dynamic early. As their customer base expanded rapidly, they needed systems that could scale without creating administrative bottlenecks. 

After onboarding with a Merchant of Record (MoR) like Paddle, they reduced chargeback volume by 80%. 

This result was possible thanks to clear payment policies, accessible support channels, and insights into customer purchasing behavior.

Use anti-fraud tools

Fraud detection tools can now analyze transaction patterns, flag potential fraud before it completes, and automatically block high-risk purchases based on dozens of signals that no human could process in real-time.

The question now is about how to integrate these tools without creating complexity that slows you down or adds excessive chargebacks to your processing burden.

You can piece together separate solutions. One vendor for payment fraud screening. Another for chargeback representment. A third for managing your chargeback ratio and monitoring. 

That approach works until you’re managing multiple platforms, reconciling data from different sources, and trying to get support from three companies when something breaks. Each additional tool adds cost and complexity to your chargeback management system.

Or you can use an integrated solution that handles fraud detection, payment processing, and chargeback protection in one system. 

Paddle builds anti-fraud capabilities directly into the platform, so you’re not paying separately for fraud detection tools or juggling multiple vendor relationships. 

This unified approach to chargeback fraud prevention means better data sharing across systems and faster responses to fraudulent transactions.

More importantly, integrated fraud protection means your chargeback management system has access to the same transaction data your payment processor uses. That creates better fraud detection accuracy and makes the chargeback dispute process smoother when you need to contest fraudulent chargebacks.

Paddle’s approach to potential fraud helped ProxyRack cut its chargeback rate by 90%. Not through manual review processes or hiring a team to manage disputes, but through automated fraud detection and proactive chargeback protection that worked in the background. 

The system caught unauthorized transactions before they became a problem and handled legitimate chargebacks efficiently when they did occur.

How chargeback fraud hurts businesses

The visible cost of chargeback fraud is obvious. You lose the transaction amount. But that’s actually the smallest part of the financial damage. The real impact cascades through your business in ways that aren’t immediately apparent until you’re already in trouble.

Chargeback fees

Every chargeback triggers a fee from your payment processor, whether you win the dispute or not. That chargeback fee typically ranges from $15 to $100 per incident and is charged to your account regardless of fault or whether the charge was a legitimate transaction.

Win the chargeback dispute and prove the transaction was legitimate? You still pay the chargeback fee. 

Lose the dispute because the customer used stolen credit card information? You pay the fee, plus lose the revenue. 

The fee is a penalty for having a fraudulent chargeback filed against you, even when you did nothing wrong.

For high-volume businesses, these fees add up faster than most finance teams track. A hundred chargebacks per month at $20 each adds up to $2,000 in pure administrative penalties. That’s revenue you earned, already paid processing fees on, and now you’re paying again just to defend yourself through chargeback representment.

Higher chargeback rate

Payment processors track your chargeback ratio, the percentage of your transactions that result in chargebacks. 

Cross certain thresholds, and you enter monitoring programs with increased fees, stricter processing requirements, and more scrutiny on every transaction.

Excessive chargebacks signal to processors that you’re either running a fraudulent operation or you’re bad at fraud prevention. Either way, you’re now a liability. Monitoring program fees can run into thousands of dollars per month on top of your regular processing costs, adding to the financial loss from the original fraud.

Stay in monitoring programs too long or let your chargeback rate climb too high, and processors will simply terminate your account. Now you’re scrambling to find a new processor willing to take on a merchant with a history of chargeback abuse. The processors who will work with you will likely charge premium rates because you’re high-risk.

Lost opportunities

Every hour your team spends managing chargeback disputes, gathering transaction records, and fighting fraudulent claims is time not spent on growth initiatives.

For small teams, especially, chargebacks become a resource drain that pulls focus from product development, marketing, and customer acquisition. 

You’re paying experienced team members to compile evidence for chargeback representment instead of doing work that moves the business forward. Each credit card chargeback requires documentation, analysis of the chargeback claim, and often multiple rounds of back-and-forth with payment processors.

Then there’s the opportunity cost of lost revenue. Money tied up in disputed transactions isn’t available for reinvestment. Customers lost to payment fraud don’t just represent one transaction, but represent the lifetime value you’ll never capture.

Why is chargeback fraud hard to identify?

Fraudsters have gotten smart about making fraudulent transactions look legitimate. 

They’re not using obviously fake information anymore. They’re using real stolen credit card information with matching billing addresses. By the time the chargeback comes through weeks later, the trail is cold and the fraudulent transaction has already been processed.

Friendly fraud is even trickier to identify because it often looks identical to legitimate customer disputes. 

The customer says they didn’t authorize the charge. Maybe they’re lying or genuinely forgot.

Without detailed fraud-detection systems that track patterns across thousands of transactions, it’s nearly impossible to distinguish accidental disputes from intentional chargeback abuse, or even criminal fraud.

The timing gap makes everything worse. Fraudulent transactions can take 60-120 days to surface as chargebacks. That’s months of transaction records to sift through, trying to piece together what actually happened. 

Charges that seemed like legitimate transactions at the time now need to be retrieved and analyzed in the context of a chargeback dispute you didn’t see coming.

Payment fraud also adapts faster than most businesses can respond. Fraudulent actors share tactics in underground forums. Once a vulnerability becomes known, it spreads quickly. The fraud detection methods that worked six months ago may be obsolete against new attack vectors you haven’t encountered yet.

This is why businesses need fraud prevention systems that learn and adapt automatically, not static rule sets that become outdated. 

Paddle’s fraud detection analyzes transaction patterns across thousands of merchants, catching fraudulent activity that would be invisible if you were only looking at your own data in isolation. The system identifies potential fraud by recognizing patterns that span across industries and geographies.

Stop losing revenue to chargebacks

Chargeback fraud will keep eating into your revenue until you build systematic protections. The longer you wait, the worse it gets.

You can keep piecing together separate tools for payments, fraud screening, and dispute management. Or you can let Paddle proactively handle chargeback fraud prevention.

Paddle leverages a combination of human expertise and technology to identify and prevent fraud before it happens. We implement a variety of fraud detection and prevention tools to identify high-risk transactions and mitigate the risk of chargebacks.

The businesses using Paddle don’t just save money on chargeback fees. They reclaim the time their teams were spending on administrative burden and eliminate the constant worry about payment processor penalties. 

Get started today to see how Paddle can help your business fight chargeback fraud.