Guide to Friendly Fraud: 7 Important Things You Need to Know

What is friendly fraud, what are the most important things that you need to know about it, and how can you prevent it as a merchant?


The rise of the Internet, combined with the boost to digitization following the global coronavirus pandemic, has significantly increased the number of fraud attacks over the last few years.

According to CNBC, customers lost $5.8 billion to fraud in 2021, which is the mind-blowing 70% more compared to 2020. On top of that, payment statistics registered a record number of people filing a fraud complain: 2.8 million.

Unfortunately, there are different types of fraud that can be damaging for businesses and that merchants should be aware of. From triangulation to clean fraud and phishing attacks, there is no limit when it comes to the creativity of cybercriminals.

In this article, however, we will focus on one specific type of fraud that's been growing in popularity: friendly fraud.

Source: ravelin.com

So, without further ado, let's take a look at the most important things that you will need to know when it comes to friendly fraud:

1. What is friendly fraud?

Friendly fraud, also known as chargeback fraud, refers to the type of fraudulent practice in which the customer makes a legitimate purchase with their credit or debit card, but then files a payment dispute (chargeback) with the issuing bank despite having received the goods or services. According to Ethoca, this type of fraud accounts for 70% of all credit card fraud.

Studies from Expert Market have shown that friendly fraud increases every couple of years at the rate of 41%, meaning that most merchants at risk of losing revenue as a result of it.

However, the actual reason why friendly fraud can be so damaging for businesses is the true intention behind every complaint. Even though the term itself refers to the fraudulent practice of disputing the payment despite receiving the product, there are legitimate reasons why a customer may decide to file a chargeback.

Let's take a look at all cases in which friendly fraud may occur, whether intentional or not:

1.1. The customer doesn't recognize the charge

In this case, the customer wasn't able to recognize a particular charge on their credit card, and suspecting that it was a fraudulent transaction, they decided to dispute with the bank instead of contacting the merchant first. This can happen for a variety of reason:

A family member uses the card of the original cardholder to make an online purchase, without letting them know about it. As soon as the cardholder sees the charge but doesn't recognize it, they might think that it wasn't legitimate when it actually was, leading to a chargeback.

The customer makes a legitimate payment, but the invoice doesn't include clear payment descriptors - or the merchant uses their legal name on the invoice while the customer knows them by their commercial name. As soon as the merchant or the payment is not clearly recognized, the customer files a chargeback.

Recurring payments - friendly fraud can also be an issue with recurring payments and subscription-based models, especially if the subscription is on a yearly-basis (or with less frequency in general). The customer completely forgets about the subscription, but when the charge comes, they don't recognize what it was - and file a chargeback.

Unfortunately for merchants, whether these chargebacks were legitimate or fraudulent, the result is the same - increased chargeback ratios which can lead to penalties by credit card issuers and even the termination of the account.

Source: hoteltechreport.com

1.2. The customer claims the product was never delivered

Among the most common cases of friendly fraud is when customers claim that their package was never delivered. It's important to keep in mind that we are not talking about legitimate cases in which customers made a payment but never actually received their products.

We are talking about users that received their product, but still claimed to the issuing bank that they didn't - hoping to keep both the product and their money.

1.3. The customer doesn't know the difference between a chargeback and a refund

Unfortunately, many customers may file a payment dispute because they are not able to clearly differentiate between a chargeback and a refund, even though they didn't have actual intentions to hurt the merchant or commit a fraud.

The difference is simple, but important - refunds are filed directly with the merchant, while chargebacks are filed with the issuing bank. Refunds are completely normal within the activity of any business, and they may be needed if the product didn't meet the expectations or arrived broken or damaged.

Chargebacks, on another hand, can seriously hurt businesses, leading to consequences such as revenue loss, costly penalties, damaged reputation, and even the termination of the account in more serious cases.

However, many customers doesn't know the differences, and file a chargeback thinking that it is the most effective solution.

1.4. The package came damaged or defective

Another situation that may end up being a case of friendly fraud is when the customer claims that their package came damaged or defective.

While this can indeed be the case, it can also become an underlying excuse for customers to get their money back - or get a new product as a bonus, and keep the original one as well.

1.5. The charge was incorrect

Another case in which a friendly fraud can happen, although it can also be a completely legitimate situation, concerns incorrect charges. If the amount that the merchant charged didn't coincide with the actual amount of the purchase, the customer may decide to file a chargeback instead of resolving the issue with the merchant.

2. What are the consequences of friendly fraud for merchants?

Friendly fraud can be extremely damaging for merchants as they not only contribute to the total amount of chargebacks (which can lead to a dangerously high chargeback ratio), but also causes revenue loss from the original transaction. According to the LexisNexis 2016 True Cost of Fraud report, “Every dollar of fraud cost merchants $2.40, up from $2.23 a year ago.”

