The flywheel effect of chargebacks cost US merchants USD 243B in 2023

There are currently 193 million active cardholders in the US, as per data from the US Census Bureau. And, while not every American filed a chargeback in 2023, those that did dispute a charge tended to do so repeatedly, as revealed by the 2024 Cardholder Dispute Index (CDI).

Within this subgroup, the average cardholder filed 5.7 chargebacks in 2023, with an average dollar value of USD 76 per dispute. Given that 78% of Americans admitted filing at least one chargeback over the last year, this ultimately suggests that cardholders in the US disputed a minimum of USD 65.2 billion worth of charges in 2023, on the most conservative basis, equating to USD 243.75 billion and up when factoring in Lexis Nexis’s True Cost of Fraud burden to US retailers.

Chargeback fraud and misuse is surging

Chargebacks were originally devised as a consumer protection mechanism against credit card fraud. Today, the chargeback process is seen as a convenient alternative to facilitate refunds by circumventing retailers and disputing transactions directly through issuing banks with minimal pushback — regardless of whether they have a valid reason to do so. Technological evolution and shifts in consumer behaviour have coupled to breed a new age of entitlement standards, creating a growing environment for frictionless fraud, perpetrated by consumers — whether innocently or otherwise. This has become the primary cause of dispute volume growth where recent statistics cited by Mastercard revealed a 32% year-over-year increase in chargebacks, supported by Visa reports underscoring this rising threat, indicating that up to 75% of all chargebacks filed were cases of friendly fraud and first-party misuse.

With friendly fraud, there is a small but growing minority of cardholders who engage in ‘cyber shoplifting,’ as it is sometimes described. These are first-person fraudsters who complete a purchase with the premeditated intent to file a chargeback later to ‘get something for free.’

First-party misuse can also occur when cardholders file chargebacks due to misunderstandings or convenience, such as when consumers call banks to cancel subscriptions rather than contact the retailer. 

Additionally, many cases of first-party misuse arise from cardholders being unable to recognise credit card billing descriptions. This is a widespread problem, with nearly 95% of cardholders reportedly finding charges on their billing statement that they do not recognise. In response, many consumers file chargebacks, assuming those charges are fraudulent. 

Whatever the reason or intent consumers possess for filing a chargeback, most cardholders see chargebacks as a viable substitute for requesting a refund. In fact, 72% of cardholders consider disputing a charge with the bank to be a valid alternative to requesting a refund from a merchant, despite chargebacks costing retailers 3.75 times the transaction value in lost revenue and merchandise, chargeback fees, higher overhead costs, and damaged relationships with card networks.  However, these do not even include the additional burden and cost to financial institutions through snow-balling, trickle-down effects.

Figure 2: Graph from 2024 CDI showing 72% of cardholders consider chargebacks and refunds equivalent processes

What to do going forward

Banks and card networks need to collaborate with each other and merchants to develop unified standards that are fair and balanced, properly enforce chargeback and dispute rules and guidelines, and hold stakeholders (whether buyer, seller, network, or institution) accountable in instances of chargeback fraud and misuse. With the short-sighted implementation of revolving policies and quick-fix methods (to help reduce liabilities) — many of which place priority on customer service for cardholders rather than defending honest transactions — results backfire to create a flywheel effect that unintentionally rewards bad behaviours and perpetuates growth of the very problem we want to resolve. 

Balancing the scales of chargeback justice lies not only in better educating consumers, merchants, and banks, but also requires a more balanced and transparent exchange of related data and consistently applied standards. Cardholders should be made aware of the proper use of chargebacks and the practices and behaviours which constitute first-party chargeback misuse. Furthermore, cardholders should be prevented from exploiting dispute methods available today. 

As for merchants, the most impactful action they can take today is proactively addressing every dispute. With major card networks estimating three-quarters of all chargebacks are instances of chargeback fraud or misuse, merchants should be more inclined to provide valuable feedback that identifies and prevents these incidents from repeating. Given the arduous processes and lack of standards in the chargeback arena, many merchants consider chargebacks as a line-item ‘cost of doing business’ – and, while some merchants arguably have low ticket transactions that don’t justify the cost to contest with a response, failing to address the source of each case has proven to contribute to growing concerns. 

Chargebacks can provide crucial understanding into the true sources of customer and bank interactions, fulfillment processes, customer experiences, new and developing fraud threats, gaps in policies, and more. With the right tools and data-driven feedback, retailers can optimise internal processes and resource allocation, identify bottlenecks, enhance customer interactions, and reduce dispute rates altogether.

However, curbing the upward trend in chargeback issuances will not be an easy task. If the payments industry dedicates to adopting a collaborative, data-driven culture, and imposing consistent outcomes that are fair to both buyers and sellers, we can deter chargeback fraud and misuse and increase confidence in electronic transactions for everyone involved.

About Monica Eaton

As an acclaimed entrepreneur, speaker, and author, Monica Eaton is widely recognised as a thought leader in the fintech industry and a champion of women in technology. Today, her innovations are used by thousands of companies worldwide, cementing her reputation as one of the payment industry’s foremost experts in risk management, chargeback mitigation, and fraud prevention. For further details, visit  http://www.monicaec.com.

About Chargebacks911

Chargebacks911 drives profitability for online merchants by decreasing payment disputes and recovering revenue lost to chargeback fraud. Through a proprietary suite of software and service offerings, the company delivers transparent, end-to-end chargeback management solutions backed by the industry’s only performance-based ROI guarantee.