Merchants face internal fraud blind spot, report warns

Chargebacks911 has published research indicating that nearly one in four merchants has experienced employee-initiated fraud or in-house collusion. The findings are based on a survey of more than 250 merchants for its 2026 Chargeback Field Report.

Fewer than four in ten merchants that had encountered internal fraud were actively monitoring for it. Another 53.5% either did not know whether internal fraud was being tracked within their organisation or said it was not.

The figures point to a gap in fraud controls as retailers bring in seasonal staff who may gain access to payment systems, customer data and refund processes. Internal fraud can also be harder to identify than external attacks because transactions or account activity may appear routine.

The report cites cases in which an employee with access to customer accounts directs a buyer to file a chargeback instead of requesting a refund through the merchant, then shares the money with them. In other cases, a refund may be agreed but not processed correctly, leaving the customer to dispute the payment and the merchant to absorb the loss.

Both situations can resemble ordinary chargeback activity rather than an obvious internal problem. Without oversight across the full dispute process, merchants may struggle to distinguish employee misconduct from consumer abuse or other forms of fraud.

Monitoring gap

The survey found that fewer than half of merchants monitor employee actions that result in disputes. Many businesses only uncover internal fraud after losses build to a level that can no longer be ignored.

That pattern matters during peak recruitment periods, when retailers often expand staff access quickly and train large numbers of temporary workers in a short time. Such periods can expose weaknesses in processes that permanent teams may have learned to manage informally.

Monica Eaton, Founder and Chief Executive Officer of Chargebacks911, said the issue is often overlooked by businesses focused on external threats. "The most sophisticated fraud prevention platform in the world cannot stop a threat it was never designed to recognize. Merchants have invested heavily in stopping fraud at the door. Very few have stopped to ask what happens when the threat already has a key," Eaton said.

Inside the perimeter

Donald Kossmann, Chief Technology Officer at Chargebacks911, said assumptions built into many fraud programmes shape what merchants choose to monitor. "The assumption behind most fraud prevention strategies is that the threat is outside the building. That assumption determines which data gets monitored, which patterns get flagged and, just as importantly, which risks never get questioned. Internal fraud is effective because it operates inside the perimeter that assumption creates. It doesn't bypass controls. Managing internal fraud isn't a matter of suspicion but rather of architecture. Merchants need continuous visibility across dispute activity to identify unusual patterns before unexplained losses become accepted as part of doing business," Kossmann said.

The report's conclusions come as merchants face continued pressure to reduce chargebacks and refund losses while managing higher transaction volumes. Internal fraud can sit undetected within those losses because the outcomes may look similar to errors, friendly fraud or ordinary disputes.

The challenge is not limited to deliberate collusion. Process failures can produce the same financial result if a refund is mishandled and later disputed, leaving the merchant with a chargeback that appears no different from one triggered by an outside actor.

Eaton said many merchants still identify the problem by chance rather than through formal controls. "Most merchants discover internal fraud by accident. A pattern eventually becomes too obvious to ignore, or someone says something they shouldn't. That is not a detection strategy. Merchants who are serious about managing this risk need to understand their own dispute activity well enough to recognize when something doesn't add up, before the business starts explaining away losses it should have prevented," Eaton said.