Online merchants are far more vulnerable to chargebacks than card-present (in-person) sellers, primarily due to card-not-present (CNP) transactions. False declines, friendly fraud, disputes on clear return policies, and shipping delays also contribute to this high susceptibility.
CNP fraud is particularly prevalent, causing considerable losses for businesses. Indeed, an Experian report notes that such attacks could cause an estimated $28 billion in losses by 2026.
As an existing, new, or soon-to-be online merchant yourself, you need to familiarize yourself with these e-commerce chargeback challenges. The more you know, the better and more effective the merchant fraud prevention strategies you can use for your business.
What Is an Online Merchant?
Online merchants are individuals or businesses that sell goods (products, services, or both) over the internet. Their entire operations are typically completely online, without traditional (physical) brick-and-mortar stores.
Online-only merchants execute all their core business processes digitally, including:
- Marketing
- Sales transactions
- Order processing
- Sales management
- Payments
- Fulfillment
- Customer service and communication
From dedicated websites to mobile applications and marketplaces, these are some of the platforms online merchants use to do business with consumers.
What Is an Example of an Online Merchant?
E-commerce websites are a prime example of online merchants, and they make up a massive industry in the United States. Figures from Statista estimate the e-commerce market to generate a staggering $1.8 trillion in 2029, up from 2025's $1.3 trillion.
Amazon, a type of pure-play e-commerce site, is a specific example of an online merchant that directly sells products to consumers. Marketplace sellers (e.g., businesses that trade via platforms like eBay and Etsy) are also online merchants.
Why Are Online Merchants Most Vulnerable to Chargeback Disputes?
As an online merchant, you must be aware of why online merchants are vulnerable to chargeback disputes, as it can cost your business significant losses. You can implement better prevention strategies by exploring guides with chargeback costs explained and summarized.
Remember: Such online payment disputes will not only result in revenue loss from the original transactions. You, the merchant, will also face additional charges and expenses, from chargeback penalties to admin costs and processing fees.
According to the Merchant Risk Council, for instance, online merchants lose around $240 in total associated revenue for every $100 in chargebacks.
CNP Fraud
CNP fraud often occurs when criminals use stolen credit or debit card details (card numbers, CVVs, and expiry dates) to make unauthorized online purchases. Since many online transactions only require these details, malicious actors are often successful with these crimes.
Online merchants face chargeback costs when the stolen debit or credit card's legitimate owner files a fraud claim.
False Declines
False declines are erroneous rejections of online payments for legitimate transactions. They typically occur due to outdated, poorly calibrated, or "overzealous" fraud and digital transaction security systems.
Since false declines can be annoying, confusing, and even frustrating to buyers, they can ruin the entire customer experience. Unhappy customers can then file chargebacks due to confusion or simply out of spite.
Friendly Fraud
Also sometimes referred to as "chargeback fraud," friendly fraud happens when cardholders tag and dispute purchases that appear on their transaction statements as fraudulent.
The problem is that these transactions are legitimate, with cardholders knowingly initiating them. Still, they choose to file fraud claims as they want to keep the goods while also getting their money back through a refund.
Return Policy Disputes
Return policy disputes are conflicts between online merchants and customers. They surround the return, exchange, or refund of paid-for goods or services.
Returns can stem from legitimate causes, such as receiving items that are defective, damaged, or don't meet descriptions. Unfortunately, they can also be a type of fraud.
Wardrobing, bracketing, and sending back empty boxes are some examples of the latter. According to the National Retail Federation, these are among the costly return behaviors that nearly two in three consumers admit to engaging in.
Shipping Delays
Another reason online merchants are most vulnerable to chargeback disputes is due to their need to ship purchased items. The shipping process can experience significant delivery delays due to various factors and causes, including:
- Supply chain disruptions
- Severe weather conditions
- Logistical and infrastructural problems
- Inventory and operational bottlenecks
When customers have to wait too long to receive their paid-for goods, they're likely to become frustrated enough to file an "Item Not Received" (INR) claim.
Conversely, they may choose to cancel the transaction altogether. They'll then demand a refund, as the delivery is taking "longer" than stated on the merchant's site.
Frequently Asked Questions
Are All Chargebacks Preventable?
Unfortunately, no.
Chargebacks will always be a "normal" part of online transactions. One reason is that many situations that warrant them are legitimate. They're beyond your and your customers' control.
You cannot, for instance, prevent severe weather conditions. Supply chain disruptions caused by global pandemics are also beyond control.
What you have authority over, however, is the use of proactive measures and strategies that can help minimize the risk of and frequency of costly chargebacks.
What Chargeback Prevention Strategies Should Online Merchants Employ?
As an online merchant, you should employ a multifaceted chargeback prevention system that includes a robust fraud detection platform. They include protocols like 3D Secure, AVS, and CVV.
The above security protocols can help prevent or reduce fraudulent chargebacks. They verify cardholder identities to authenticate transactions.
You should also prioritize proactive customer service and on-point billing descriptors. Address customer confusion, issues, and dissatisfaction without delay.
Doing so can help ease their frustration. It may even be enough to stop them from initiating chargebacks.
Ensuring all your product descriptions are accurate should also be a top priority.
You should also use plain language as much as possible. It can help make your return, exchange, or refund policies more straightforward and eliminate confusion and loopholes.
Fight Chargeback Disputes
From CNP fraud to false declines and shipping delays, these are some of the top reasons online merchants are more prone to chargeback disputes.
The good news is that you have many strategies at your disposal, such as advanced fraud detectors and excellent customer communication. With these tactics, you can help combat and keep these costly disputes at bay.
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