Rising chargeback fraud in India's digital economy and the merchant's defence

India's online shopping ecosystem is flourishing. With more than 270 million digital consumers and a market size expected to expand from $107.7 billion in 2024 to $650.4 billion by 2033 (IMARC), ecommerce has emerged as the pulse of the country's consumer culture. Platforms and payment gateways have made shopping as easy as a tap, compelling even offline retailers to shift online. Simultaneously, with this transformation, direct-to-consumer (D2C) brands have thrived, establishing online stores and reaching customers in Tier I to Tier II cities, supported by efficient digital payment infrastructure.

But this rapid growth comes at a hidden cost called ‘Chargeback Fraud’.

The rise of chargebacks

With greater purchases going online and higher development of card-not-present transactions, chargebacks have become a major pain point for online Merchants and payment processors. Mastercard's 2025 State of Chargebacks report estimates that the global fraud volume is slated to rise up to 24% by 2028 to a total of 324 million transactions per year. 

Chargebacks do not merely impact merchants’ bottom line, but also disrupt operations, customer experience, and brand image. Each chargeback results not only in a lost sale but also in the loss of the product or service that was already delivered. In addition, the resolution of disputed transactions imposes serious operational burdens. Frequent disputes also chip away at customer trust and harm long-term brand value, and can even stop merchants from accepting online payments. For Indian entrepreneurs driving within a hyper-competitive environment, this quiet erosion of revenue and trust can be acutely painful and disruptive.

Understanding chargeback fraud

Chargeback occurs when a customer disputes a transaction on their card or wallet and has their card issuer reverse it. While the process intends to safeguard consumers from fraud or faulty products, it's increasingly misused, which has resulted in what's now widely referred to as chargeback fraud.

Here are some common types of chargeback fraud affecting Indian businesses today:

• False non-delivery claims: A buyer falsely claims they didn’t receive the product or that it was defective, despite successful delivery. This is especially prevalent for high-ticket items.

• Clone website scams: Fraudsters replicate popular brand websites, trick genuine users into purchasing fake products, and later initiate chargebacks. The real brand is left to deal with reputational fallout.

• Collusion frauds (targeting payment aggregators): Fraudsters masquerade as genuine merchants, orchestrate fake transactions using dummy buyer credentials, collect payments via a payment aggregator, and then, posing as the buyer, initiate chargebacks. This not only results in losses for aggregators but also triggers stricter checks for legitimate merchants in the ecosystem.

• Use of stolen payment credentials: A hacker or criminal steals someone’s payment information and makes a purchase, resulting in a chargeback on the stolen proceeds from the victim.

Smart strategies to prevent chargebacks

To protect revenue and customer trust, entrepreneurs must proactively implement a multi-layered approach to fraud prevention. While large merchants are investing heavily in chargeback protection technology that may cost up to $500,000 per annum, SMEs can also build sufficient safeguards to protect themselves from potential losses. Some of these are discussed below:

1. Real-time transaction monitoring

Use fraud detection tools that flag anomalies before processing an order. Look out for certain IPs or BINs, or payment instruments, leading to repetitive chargebacks, or unusual orders at unusual timings from unusual addresses and so on. Machine learning and AI fraud detection solutions can be explored depending on the maturity of the merchant’s operations, which can help in analysing vast amounts of transaction data to detect abnormal patterns and anomalies.

2. Maintain adequate records

A clear refund and return policy, visible on the website, helps reduce disputes, which customers might raise due to anxiety. Incrementally, maintain proof of promised goods and services, order confirmations, proofs of delivery, and customer communication logs to contest fraudulent chargebacks effectively. Such records could also help in initiating and supporting legal action, where necessary.

3. Chargeback alerts

Work closely with your acquirer to manage potential chargebacks. Get notified as soon as a dispute is raised to avoid missing deadlines to contest the same.

4. Brand monitoring

Use digital tools to detect fake websites or impersonators. If you find any, take immediate legal and technical action to avoid being linked to fraudulent orders.

5. Stay informed

Remain aware of emerging fraud trends impacting your industry and update your fraud prevention strategies accordingly.

The road ahead

Chargeback fraud is an unwelcome reality in the digital commerce space, but it's not an uncontrollable one. For merchants, investment in building proactive and reactive mechanisms is the key to avoiding unforeseen financial and operational drains and reputational damage caused by such fraud.

Looking beyond individual businesses, however, this growing threat requires a collaborative effort among entrepreneurs, payment operators, and regulators, by creating central mechanisms for fraud detection and fostering a seamless exchange of vital information, to ensure that the fundamental trust in online transactions remains unshaken.