Friendly Fraud: How Merchants Can Fight Chargeback Fraud

When it comes to eCommerce there many different types of fraud that merchants have to worry about from account takeover to promo abuse...
by Ronen Shnidman
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Published: May 12, 2021
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Family fraud - A child making an in-app game purchase

Chargeback fraud is an ever-present problem for merchants. An increase in customer disputes is a direct threat to profitability as chargebacks involve extensive fees, penalties, and hidden costs—costs that contribute to an estimated $125 billion in yearly losses. Considering that most businesses have trouble even identifying friendly fraud, it is little wonder that 90% of merchants report chargeback fraud as a major concern.


The increase in chargeback fraud volume occurred alongside the overall rise in eCommerce. Experts estimate that the 66 billion transactions Americans conduct in 2022 will result in 33 million disputes, up from 25 million the year before (and friendly fraud is labeled as one of four primary contributing dispute factors). For merchants who operate with tight margins, such increases in dispute volume could have a monumental impact.

Since friendly fraud is one of the most confusing types of chargeback abuse, we want you to have access to the right information. Let’s walk through the details that way you are best prepared to combat this very “unfriendly” form of fraud.


What Is a Friendly Fraud?


Friendly fraud is a category of chargebacks initiated by an authorized cardholder who unfairly disputes a legitimate payment. Also known as chargeback fraud, friendly fraud is a first-party misuse of the credit card payment system.

Friendly fraud accounts for dispute claims that occur across a range of customer intentions. The chargeback process is meant to defend consumers from criminals who make unauthorized transactions, but cardholders – by accident or as an attempt for illegal personal gain – initiate a chargeback for a host of secondary reasons outside of direct fraud.


As a result, purchases made in good faith are repudiated instead of reversed, effectively sidestepping the normal refund process and operating as a form of cyber shoplifting. With 60-80% of all chargebacks due to friendly fraud, it is a prevalent abuse of consumer protections, one that leaves merchants on the hook for the financial fallout.

The term friendly fraud comes from the military expression of “friendly fire,” when a soldier fires upon his own side. Likewise, trusted and authorized cardholders can use wrongful disputes and chargeback claims to “fire” at merchants, the very business partners who facilitate a safe payment environment and provide them with needed goods and services.


With 1-click let Justt fight your merchants' chargebacks!

How Does Friendly Fraud Happen?


In 1974, the Fair Billing Act came into law. The legislation defended consumers from unfair credit billing, such as charge errors, undelivered goods, or the fraudulent actions of criminals. Consumers could now dispute incorrect credit card charges on fairness grounds.

The chargeback process is beneficial for the entire card payments industry. A safe business-to-customer relationship inspires repeat business and props up a robust eCommerce market. If trust breaks between either selling or buying party, immense friction is introduced to each business transaction.


Unfortunately, card issuers have consumer-first policies and federal regulation considerations that prioritize customer rights over merchant rights. As a result, financial institutions back the initial claims and reason codes made by consumers by default, regardless of if they are accurate. The burden of proof increasingly becomes the merchant's responsibility.

But fighting the numerous friendly fraud chargebacks is labor-intensive and expensive. And for businesses with tight margins, the resources to defend against disputes are non-existent. As a result, consumers have both the means and the motive to abuse the chargeback process: to wit, some 81% of customers admit to filing a chargeback strictly out of convenience.


What Can Cause Friendly Fraud?


Friendly fraud occurs for several different reasons within various purchase scenarios:


Unintentional charge repudiations



First, honest customers may initiate a dispute by accident, without realizing the friendly fraud they caused.

For example, a client might forget their product order and repudiate an unrecognized charge found on their credit card bill. Or, a consumer might initiate a dispute for a delayed package that arrives weeks later, keeping both the reversed cash and the product.

In both cases, the consumer acted honestly and with no ill-intent, yet still committed friendly fraud.


Family fraud


Second, family units can mistakenly engage in friendly fraud chargebacks if the primary cardholder is unaware of purchases made by dependents or relatives.

For example, a child might buy online game tokens for a video game through a saved credit card, a charge that the parent may unknowingly dispute at the end of the billing cycle. Or, a spouse may make a series of unrecognized purchases which the other partner does not recognize, leading to chargeback abuse.

Once again, family fraud is not malicious, but it is an illegitimate dispute that all merchants can challenge.


Liar buyer


Third, some customers will lie about a dispute as a way to recoup potential losses.

For example, some clients might feel buyer’s remorse and attempt to steal any paid money back with a chargeback. Others make false claims (hence the term liar buyer) out of convenience, while select groups use chargebacks as a form of political expression and activism.

In the case of liar buyer, the intent is malicious and a direct misuse of a credit card.


Customer dissatisfaction


Lastly, consumers will use chargebacks to express their dissatisfaction with a product.

For example, a consumer might feel short-changed about the quality of a service. Instead of communicating with the business, the customer attempts to earn recompense through a chargeback.

Often, disputes related to dissatisfaction are closely related to an inaccessible refund policy. Still, if the purchase proceeded according to the pre-set terms and conditions, it is a sale made in good faith, and any related chargebacks are a form of friendly fraud.


