What are the two main chargeback categories and what is the difference between the two?

Fraudulent and non-fraudulent are the two primary categories of chargebacks. Fraudulent chargebacks occur when an individual or criminal group initiates a chargeback(s) with the intent to steal or deceive.

The industry classifies fraudulent chargebacks in two primary categories – true fraud and friendly fraud.

  • True Fraud – criminal makes an unauthorized purchase using either a stolen credit card or stolen credit card number. The legal credit card holder initiates a chargeback to reverse these fraudulent charges.
  • Friendly Fraud – an individual purchases a product or service and receives those products or services, but files a chargeback to avoid paying.

While true fraud can be an individual acting alone, other activity can be tied to a more organized criminal group or effort. Friendly fraud, while highly illegal and of course unethical, can be best equated to shoplifting and is often an individual acting alone in a less organized capacity.

Non-fraudulent chargebacks occur when the cardholder initiates a chargeback either without going to the merchant or the customer was dissatisfied with the merchant’s policy and/or response. Typical causes for non-fraudulent chargebacks include:

  • Duplicate transactions
  • Unclear or unfair refund policy
  • Refunds not issued in a timely manner
  • Merchant name not as expected on billing statement
  • Shipping delays and out-of-stock merchandise
  • Unsatisfactory customer service

Due to the legal protections of The Fair Credit Billing Act of 1974, consumers often go directly to their issuing bank to file a chargeback rather than rectifying the issue with the merchant. This is very costly for merchants and incidences can be reduced by effective customer relations.