The Chargeback Trap: How Fraudsters Win and Businesses Lose
One of the sessions at the FTT Fintech Festival 2025 that left a lasting impression on me was the discussion on chargebacks. The scale of the issue now is enormous, and it’s something I’ve personally lived through. During my time when I was running a retail and hospitality business, like many other small business owners, I lost thousands of pounds to chargebacks.
Back then, card providers gave us the ability to take payments over the phone. They approved it, supplied the card machines, and charged us for the privilege; however, if a customer later claimed it “wasn’t them”, the money was withdrawn from our account pretty quickly. The only explanation ever offered was that we “shouldn’t have taken the payment over the phone” in the first place. There were times when customers pressed a particular function on the card machine that allowed them to avoid entering a PIN. We didn’t even know this was possible until the chargeback arrived. And no matter how much proof we pulled together, no dispute ever went in our favour.
That experience came back to me as I listened to the panel describe how widespread the problem has become. Last year, the UK processed around £128 million in chargebacks, while in the US, the figure was more than $11 billion. The most worrying part is that a significant portion of this is not sophisticated cybercrime but behaviours that fall into the grey area of “friendly fraud” or what is now more accurately called first-party misuse. In simple terms: the customer is real, the card is real, the transaction is real, but the dispute is still filed.
The session explored why this is happening, and the reasons are deeply rooted in the evolution of payments. Chargebacks were invented decades ago as a consumer protection measure for card-present transactions. That old system now governs digital commerce, cross-border payments, subscription models, contactless transit, and mobile remittance – uses it was never designed for. Today, disputing a transaction is often easier for a customer than contacting a merchant, cancelling a subscription, or even checking past receipts. Social platforms and forums freely share “tips” on how to get money back. The cost-of-living crisis fuels more opportunistic claims. And because issuing banks tend to prioritise the cardholder’s experience, merchants bear the financial and operational burden.
What struck me in the panel conversation was how uneven this landscape is. Issuers protect their customers, sometimes with little scrutiny of the circumstances. Merchants are financially liable even when they can demonstrate clear patterns of misuse. And the idea of close collaboration between issuers and merchants (the very thing that could prevent fraudulent chargebacks) is still largely theoretical. In the UK, large organisations like transport networks have begun speaking directly with issuers to reduce invalid disputes, but this level of cooperation is out of reach for most merchants, especially small businesses.
Technology offers some promise, but not without its limitations. AI can surface behavioural anomalies, speed up internal workflows, and enhance transaction monitoring. But it cannot (yet) make nuanced decisions about disputes rooted in human behaviour, household spending dynamics, or buyer’s remorse.
Payments decisions are deeply interconnected. A single chargeback affects cash flow, fraud ratio, merchant relationships, card eligibility, and business survival. In remittance, it can wipe out profits; in hospitality, it can mean the difference between profit and loss. This highlights that payment systems often favour one side over the other.
Listening to all of this, I kept returning to a simple question: how fit is our chargeback system if it can be so easily misused, leaves merchants exposed, and offers no meaningful path to fairness? Merchants pay the fees, take the risks, invest in the tools, and fund the ecosystem, and still they’re often the least protected participant in it.
This is where academic research could make a real difference. Chargebacks sit at the intersection of technology, regulation, behavioural science, ethics, and international payments. This problem touches on economic resilience, consumer behaviour, fraud governance and financial inclusion.
Centre of a rapidly changing payments ecosystem that includes real-time transactions, digital wallets, cross-border remittances, subscription models.
Here are five research directions that could meaningfully advance the conversation:
1. Designing a fair liability model for modern payments. How should responsibility be distributed between issuers, acquirers and merchants in a world where card-not-present transactions dominate? What evidence standards are fair for all parties?
2. Behavioural drivers of first-party misuse. What motivates consumers to dispute legitimate transactions, and how can behavioural insights improve dispute resolution, customer education and policy design?
3. AI-assisted dispute adjudication. How can AI be used responsibly to detect misuse patterns, identify anomalies, and support dispute decisions without bias, privacy risks or over-reliance?
4. Cross-border chargeback governance. What reforms are needed to support fair dispute processes in remittance and international payments, where liability, regulation and evidence standards vary dramatically across countries?
5. The economic impact of chargeback misuse. How do rising chargebacks affect business survival, pricing strategies, innovation and financial stability across sectors such as hospitality, transport, retail and cross-border commerce?
Chargebacks were created for a world where fraud looked very different. Today, they sit at the middle of a rapidly changing payments ecosystem that includes real-time transactions, digital wallets, cross-border remittance, subscription models and increasingly sophisticated fraud patterns.
If we want a system that protects consumers and merchants — not one at the expense of the other — then chargebacks must evolve. Research, collaboration, better data sharing and smarter regulation are key to making that happen.
More reflections from FTT Fintech Festival 2025 coming soon.