A Chargeback Fraud is a financial transaction reversal that occurs when a customer disputes a legitimate charge with their bank, credit card issuer or credit card company, claiming they did not authorize the transaction or did not receive the product or service, while actually retaining the item. Chargeback fraud is also known as "Friendly Fraud."
The Chargeback fraud can occur in various forms and way, including "friendly fraud," where the cardholder intentionally files a chargeback after receiving his/her goods and services which he/she ordered, and "return fraud," where the customer returns a product in good condition but claimed that the products was defective.
Chargeback fraud is a risk for any business that accepts credit card payments, but some are more vulnerable than others. Businesses selling high-value items, such as luxury goods or travel services, are particularly at risk because fraudsters may try to obtain these expensive products for free through fraudulent chargebacks.
Online retailers and digital service providers also face increased risk due to the difficulty of verifying online transactions. This makes it easier for fraudsters to dispute charges and receive refunds. Digital products, like software or online courses, are especially vulnerable because customers can claim they didn’t receive the product or were dissatisfied with it.
Subscription-based businesses are another high-risk group. Customers might forget about their subscriptions or not recognize recurring charges, leading to chargeback claims. Some might even falsely claim they didn’t authorize a subscription they’ve been using.
In Nigeria, the rise of e-commerce has brought along significant challenges, especially in the form of chargeback fraud. This type of fraud is most common in online businesses where verifying a customer’s identity can be difficult. Companies that sell high-value items or digital products are especially at risk, as fraudsters often use the chargeback system to obtain goods without paying for them. As more businesses move online, the risk of these fraudulent activities continues to grow.
How to prevent and stop Chargeback Frauds in Nigeria
Several Nigerian fintech and payment gateway companies have already experienced heavy losses due to chargeback fraud. For example, Interswitch, a leading payment processor, reportedly lost ₦30 billion, recovering only part of it. Union54, a startup offering card services, decided to halt its operations in Nigeria after facing persistent chargeback issues, which could have led to losses exceeding $1 billion.
