Transaction Disputes: A Merchant's Guide to Protection and Prevention in 2025

Imagine this: A customer purchases a high-end electronics item from your online store, receives it in perfect condition, uses it for two months, and then files a dispute claiming they never received it. Your business loses the merchandise, pays chargeback fees, and your dispute ratio creeps dangerously close to card network thresholds. Sound familiar?

Transaction disputes have become one of the most significant challenges facing ecommerce merchants today. With digital commerce continuing its explosive growth across Europe and the UK—sales grew 7% in Europe in the past year—the volume and sophistication of transaction disputes have increased in lockstep. For merchants, each dispute represents not just a potential revenue loss, but administrative burden, fees, and the risk of being labeled a high-risk merchant by payment processors.

This comprehensive guide will help you understand what transaction disputes are, why they're increasing, how to handle them effectively, and most importantly, how to prevent them from damaging your bottom line.

What is a Transaction Dispute?

A transaction dispute occurs when a cardholder questions a charge on their credit or debit card statement and asks their issuing bank to reverse it. While consumers might use terms like "dispute," "chargeback," or "refund" interchangeably, merchants need to understand the critical distinctions.

A chargeback is a forced payment reversal initiated through the card network (Visa, Mastercard, etc.) when a cardholder disputes a transaction with their bank. The funds are pulled from your merchant account, often before you're even notified.

A refund is a voluntary return of funds that you, the merchant, initiate—typically after a customer returns merchandise or requests their money back through your normal channels.

A transaction dispute is the broader term that encompasses the entire process, from the initial customer complaint to the final resolution, which may or may not result in a chargeback.

For merchants, the distinction matters enormously. A refund you process yourself costs you the sale but avoids chargeback fees (typically €15-€100 per incident) and doesn't count against your chargeback ratio. A chargeback, conversely, brings all these penalties plus potential long-term consequences if your ratio exceeds card network thresholds (typically 0.9-1.0% of transactions).

Transaction disputes have increased significantly in the post-SCA (Strong Customer Authentication) era. While SCA has made traditional payment fraud more difficult in Europe, it has inadvertently driven fraudsters toward first-party fraud tactics. Industry data shows that first-party fraud chargebacks were up 60-70% in April and May 2025, with June seeing a doubling compared to the previous year across the EMEA region.

Why Customers Dispute Transactions: The Merchant's Perspective

Understanding why customers initiate disputes is your first line of defense. Not all disputes are created equal, and recognizing the patterns helps you prevent future occurrences and fight back when necessary.

Legitimate Dispute Reasons

Fraudulent or Unauthorized Transactions: When a customer's card is genuinely stolen or compromised, they have every right to dispute charges they didn't authorize. Merchants need proper verification systems to prevent fraudulent purchases in the first place.

Item Not Received (INR): The customer claims they never received their order. This can result from shipping problems, porch piracy, or delivery to the wrong address.

Significantly Not As Described (SNAD): The product delivered differs materially from what was advertised, involving condition, functionality, size, color, or quality issues.

Billing Errors: These include duplicate charges, incorrect amounts, or charges after a subscription was supposedly canceled—often merchant system errors that should be caught before reaching the dispute stage.

Service Not Rendered: Particularly relevant for service-based businesses or digital goods, where the customer claims they paid for something they never received.

First-Party Fraud: The Growing Threat

First-party fraud, also called "friendly fraud" or "chargeback fraud," occurs when legitimate cardholders make purchases and then falsely dispute them to get both the product and their money back.

The data is alarming. In Europe's fashion and apparel industry, consumer abuse increased 32% year-over-year. The beauty and cosmetics sector saw a staggering 126% increase in policy abuse by legitimate cardholders. Even the luxury goods sector remains susceptible to sudden shifts in consumer behavior.

Common first-party fraud scenarios include:

• Wardrobing: Purchasing clothing, wearing it once (often with tags hidden), then returning it or disputing the charge

• Bracketing: Buying multiple sizes or colors with the intention of keeping one and returning or disputing the others

• False INR claims: Claiming an item never arrived when it actually did

• False SNAD claims: Exaggerating product defects to justify a return or dispute

• Digital goods fraud: Downloading software or digital content, then claiming it wasn't received or didn't work

What makes first-party fraud particularly insidious is its difficulty to detect and fight. Unlike third-party fraud (where a criminal uses stolen payment credentials), first-party fraud involves legitimate customers using their own valid payment information. The cardholder can pass authentication checks, provide their real shipping address, and even provide biometric verification—and still commit fraud.

