What is Friendly Fraud?

Stuart Joce Posted on May 26, 2020


Friendly fraud occurs when a consumer registers a chargeback instead of contacting the merchant to try and obtain a refund. Cardholders dispute legitimate charges leading banks to force refunds under the pretence that the merchant is at fault.

Consumers may accidentally commit friendly fraud because they don't recognise the difference or the impact of obtaining a refund from the merchant compared to obtaining a refund via the bank. They believe chargebacks are a legitimate way of obtaining a legitimate refund.

Other consumers may knowingly abuse the chargeback process and are deliberately attempting to defraud the merchant and obtain something for free.

Whilst there is a clear distinction between malicious chargeback fraud and honest friendly fraud, the distinction is academic as they both involve the filing of an undeserved chargeback. Whether intended or not, procuring goods and obtaining a refund accounts to cyber shoplifting.

Friendly fraud v true fraud.

It is worth distinguishing between friendly fraud and true fraud and the key difference between friendly fraud and "true" fraud is the identity of the person committing the fraud. True fraud is typically identity theft and starts with the theft of card details. In this case, once the theft is discovered, the account is closed, and a new card number is issued.

In the case of friendly fraud, the cardholder is the fraudster. This could be the cardholder or an authorised user of the card such as a family member or employee. In either case, a transaction was authorised, passed fraud protection and was deemed a legitimate purchase. The consumer subsequently files a chargeback, in doing so attempts to obtain a refund whilst retaining the product or service.

Fraudsters offer many reasons for filing a chargeback including;

  • They didn’t receive the service or product.
  • The service or product was not as described.
  • The merchant failed to cancel a recurring payment when requested.
  • The cardholder didn’t authorise the original transaction.

Whether the fraud was intentional or not, the impact and cost to the merchant is significant.

Additional impact of friendly fraud.

Friendly fraud almost always involves an online or digital purchase. However, it may help to compare the scenario to a high street store. Whether a consumer is a deliberate shoplifter or accidentally walks out of the store holding a forgotten item, the merchant loses the cost of the merchandise.

With online purchases things are worse because the fraud happens long after the fraudster has left the “store” and can’t be mitigated by loss prevention teams or security guards.

However, the cost of the merchandise isn’t the end of the cost to the merchant. Other losses include;

  • Chargeback fees.
  • Shipping costs.
  • Transaction processing fees.
  • Cost of resource to challenge disputes.

In fact, A 2016 study by LexisNexis stated that chargeback fraud costs merchants £2.40 for every £1 lost to fraud.

"High risk" businesses such as those with recurring payments or high-ticket value transactions typically lose even more. But much of this loss is preventable.

Why has friendly fraud grown?

Chargebacks were originally implemented to protect consumers from unfair sales practices and identity theft. However, merchants now need protection from the process that was designed to protect the consumer from them.

Friendly fraud has not always been the issue that it is today and has seen growth for a number of reasons;

  • Growth of online shopping
    • Friendly fraud is easier to commit against an online business than it is against a high street store and fraud prevention systems haven’t kept up with the growth in “card not present” transactions.
  • The chargeback process has not kept up with the dynamics of the market.
    • Chargebacks are widely acknowledged to have been introduced with the Fair Credit Billing Act of 1974, 20 years before the arrival of Google and Amazon and the process has remained largely unchanged ever since.
  • Consumers follow the route of least resistance.
    • The growth of the internet has brought with it an expectation of immediacy and consumers feel this is more likely to be delivered by the bank than the merchant when requesting a refund. 80% of cardholders admit to having filed a chargeback out of convenience and the system allows this to continue unchecked at the cost of the merchant.
  • Banks exacerbate the issue.
    • Issuers thoroughly investigate all chargebacks, in theory. However, in reality banks are overrun by the process leading the chargebacks being submitted to merchants acquiring banks with little evidence. This means that merchants are carrying the cost of a fraud that fraudsters are rarely held accountable for.
  • Merchants have limit options for recourse.
    • Merchants have the right to challenge chargebacks but have limited chance of seeing a chargeback reversed without expending considerable cost and resource. Merchants are guilty until proven innocent and merchants have limited options from stopping repeat behaviour.

To find out how we can help you mitigate the risk contact us at paymenthelp.org today