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Much of the conversation surrounding card payment security focuses on safeguarding sensitive card details and preventing security breaches. However, there's an arguably more serious threat to today’s retailers that involves neither theft nor hacking—friendly fraud.
Representing the majority of credit card fraud cases, friendly fraud poses a serious challenge to merchants and must be addressed by any business hoping to safeguard its operations.
What is friendly fraud?
Friendly fraud, also known as first-party fraud, is when a customer requests a refund or chargeback for a purchase without a legitimate reason. Unlike traditional fraud, friendly fraud is perpetrated by cardholders themselves, rather than by someone using stolen credit card or hacked account details.
Friendly fraud is often unintentional, stemming from confusion and genuine misunderstandings. In other cases, however, “friendly fraud” is pre-meditated, with cardholders deliberately abusing the chargeback system for financial gain.
Types of friendly fraud
There are several common scenarios in which friendly fraud occurs, including:
- Mistakes and forgetfulness
A person may not recognise or understand a charge on their bank statement, assume it’s fraudulent, and submit a chargeback request without realising the purchase was legitimate. In other cases, the cardholder may just forget having made the purchase entirely. - Accidental purchases
A common example of unintentional friendly fraud is when a child makes a purchase using their parent’s card or online account, such as for in-app purchases, streaming films and TV, and playing online games. Although the purchase was legitimate, the cardholder may still request a refund or chargeback, either because they don’t recognise the purchase or because they didn’t technically authorise it. - Buyer’s remorse
Another common scenario behind friendly fraud is when a customer regrets their purchase and seeks an easy way to “undo” it. If their reasoning doesn’t meet the company’s return policy, if they’ve left it too late, or if they’re just not up to the task of shipping the item back, they may submit a chargeback request based on false claims. - Cyber shoplifting
The most inexcusable type of friendly fraud is intentional abuse of the chargeback system. In these cases, cardholders make purchases with the pre-meditated plan to keep the items, claim they didn't receive them, and receive a full refund. This type of chargeback fraud is also known as “cyber shoplifting” and “goods lost in transit fraud (GLIT)”. - Refund abuse and “de-shopping”
Friendly fraud can also refer to cardholders who abuse a merchant’s refund policy, either claiming defects to get a refund while retaining the product, or buying items for temporary use with the deliberate intention of returning it later (also known as "de-shopping”). For example, a person might purchase an expensive outfit to wear to an event only to return it afterwards for a full refund. Despite having used and enjoyed the item as intended, the customer returns it as a way of circumventing the cost, effectively getting temporary free use of the product.
How friendly fraud affects businesses
If left unchecked, friendly fraud can have a significant effect on a business’s profits. It’s estimated that merchants will pay 100 billion USD in chargebacks in 2024 alone, with more than 60 per cent being instances of friendly fraud. These damages are compounded by the loss of merchandise, chargeback fees and penalties, increased payment processing costs, and the allocation of significant resources used to manage and dispute fraudulent chargebacks.
The negative impacts of friendly fraud include:
- Financial losses
The most obvious and significant impact of friendly fraud is the initial revenue lost when items are refunded and payments are reversed via chargebacks. On top of this, in the majority of friendly fraud cases, the merchant loses out on both the transaction amount and the cost of the goods that were never returned. - Higher payment processing costs, chargeback fees, and penalties
Businesses with higher-than-average chargeback rates are typically charged more for payment processing services and may also incur penalties from credit card issuers and banks. High chargeback rates are associated with being a more “high-risk” merchant, leading to higher fees, operational restrictions, and increased scrutiny of the business as a whole (in some cases being denied payment processing services altogether). - Increased operational costs and strained resources
The growth of friendly fraud has forced businesses to allocate more money and resources to fraud management and prevention. For small businesses, this often means diverting staff away from other areas or outsourcing to third-party specialists, further stretching their limited resources and budgets. For larger companies, it can mean hiring full-time chargeback analysts and even dedicating entire teams to the task of monitoring and disputing chargebacks.
Is friendly fraud preventable?
Merchants do not have to accept high rates of friendly fraud as an inevitable “cost of doing business.” Although it’s not possible to eliminate it completely, businesses can significantly reduce instances of friendly fraud by carrying out the following mitigation strategies.