The shift toward first-party fraud accelerated after Strong Customer Authentication (SCA) implementation across Europe. As traditional payment fraud became harder, bad actors simply pivoted. The rise of "fraud-as-a-service" offerings makes this even more accessible—professional fraudsters now coach or manage false claims for everyday consumers in exchange for a percentage of the "recovered" funds.

The True Cost of Transaction Disputes for Merchants

Every disputed transaction hits your business multiple times:

Direct Financial Losses: You lose the merchandise, the sale revenue, and the shipping costs. If you fulfilled a €500 electronics order that gets disputed, that's €500+ in direct losses.

Chargeback Fees: Banks and payment processors charge you for processing disputes, typically €15-€100 per chargeback, regardless of whether you win or lose.

Operational Costs: Staff time spent gathering evidence, responding to disputes, and communicating with banks represents significant hidden costs.

Increased Processing Fees: Merchants with high chargeback ratios often face higher payment processing rates or additional fees.

Account Termination Risk: Exceed card network chargeback thresholds (typically 0.9-1.0% of transactions, or 100 chargebacks per month), and payment processors may terminate your merchant account entirely—essentially forcing your business offline.

How to Handle Transaction Disputes: A Step-by-Step Approach

Step 1: Review the Dispute Immediately

When a chargeback notification arrives, you typically have 7-10 days to respond. Review the dispute reason code—these standardized codes tell you exactly why the customer initiated the dispute.

Common reason codes include:

• Fraud (10.4 for Visa, 4837 for Mastercard): Customer claims they didn't authorize the transaction

• Not as Described (13.1 for Visa, 4853 for Mastercard): Product significantly different from listing

• Not Received (13.3 for Visa): Item never delivered

• Credit Not Processed (13.6 for Visa): Customer claims refund wasn't provided

Step 2: Gather Compelling Evidence

Your response package should include documentation that directly addresses the dispute reason:

For fraud claims:

• Proof of delivery to cardholder's address

• IP address and device information matching customer's location

• Evidence of 3D Secure/SCA authentication

• CVV/AVS match information

For Item Not Received:

• Shipping confirmation with tracking number

• Delivery confirmation showing signature or GPS coordinates

• Communication with customer after delivery

For Not As Described:

• Product photos and exact listing descriptions

• Any communication with customer about the item

• Return policy clearly displayed at checkout

Step 3: Submit Within the Deadline

Late submissions are automatically ruled in the customer's favor. Build in buffer time—if you have 10 days, aim to submit by day 7 to account for any technical issues.

Step 4: Track and Learn

Whether you win or lose, track every dispute's details to identify patterns. Are certain products generating more disputes? Specific shipping carriers? These insights inform your prevention strategies.

When to Fight vs. Accept a Chargeback

Fight when:

• You have strong evidence (delivery confirmation, customer communication)

• The dispute amount justifies the time investment

• The customer has a pattern of filing disputes

Accept when:

• You lack sufficient evidence

• There was a genuine merchant error

• The dispute amount is very small relative to response costs

Remember: even when you win, you still paid the chargeback fee and invested staff time.

Preventing Transaction Disputes: Your Best Defense

Prevention is exponentially more cost-effective than fighting disputes after they occur.

Crystal-Clear Product Information

Industry data shows that "Not As Described" disputes are common across all sectors. Combat this with:

• Detailed descriptions: Include dimensions, materials, colors, functionality, and limitations

• High-quality photos: Multiple angles, lifestyle shots, and close-ups

• Videos: Particularly valuable for complex products or apparel

• Customer reviews: Real customer photos set accurate expectations

Transparent Policies

Make your policies impossible to miss:

• Clear return windows: Display prominently on product pages and at checkout

• Shipping timelines: Set realistic expectations and update if delays occur

• Refund processes: Explain exactly how refunds work and timing

Recent consumer surveys show that 77% of European consumers consider return policies fairly or very important when deciding where to shop online, with that figure climbing to 86% in Spain and 84% in Italy.

Robust Fraud Prevention

Layer your fraud defenses:

Strong Customer Authentication (SCA): Ensure your payment process complies with European PSD2 requirements, combining two-factor authentication:

• Something the customer knows (password)

• Something they have (phone/device)

• Something they are (biometric)

Additional layers:

• Address Verification Service (AVS)

• CVV Verification

• Device Fingerprinting

• Velocity Checks

• AI-Powered Risk Assessment

Recent data shows that fraud pressure in EMEA increased 46% by GMV year-over-year. Traditional fraud hasn't disappeared despite SCA—it's just shifted tactics.