How Can Merchants Prevent and Combat Friendly Fraud?


You do not have to accept friendly fraud as a cost of doing business. Take the following steps to help reduce your chargeback fraud volume:


Provide excellent customer support


Robust and emphatic service reps that can address customer complaints are able to deter and prevent several types of friendly fraud. Reports show that nearly half of friendly fraud is unintentional, with 49% of surveyed consumers filing a dispute because of a misunderstanding. Good customer support can limit such needless chargebacks, all while offering further support to priority users and protecting your chargeback ratio.


Invest in delivery transparency


A third of surveyed consumers state that they repudiated a charge due to non-delivery. Any actions that better communicate delivery times, shipping issues, and shipment confirmation can reduce transfer-related chargebacks. Collect proof-of-delivery, usage logs, and package receipt signatures as evidence.


Collect authorization and authentication data


Stringent verification systems not only protect both you and the consumer's data, but they help create positive friction that can reduce chargeback volume. Webpages that allow customers to review their order, verify their credit card, and receive online purchase confirmation all help mitigate buyer’s remorse. Plus, any collected payment forms show a clear transaction record that can be used as evidence when fighting a false claim.


Provide clear billing descriptors


Change the descriptors that display on a credit card bill. Consumers rely on credit cards for everyday purchases, and having recognizable business tags can reduce the forgetfulness and confusion that leads to friendly fraud chargebacks. In addition, digital sales have given merchants access to a global audience, which introduces a language barrier. The clearer your billing descriptors are, the better.


Craft an adequate return policy


About 55% of American consumers reported that a generous returns policy would make them less likely to pursue a chargeback. Moreover, a refund involves far less cost than a chargeback and its associated fees. Invest in a viable returns policy, and write purchase terms and conditions as a form of chargeback fraud protection.


How To Best Fight Friendly Fraud


For all the friendly fraud chargebacks you cannot deter pre-transaction, there is the option to fight the false claim through a process known as chargeback representment. If you provide compelling evidence confirming the legitimacy of the transaction, the issuing bank can reverse the chargeback.

Keep the following customer data as compelling evidence:

  • All transaction data (e.g. data and time)
  • Credit card verification data
  • The customer's transaction history
  • Communications between customer service and the cardholder
  • Signed delivery confirmation
  • Billing and email addresses

Unfortunately, the costs of fighting chargebacks sometimes outweigh the benefits. It can take significant business resources to assemble evidence and refute each repudiated charge, especially for businesses with high sales volume. In such scenarios, outsourced chargeback mitigation is the best and most comprehensive solution to the chargeback problem.

For example, at Justt, we provide complete chargeback lifecycle management. A combination of artificial intelligence and human expertise manages the entire chargeback process, an entirely hands-off service for your business. You receive tailored solutions according to the needs of your business, supported by data insights related to your specific industry. Best of all, enjoy success-based fees. You only pay when we win a dispute, helping mitigate your risk and lower upfront costs.


Bottom Line


Chargeback fraud is a major source of loss for merchants. And with the next wave of friendly fraud upon us, such drastic increases in chargeback volume threaten margin-tight industries.  But friendly fraud occurs across a complex set of consumer scenarios, making it difficult to evaluate and defend against.

While several helpful actions limit potential instances of friendly fraud (high-quality customer service, good store policies, clear billing descriptors), combating customer disputes can remain a costly endeavor.


For better protection against friendly fraud, chargeback mitigation solutions offer comprehensive tools that help merchants fight false claims and win back lost revenues.

Want to try out our chargeback mitigation solution?


Let’s talk

Friendly Fraud FAQs


Why is it called friendly fraud?

It’s friendly fraud because the customer behaves like a friendly customer up to the moment when they file for a chargeback.

How can you avoid friendly fraud chargebacks?

To avoid friendly fraud chargebacks, you need solutions that enable you to address disputes before they become chargebacks. Efficient communication with confused customers can help prevent friendly fraud chargebacks.

How do you fight friendly fraud?

Document every order received properly and submit relevant documentation to the issuing bank as evidence of a legitimate transaction.

What is a true fraud chargeback?

This is a chargeback claim from a customer for an unauthorized purchase that was truly illegitimate and entitles the customer to be made whole.

How do banks investigate friendly fraud?

A bank investigator will inspect transaction data for likely fraud indicators. They can use location data, time stamps, IP addresses, and other data to determine whether the cardholder completed the transaction or not.

Is friendly fraud punishable?

Unlike true fraud, friendly fraud isn’t always punishable since most practices leading to friendly fraud aren’t illegal. Evn-friendly fraud practices of dubious legality are practically speaking difficult to punish through enforcement actions.


Our tailored solution uses superior machine learning technology and human know-how to achieve the best success rates in the industry. Our success-based fee means that you use us risk-free. We can only help your bottom-line.


Contact us to find out more
Written by
Ronen Shnidman
Ex-journalist and major fan of fintech and OSINT, I write regularly for leading industry outlets in finance and fraud prevention. Outlets I contribute to include Payments Dive, Finextra, and Merchant Fraud Journal, and I have been cited by PYMNTS.com
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