Friendly Fraud: What It Is and Why It Happens

Fraud takes many different forms. Some thieves steal the identities of unsuspecting victims and use their payment information to make illegitimate purchases.

This is what most people assume when they think of online fraud.

However, some fraud comes from legitimate customers who make purchases using their own payment details – and then make dishonest claims to get their money back days, weeks, or months later.

This is called “friendly fraud” and it’s becoming a serious problem for online businesses.

We explain everything in this article.

What Is Friendly Fraud?

Friendly fraud (also called chargeback fraud) is when a customer tries to get their money back by requesting a chargeback with their card-issuing bank (like Visa or Mastercard) after they’ve made a legitimate transaction.

If the bank honors the chargeback, the customer gets their money and they get to keep the item or service that they originally purchased.

Basically, friendly fraud is the same as shoplifting.

The customer gets a refund without ever speaking to you, and you (the merchant) suffer the loss of time, money, and reputation.

But while you might be able to stop a shoplifter at the door (or at least get their license plate number), you never really know who is committing friendly fraud until they file the chargeback.

Sadly, friendly fraud is becoming a bigger problem every year. The stats are quite discouraging.

Friendly fraud

Why do we call it friendly fraud? Because it originates from someone who is supposed to be a friendly party.

With traditional fraud, an unauthorized third party uses someone else’s credit card to commit fraud. But in friendly fraud, the perpetrator is the cardholder or someone who is authorized to use the card, like a family member.

Obviously, this means the term “friendly fraud” is a bit of a contradiction, because there’s nothing friendly about it at all.

In fact, friendly fraudsters often make purchases with the intent of issuing a chargeback later – essentially, abusing both the company and the bank in order to get something for free.

How Does Friendly Fraud Work?

In order to commit this kind of fraud, the customer has to convince the card-issuing bank that they deserve their money back. They can cite a number of reasons, but most friendly fraudsters report that the purchase was unauthorized.

They use this excuse because it’s easy to say, “Someone must have stolen my identity.” It’s hard to prove otherwise.

Here are some other excuses they use to justify their inappropriate chargeback:

  • The item or service wasn’t delivered.
  • The merchant didn’t cancel the customer’s payment when requested.
  • The item or service doesn’t match the online description and now they don’t want it.
  • They returned the item but a refund was not processed.
  • They canceled the order but it was still sent to them.

When you combine the zero-liability policies of card-issuing banks, the “card not present” nature of e-commerce, and consumer protection regulations, you get an environment where banks prefer to take cardholders at their word.

The costs? They can add up quickly.

Here’s what you stand to lose as a victim of friendly fraud:

  • The cost of the product or service sold. This is often the biggest expense.
  • Chargeback fees, which could be large, depending on your payment process. Stripe is quite affordable in this regard.
  • Shipping or service delivery costs.
  • Money and time spent disputing the chargeback.

The challenge, of course, is that any one of those claims might be valid. This is why friendly fraud is so frustrating; Having a system in place that helps consumers get their money back when they are wronged by a merchant is a good thing, but the system isn’t perfect.

Why Does Friendly Fraud Happen?

Chargebacks were designed as a tool to protect consumers from unfair merchant practices, but some consumers take advantage of this protection by making false claims. Friendly fraud has been around since the beginning of online shopping, but it has grown exponentially in the last few years – for a few reasons in particular:

Everyone Shops Online These Days

In 2018, 1.8 billion people worldwide purchased goods online. In the same year, global e-commerce reached $2.8 trillion. Naturally, more online business means more online fraud.

Friendly fraud

Regulations Hardly Address Friendly Fraud

Friendly fraud is fraud. This means that it’s definitely illegal, but regulations simply haven’t evolved to tackle issues like this yet. The rules governing the overall process were designed in the 1970s and have not been updated to reflect our modern digital world that relies on massive amounts of online business.

Customers Prefer the Fastest and Easiest Solution

It’s no surprise that people don’t want to follow a lot of steps. They want their money back right now. Many cardholders feel it’s more efficient to simply fill out a form with their card issuer than deal with whatever steps the merchant lays out. 81% of cardholders have filed a chargeback simply because it’s convenient.

Merchants Lack the Resources to Fight Back

As a merchant, you have the right to challenge any chargeback, and the card issuer has a process for it. If the process doesn’t turn out in your favor, you can always file a lawsuit, but lawsuits are time-consuming and expensive – especially if it’s over a small charge. Fraudsters know you aren’t going to take them to court over $50.

Banks Don’t Conduct Thorough Investigations

Card-issuing banks don’t ask much for much evidence from cardholders. For instance, if the cardholder claims identity theft, the issuing bank doesn’t ask for evidence of their claim (such as a police report). As a default, the cardholder is assumed to be honest, and the onus is on the merchant to prove that the transaction was legitimate.

Plus, the card issuer knows that the merchant probably won’t fight the chargeback in court and can’t refuse to accept their cards. So, the issuer is incentivized to help the consumer over the merchant.

Is All Friendly Fraud Malicious?

No, not all friendly fraud is completely malicious. Sometimes it’s the result of an accident or misunderstanding.

For instance, a cardholder may issue a chargeback because they don’t recognize the merchant’s name on their statement. Using a descriptive name on your transactions is a key way to prevent chargebacks.

Another example is when a spouse or child makes a purchase without informing the cardholder. The cardholder may have given the spouse or child permission, but wasn’t aware of the actual transaction.

Sometimes, people just forget what they purchased. This happens more than you’d think, as identity theft is such a widespread problem that people automatically think of fraud when they see something incorrect on their bank statement.

And, of course, there are some harmless customers who simply don’t understand the difference between a merchant refund and a bank-issued refund. It’s all the same, from their perspective.

Sadly, these more innocent mistakes can cause trouble for everyone. The merchant takes a hit to their reputation with the card-issuing bank and/or payment processor. The customer is often banned from doing business with the merchant. Plus, if the customer requests too many chargebacks, the card-issuing bank will grow increasingly suspicious.

What Can Merchants Do About Friendly Fraud?

This is a tough question. As we mentioned, it’s hard to stop friendly fraud before it occurs, because – at first – it looks like a legitimate transaction. Fraud detection tools aren’t much help, because the customer’s identity and payment information are legitimate.

To protect yourself against friendly fraud, document as much as you can.

Your job is to have plenty of information to defend yourself if a customer requests a chargeback. If you can convince the card-issuing bank that you’ve fulfilled your obligation, you will be less likely to take the hit to your wallet – or your reputation.