Excellent Customer Service

Many disputes happen because customers feel they have no other option. Prevent this by:

• Responsive support: Answer questions quickly across multiple channels

• Proactive communication: Send shipping notifications and delivery confirmations automatically

• Easy problem resolution: Make it simple for customers to report issues

• Clear contact information: Display your customer service channels prominently

Consumer research indicates that 94% of European consumers say ease of returns is crucial to their shopping experience.

Strategic Returns Management

The solution isn't to make returns difficult for everyone, but to intelligently identify risky return behaviors:

Risk-based friction: Use data to identify customers with histories of abuse and apply appropriate friction (slower refunds, required item inspection) while giving trusted customers instant refunds.

Track serial returners: Flag accounts with suspicious patterns like consistently returning high-value items or claiming frequent INR/SNAD.

The home goods industry in EMEA saw an 8% decrease in consumer abuse by GMV in 2025, suggesting that intelligent approaches work. Meanwhile, fashion and apparel saw a 32% increase, highlighting the ongoing challenge in abuse-prone categories.

Shipping Best Practices

Many disputes center on delivery issues. Mitigate these with:

• Signature confirmation: For high-value orders (typically over €200-500)

• GPS delivery verification: Many carriers now provide coordinates

• Reliable carriers: Track carrier performance and switch if necessary

• Proactive delay communication: If shipments are delayed, notify customers immediately

Clear Billing Descriptors

Ensure your billing descriptor (what appears on customers' credit card statements) is recognizable. "XYZ Enterprises Ltd." means nothing to customers who shopped at "BestGadgets.com." Unrecognized charges trigger disputes.

The Role of Technology in Dispute Prevention

Modern commerce protection platforms have revolutionized how merchants handle transaction disputes:

Pre-Authorization Fraud Prevention: AI-powered systems analyze hundreds of signals in milliseconds—device fingerprinting, purchase history, shipping/billing relationships, velocity checks, and global commerce network insights.

Post-Purchase Abuse Detection: Advanced systems monitor for return abuse patterns, serial returners with high-value claims, account takeover indicators, and promo abuse schemes.

Network Intelligence: The most powerful tools leverage network effects. When thousands of merchants share anonymized fraud data, patterns emerge that would be invisible to individual businesses.

Looking Ahead: Emerging Challenges

BNPL Regulation Changes

The UK's new Buy Now Pay Later regulations, taking effect mid-2026, will change how BNPL disputes work. Approved BNPL accounts may become more attractive targets for fraud rings once customers pass credit checks.

Agentic Commerce

As AI-powered shopping agents begin making purchases on consumers' behalf, new questions emerge about transaction disputes. If an AI agent makes an incorrect purchase based on ambiguous instructions, who bears responsibility?

Continued Evolution of First-Party Fraud

As merchants improve their fraud prevention, first-party fraud tactics will likely become more sophisticated. The 70% year-over-year increases in some categories suggest this is already a growing problem requiring constant vigilance.

Conclusion: Building Resilience Against Transaction Disputes

Transaction disputes are an unavoidable aspect of ecommerce, but they don't have to devastate your business. The key is building a comprehensive approach that combines prevention, intelligent response, and continuous learning.

Start with the foundations: clear product information, transparent policies, excellent customer service, and basic fraud prevention tools. Then layer in more sophisticated solutions—AI-powered risk assessment, intelligent returns management, and network intelligence that learns from millions of transactions.

Remember that legitimate disputes deserve fair handling. Customers have real grievances sometimes, and resolving these quickly often costs less than fighting chargebacks. But when facing first-party fraud—the customer who receives their luxury handbag and then claims it never arrived—you need both the evidence and the conviction to fight back.

The merchants who succeed balance customer experience with fraud prevention. They make shopping and legitimate returns seamless for trusted customers while adding proportionate friction for risky behaviors. They invest in technology that identifies patterns humans would miss. And they stay informed about emerging threats and regulatory changes.

With fraud pressure increasing 46% across EMEA and first-party fraud spiking 60-70% in recent months, the time to strengthen your defenses is now. Every prevented dispute protects not just that transaction's revenue, but your chargeback ratio, your processing fees, and your ability to continue accepting card payments.

Modern commerce protection solutions offer AI-driven fraud prevention, abuse detection, and financial guarantees that growing ecommerce businesses need. By instantly identifying legitimate customers while flagging risky transactions, these platforms help you approve more orders, prevent more fraud, and handle disputes more effectively—all while improving the experience for your best customers.