1.1 Background to the Study

Credit card fraud is frequently identified as a significant factor leading to the closure of online stores in developing countries, primarily due to chargebacks, where the card issuer reimburses the cardholder for a purchase. In this context, banks are not held responsible for fraudulent activities at the point of sale, and the burden of losses falls on the merchants. Consequently, merchants must take measures to prevent fraud and safeguard their profits.

In addition to the financial losses incurred due to fraud, merchants risk damaging their reputation with legitimate customers when they reject valid transactions. Therefore, implementing effective anti-fraud management is crucial for the success of online businesses and underscores the significance of this issue.

Globally, rapid advancements in internet technology have created various opportunities in the realms of economy, society, and culture. The internet continues to have a profound impact on nations, communities, institutions, and individuals, giving rise to innovations like e-commerce, e-banking, e-governance, and e-learning. E-commerce, in particular, has proven to be a driver of economic growth in developed regions such as Europe, America, and parts of Asia since the early 21st century. It is also experiencing rapid growth in countries like Nigeria, South Africa, Kenya, and Egypt, thanks to improvements in internet and telecommunication services. Prominent e-commerce websites in Nigeria include,,, and others. Online shopping is gaining acceptance among Nigerian consumers due to its convenience, eliminating the need to visit physical retailers.

Consumer-to-consumer (C2C) e-commerce, the oldest form of e-commerce, allows users to buy and sell directly from each other. It enables users to find products and services easily, fostering competition and making it simpler to locate otherwise hard-to-find items. However, despite the positive aspects of e-commerce, it also presents negative impacts, with fraud being a major problem. In 2014, for instance, the Nigerian Inter-Bank Settlement System (NIBSS) reported 1,461 cases of electronic fraud, resulting in substantial financial losses.

Fraud occurrences in various e-commerce platforms can differ based on the specific e-commerce model used in a given environment, and some issues may be universal. Therefore, addressing fraud in business-to-business platforms may require different approaches compared to business-to-consumer platforms. There is a distinct trust gap in consumer-to-consumer online businesses compared to other e-commerce forms, making them more susceptible to internet-based fraud. This necessitates the development of distinct strategies to mitigate the risks associated with consumer-to-consumer e-commerce transactions. Additionally, differences exist between consumer-to-consumer and business-to-business e-commerce, meaning that methods employed in business-to-consumer e-commerce may not be directly applicable in the consumer-to-consumer context.

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1.2 Statement of the Problem

Chargebacks, often overlooked in research, are considered a significant expense for merchants when it comes to accepting card payments. Unlike interchange fees or merchant discount fees, which are believed to be the primary costs for U.S. merchants in accepting payment cards, the quantity and monetary value of chargebacks that merchants receive, as well as the losses they experience due to chargebacks, have not been adequately documented in previous studies (GAO 2009; Hayashi 2012).

On the flip side, cross-border e-commerce is an emerging online market that holds great potential for small and medium-sized enterprises (SMEs). According to a report commissioned by PayPal, more than 130 million cross-border shoppers worldwide were expected to spend over US$300 billion by 2018 (PayPal Media 2013). In comparison to domestic e-commerce, cross-border e-commerce offers more significant business opportunities, particularly from emerging markets like China and Brazil (PayPal Media 2013).

However, engaging in cross-border trade and international delivery is substantially more complex and risky than traditional offline markets or domestic electronic markets. This complexity arises from various factors, including a high level of information asymmetry between international buyers and sellers, weak legal enforcement across different countries, language and cultural barriers, and elevated shipping costs in international trade (Gomez-Herrera et al. 2014; Savrula et al. 2014; Gessner 2015).

Given the intricate and uncertain nature of cross-border transactions, the risk of chargeback fraud becomes a more significant concern for online merchants, particularly SMEs. SMEs typically have fewer financial resources at their disposal compared to large enterprises, making them more vulnerable to the potential financial losses associated with chargeback fraud.

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1.3 Objectives of the Study

The main objective of the study is to examine the impact of chargeback fraud on Small and Medium Scale Enterprises in the E-commerce industry. Specific objectives of the study are:

  1. To determine the prevalence of chargeback fraud among SMEs in the ecommerce business.
  2. To assess the financial impact of chargeback fraud on SMEs in the ecommerce business.
  3. To develop recommendations for policymakers and industry stakeholders to address chargeback fraud.

1.4 Research Questions

To guide the study and achieve the objectives of the study, the following research questions were formulated:

  1. What percentage of SMEs in the ecommerce business have experienced chargeback fraud?
  2. What is the average cost of a chargeback for SMEs in the ecommerce business?
  3. What policy changes can be implemented to reduce the prevalence and impact of chargeback fraud?