- Have a robust and accessible returns policy
One of the best ways to prevent illegitimate chargebacks is to encourage customers to return products directly to you if they are unsatisfied. If your returns policy is clear and reasonable, and if the returns process is straightforward, it can prevent customers from bypassing the proper channels and resorting to illegitimate chargebacks instead. - Use a clear statement descriptor for customer bank statements
Make it easy for customers to recognise their purchases as they appear in their bank statements by keeping your merchant descriptor clear and up-to-date. For example, use your trading name rather than an obscure acronym or the name of your parent company. If your business undergoes a name change, this should also be reflected in your statement descriptor. Work with your payment services provider to ensure that your merchant statement descriptor is as clear as possible. - Communicate throughout the sales and shipping process
Keep customers updated during every stage of the sales process to reduce opportunities for confusion and concerns. Emailing customers order confirmations and shipping updates helps ensure they don’t prematurely file a chargeback request, particularly if the item’s arrival has been delayed. - Be accessible and responsive to customer questions and concerns
Make it easy for customers to get in touch with your customer service team so that any concerns can be resolved directly, rather than via the chargeback system. When customers feel that their concerns will be heard and addressed, they are far less likely to request a chargeback as their first recourse. - Require multi-factor authentication to prevent unauthorised transactions
Accidental purchases, particularly those made by children via their parents’ online accounts (e.g. streaming services, in-app games, etc.) can be avoided by employing multi-factor authentication tools, such as one-time-passwords (OTP), fingerprint or facial recognition, and security questions. Storing passwords in secure enterprise password managers helps reduce the risk of weak or reused credentials being exploited in unauthorized account access.. Merchants who integrate strong verification measures into their payment gateways help customers avoid these unintentional purchases and therefore reduce the incidence of friendly fraud. - Routinely monitor chargebacks for friendly fraud red flags
Since it’s impossible to prevent friendly fraud altogether, it’s important for businesses to keep an eye on their chargeback rates and identify any suspicious patterns. Some red flags to look out for include multiple chargebacks for the same customer, a sudden spike in chargebacks, and chargebacks on expensive and high-demand items. Routine monitoring, either by an in-house chargeback analyst or third-party vendor will allow you to promptly address any vulnerabilities in your sales process that are leading to increased rates of friendly fraud and prevent future occurrences. - Make use of fraud-prevention technology
AI-driven fraud prevention tools can help automatically detect suspicious transactions and highlight them before the customer has time to file a chargeback. Automated “fraud scoring” tools assess the risk level of transactions based on factors like transaction value, frequency, and location. Merchants can also deploy “device fingerprinting” tools, which analyse information from the device used to make the purchase and detect whether it’s been associated with fraud in the past. - Dispute illegitimate chargebacks
Disputing illegitimate chargebacks isn’t just crucial for recovering potential losses in the short term, but it also sets a precedent that your business will not tolerate fraud. Particularly as it relates to intentional chargeback fraud, demonstrating that your business isn’t complacent—that you don’t simply absorb the loss—is vital for sending a message to potential fraudsters.
Friendly fraud vs Chargeback fraud
Friendly fraud and chargeback fraud are terms often used interchangeably. Some people use “friendly fraud” to describe unintentional chargeback fraud only and use “chargeback fraud” to describe all fraudulent chargebacks, regardless of intent. However, others use “friendly fraud” to describe fraudulent chargebacks that are both deliberate and inadvertent, highlighting a lack of apparent consensus in the terminology.
One clear difference between the terms friendly fraud and chargeback fraud is that friendly fraud is a broader category of which chargeback fraud is just one example. In addition to chargeback fraud, friendly fraud also encompasses refund abuse, and even some other types of first-party fraud (e.g. mortgage or loan fraud).
More importantly, although the name may seem misleading, friendly fraud is not friendly. Even when unintentional, friendly fraud is an ever-growing threat to businesses of all sizes. It can and should be addressed and mitigated in order to avoid unnecessary financial losses.
Combatting fraud: expert guidance for evolving threats
Friendly fraud is a serious concern for all merchants, particularly e-commerce retailers who are especially vulnerable due to the more anonymous nature of online transactions. Fortunately, in recent years, the payments industry has placed a major focus on security, and new, more sophisticated tools for preventing fraud are continually being developed. It's crucial for merchants to partner with a payment service provider that stays on top of new friendly fraud threats.
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FAQs
What steps can a business take after detecting a potential friendly fraud incident?
If a merchant suspects a case of unintentional friendly fraud, it’s worthwhile for them to contact the customer directly and try to resolve the matter outside of the chargeback process. Ideally, the customer will agree to drop the chargeback inquiry, perhaps agreeing to a direct exchange or refund instead.
If the matter can’t be resolved directly, the merchant can compile their evidence and present their case to the bank as part of the official dispute process. Regardless of the outcome, merchants may also choose to ban customer accounts to prevent the customer from carrying out more friendly fraud in future.
For intentional and costly instances of friendly fraud, merchants may also choose to take their case to the local law enforcement authorities and press criminal charges.
How can technology help reduce incidents of friendly fraud?
Payment security technology is continually evolving and improving to combat the threat of friendly fraud. Among the tools that merchants can deploy are:
Multi-factor authentication - By requiring customers and cardholders to verify their identity in multiple ways, such as one-time codes, facial recognition, and security questions, businesses can reduce the likelihood of friendly fraud due to accidental purchases (e.g. a child using a parent’s tablet for in-app purchases and games).
Automated fraud-detection - These automated tools–many now enabled by AI–scan for potentially fraudulent transactions and earmark them so they can be dealt with before becoming chargebacks.
Chargeback monitoring and notifications - A modern, integrated payment processing system can monitor all incoming chargebacks and alert merchants as soon as they’re initiated. This allows for prompt dispute management and resolution.
How is criminal friendly fraud enforced? Are the perpetrators subject to legal penalties?
Repeat and malicious perpetrators of friendly fraud—those who purposefully abuse the chargeback and refund system for their own gain—are committing a crime and therefore subject to legal penalties, ranging from fines to community service to jail time. However, since intentional friendly fraud can be difficult to prove, and since the legal fees spent on pursuing fraudsters can be significant, many businesses don’t take legal action. Instead, businesses tend to focus on disputing friendly fraud via the chargeback process and implementing strategies for fraud prevention.
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