If the customer decides to ask for a refund instead, the merchant loses the original transaction revenue as well. However, this is the biggest negative consequence of a refund - and that's it.

Unlike refunds, however, friendly fraud chargebacks - and chargebacks in general - can lead to additional losses for the merchant:

Costly chargeback fees imposed by the issuing bank

The cardholder gets to keep the shipped product

Overhead costs, including shipping and handling, can't be recovered

Processing fees associated with the transaction are lost

In addition, if the merchant decides to fight the invalid charge, this could take additional time and money, and the result might not even be positive. In fact, data from the same LexisNexis report that we mentioned above has shown that the average ecommerce business loses a total of $3.60 in revenue for every $1 in original transaction value.

Source: chargebacks911.com

3. What are the consequences of friendly fraud for customers?

While merchants are the ones who suffer from the consequences of friendly fraud the most, this doesn't mean that there aren't any drawbacks for customers. Let's take a look at them:

3.1. Getting blocked from future purchases

If the customer has a history of filing chargebacks, especially 3 or more, most merchants will take action by blocking them from their account and not letting them make any additional purchases.

According to Chargebacks911, a consumer who has filed a chargeback is 9 times more likely to do it again, and roughly 40% of people who commit friendly fraud will do it again in the next 60 days. For this reason, merchants that spot possible fraudulent activity will quickly prohibit them from future purchases.

3.2. Longer waiting times

Another consequence of friendly fraud for customers are waiting times. When it comes to chargebacks, the entire process for them to get their funds back may take anywhere from 30 days to 90 days - depending on the issuing bank, reason code and credit card network. These times can be even longer for cases that go to arbitration.

The time that takes for a refund to be processed will depend on the merchant. However, in most cases, it's between 7 and 14 days, which means that the customer will be able to get their funds back a lot faster.

3.3. Penalties

If the cardholder gets caught for their fraudulent activity, they can suffer consequences from the issuer too, including loss of banking privileges. Especially if they have a history of filing frequent chargebacks within a short period of time. This can also have a serious impact on their credit score.

4. How can merchants detect friendly fraud?

Unfortunately for merchants, friendly fraud can be extremely difficult to detect.

Unlike other types of fraud, in which fraud analysis and fraud detecting tools are looking for indications on whether the card is being misused in any shape or form (non-matching billing and shipping address, wrong CSV code, etc.), in the case of friendly fraud chargebacks, the card is being used by the actual cardholder (or a family member).

But the point is, the card is not being used by a thief who has stolen the credit card or the credit card data in order to complete the purchase. For this reason, it can be quite challenging to determine whether the payment details are being used in a malicious or legitimate way.

However, this doesn't mean that you can't do anything to detect friendly fraud before it happens. Usually, fraud analysts look for anomalies and unusual behavior that may suggest a possible risk of friendly fraud, such as:

Looking at the order amount - is it larger than normal for this customer and for the average on the website?

Frequency - have you noticed the customer placing a high frequency of orders? Especially for the same or similar products.

Demand - is the item that the user purchased commonly stolen, or very high in demand?

Being aware of these behaviors, and paying attention to them can be helpful when it comes to detecting friendly fraud.

5. Can businesses fight friendly fraud?

Yes, businesses can absolutely fight and dispute cases of friendly fraud chargebacks by submitting a rebuttal letter explaining the situation and providing compelling evidence in order to support it. The process of fighting a chargeback is called representment.

Once the rebuttal letter and evidence has been provided, the issuing bank will review each unique case and make a final decision on whether the customer or the merchant are in the right.

Some examples of compelling evidence to fight friendly fraud include:

5.1. A receipt of the transaction

Merchants can obtain a receipt of the transaction from their Payment Gateway. It should provide some important details, such as confirming whether the AVS and the CVV match, and everything that's needed to prove that it was the legitimate customer who made the transaction. If the card has been stolen, it probably won't match everything.

5.2. Invoice

Another important evidence to fight a friendly fraud chargeback is the invoice. It's important that it fits on a single page, and it provides essential data regarding the transaction - what was sold, when, to whom, as well as tracking numbers, shipping address, and billing address.

5.3. Tracking confirmation

When it comes to selling products and services online, proof of delivery is an absolute must for merchants who want to fight chargebacks effectively. It's important to keep in mind that the issuing bank won't have much time to look up the tracking number, so it's better to prepare and print out the confirmation beforehand, showing that the product was actually delivered to the customer.

If the goods sold were digital, any other receipt or kind of information that proves that the customer received the product should be added to the compelling evidence.

5.4. A copy of the checkout page

Having a copy of the checkout page can be quite handy when it comes to proving your innocence as a merchant. It will show proof that the customer checked a box indicating that they agreed to your terms and conditions.


Having a powerful Payment Gateway is extremely important when it comes to handling your transactions quickly, safely, and effectively - as well as to reduce chargebacks to the highest extend possible. Are you ready to get started? Contact MYMOID today!

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