1.5 Research Hypothesis

The following research hypothesis was developed and tested for the study:

  1. Ho: There is no statistical significant relationship between charge back fraud and SMEs financial performance.
  2. Hi: There is a statistical significant relationship between charge back fraud and SMEs financial performance.

1.6 Significance of the Study

The study is important for many reasons. The following are the major stakeholders this paper through its practical and theoretical implications and findings will be of great significance:

Firstly, the paper will benefit major stakeholders and policy makers in the e-commerce sector. The various analysis, findings and discussions outlined in this paper will serve as a guide in enabling major positive changes in the industry and sub-sectors.

Secondly, the paper is also beneficial to the organizations used for the research. Since first hand data was gotten and analysed from the organization, they stand a chance to benefit directly from the findings of the study in respect to their various organizations. These findings will fast track growth and enable productivity in the organisations used as a case study.

Finally, the paper will serve as a guide to other researchers willing to research further into the subject matter. Through the conclusions, limitations and gaps identified in the subject matter, other student and independent researchers can have a well laid foundation to conduct further studies.

1.7 Scope of the Study

The study is delimited to sampled Small and Medium Scale Businesses that sell online via an e-commerce platform in Ikeja Local Government Area of Lagos State. Findings and recommendations from the study reflects the views and opinions of respondents sampled in the area. It may not reflect the entire picture in the population.

1.8 Limitations of the Study

The major limitations of the research study are time, financial constraints and delays from respondents. The researcher had difficulties combining lectures with field work. Financial constraints in form of getting adequate funds and sponsors to print questionnaires, hold Focus group discussions and logistics was recorded. Finally, respondents were a bit reluctant in filling questionnaires and submitting them on time. This delayed the project work a bit.

1.9 Organization of the Study

The study is made up of five (5) Chapters. Chapter one of the study gives a general introduction to the subject matter, background to the problem as well as a detailed problem statement of the research. This chapter also sets the objectives of the paper in motion detailing out the significance and scope of the paper.

Chapter Two of the paper entails the review of related literature with regards to corporate governance and integrated reporting. This chapter outlines the conceptual reviews, theoretical reviews and empirical reviews of the study.

Chapter Three centers on the methodologies applied in the study. A more detailed explanation of the research design, population of the study, sample size and technique, data collection method and analysis is discussed in this chapter.

Chapter Four highlights data analysis and interpretation giving the readers a thorough room for the discussion of the practical and theoretical implications of data analyzed in the study.

Chapter Five outlines the findings, conclusions and recommendations of the study. Based on objectives set out, the researcher concludes the paper by answering all research questions set out in the study.

1.10 Definition of Terms

  1. Chargeback: A chargeback is a disputed transaction initiated by a cardholder or card issuer. It results in a reversal of funds from the merchant's account to the cardholder, often due to fraud, unauthorized transactions, or disputes.
  2. Fraudulent Chargeback: This occurs when a customer fraudulently disputes a legitimate transaction, leading to a chargeback. It can result in financial losses and reputational damage for the merchant.
  3. Small and Medium-Scale Businesses (SMBs): SMBs are companies that fall within a certain range of annual revenue, assets, or employee count. In the context of e-commerce, these businesses are typically smaller in scale compared to large corporations.
  4. E-commerce Industry: The e-commerce industry encompasses online businesses that sell products or services over the internet. It includes various models such as online retailers, marketplaces, and service providers.
  5. Merchant: A merchant is a business or individual that sells products or services and accepts payments, including credit card transactions, from customers.
  6. Reversal of Funds: This refers to the process of funds being returned to the cardholder's account during a chargeback, effectively reversing the payment made to the merchant.
  7. Cardholder: The cardholder is the individual or entity that owns and uses a credit or debit card for making purchases.
  8. Dispute Resolution: The process of addressing and resolving chargeback disputes, which can involve communication between the merchant, the cardholder, and the card issuer.
  9. Financial Impact: The financial consequences experienced by a merchant as a result of chargeback fraud, which may include lost revenue, fees, and operational costs associated with handling disputes.
  10. Reputational Damage: Refers to the harm to a business's reputation caused by chargeback fraud, which can lead to decreased customer trust and loyalty.
  11. Chargeback Prevention: Strategies and measures implemented by merchants to reduce the occurrence of chargebacks, such as fraud detection, improved customer service, and clear refund policies.
  12. Chargeback Management: The systematic handling of chargeback disputes, including documentation, communication, and resolution efforts, to minimize financial losses.
  13. Chargeback Ratio: The ratio of chargebacks to total transactions, which is monitored by payment processors and card networks as an indicator of a merchant's risk and compliance.