Rising ecommerce sales invite more fraud. One of the largest culprits contributing to the increase in fraud?  Friendly fraud, which you may also know as first-party fraud, first-party misuse, chargeback fraud, or liar buyer.

Despite its name, it’s not so friendly for merchants who have to deal with it. Riskified’s research on chargeback challenges found that merchants knowingly let revenue slip away, with more than 73% saying that 20% or more of their chargebacks are friendly fraud.

What is an example of friendly fraud a merchant may experience?

Friendly first-party fraud or chargeback fraud is a prime example of merchant friendly fraud. This refers to chargebacks that have been filed fraudulently by customers. Unlike true fraud – like a bad actor using stolen credit card details or hacking into a customer account to make an unauthorized purchase – friendly fraud occurs when a legitimate customer makes a purchase and then files a chargeback to dispute the charge. 

Friendly fraud happens when a cardholder intentionally disputes a transaction under false pretenses, in order to obtain a refund while keeping the goods or services. This can occur due to error, if the cardholder forgets they made the purchase or doesn’t recognize it on their billing statement. However, illegitimate actors also intentionally abuse the chargeback mechanism, claiming the transaction was unauthorized or the goods were never received/defective in order to defraud the merchant.

Instead of requesting a refund from the merchant in the case of a normal return, friendly fraudsters contact the bank – or card issuer – to request the refund, bypassing the merchant altogether. 

Consumers may commit friendly fraud for a variety of reasons:

• Claiming they did not make the transaction.
• Asserting they didn’t receive the purchased merchandise.
• Alleging the item arrived damaged.
• Stating they received the wrong item.  

The list goes on, so let’s look at common types of friendly fraud more specifically.

Types of friendly fraud

While none are quite “friendly”, some forms of friendly fraud are honest mistakes while others are more deliberate.

Accidental

• Forgetfulness: In some cases, customers genuinely forget about making a purchase, leading to a dispute when they see unfamiliar charges on their credit card statements. This often occurs with infrequent or one-time buyers.
• Confusion: Customers may not recognize the charge they see on their bill, leading them to dispute a purchase due to unclear or vague billing descriptors.
• Misunderstanding: Some customers are unaware of the difference between a refund and a chargeback, and assume a chargeback is just another acceptable way to get a refund. 
• Family member usage:  Family members or friends may use a shared payment method, causing confusion when the billing statement doesn’t align with the account holder’s memory. This may happen when a child uses their parent’s credit card or a spouse uses their partner’s card, for example. 

Intentional

• Buyer’s remorse: A customer regrets making a purchase, but doesn’t want to or is unable to return the purchase or cancel the service, and goes directly to the bank or issuer to reverse the transaction instead through a chargeback. The customer might request a chargeback under the guise of item-not-received (INR), item not-as-described, or even fraud.
• Liar-buyer: In this type of friendly fraud, a cardholder knowingly takes advantage of the chargeback process. The liar-buyer could be a customer who filed a chargeback in the past and it worked seamlessly, so they continue to do so for the explicit purpose of defrauding a company, essentially cyber-shoplifting. Similar to cases of buyer’s remorse, in order to receive the chargeback, the cardholder may request a chargeback under (false) pretenses such as INR, item-not-described, or fraud.
• Criminal intent: In some cases, individuals with fraudulent intentions may engage in friendly fraud as a deliberate attempt to obtain goods or services without paying.

The impact on ecommerce merchants 

Friendly fraud is rampant. Riskfied research indicates that around 50 percent of fraud chargebacks for Riskified Chargeback Guarantee merchants contain indicators of friendly fraud. 

Friendly fraud causes financial woes that can threaten a merchant’s survival. Merchants have to cover the costs of lost merchandise as well as shipping, processing, chargeback, and representment fees. 

Card issuers may impose tighter restrictions on merchant accounts when they exceed a chargeback ratio set by the issuer. As a result, merchants get handed a hefty fine, may have to enlist in an excessive chargeback program, and in rare cases, may lose their merchant account with the issuer. 

How to reduce chargebacks from friendly fraud

While disputing chargebacks is a necessary part of fighting friendly fraud, or “friendly” fraud, (we’ll get into this difference in a minute), there are prevention tactics to help stop it before it starts. 

Communicate clear return policies to help avoid chargebacks resulting from a condensed return window. In these cases, customers try to return an item, but when doing so, they find out that the return window has closed, and the store won’t accept the return. To avoid chargebacks from this scenario, make your customers aware of your return policy at the point of purchase. Additionally, ensure your return policy is easy to find on your website and other places online where your customers make purchases with your store. Even printing the return period on their receipt can help rectify any potential misunderstanding.

Provide exceptional customer service: The better experience you provide your customers, the more loyal they’ll be to your business. It’s to your benefit to work with your customers during their return to make sure they’re satisfied. If they feel taken advantage of or unsatisfied with the service you provided, they’re more likely to file a chargeback for retribution. It’s less costly to process a return than having to dispute a chargeback.  

Be clear on your billing statement description: The company description next to a charge on the billing statement is a critical point of communication with your customers. If a customer doesn’t recognize the name of the company on their credit card statement, they may call their issuer or bank to dispute the charge because they think it’s fraud. This little detail can cost your business big bucks, so double-check that your company name is clear on those billing statements.

Tag in fraud prevention technology to catch friendly fraudsters: Friendly fraud may follow a set of patterns that machine-learning-based fraud prevention can pick up and help flag before the transaction is approved. The technology analyzes millions of data points related to purchase history, return rates, chargebacks, and more to find patterns that may signal friendly fraud. Leveraging machine learning can also pinpoint which customers are most likely to commit friendly fraud based on their shopping history with other merchants.

Ever wondered why consumers abuse merchant policies?

Check out Riskfied’s consumer survey to find out, plus find out how you can stop policy abuse without harming your best customers.

Get the survey

Responding to friendly fraud 

Even when taking preventative measures like those noted above, friendly fraud will always occur. If you’re in business, you’ll undoubtedly receive a chargeback. Not choosing to respond to friendly fraud will result in losing 100 percent of the profit from those chargebacks. It’s in your best interest to respond to avoid significant losses.

Merchants can contest a chargeback they believe was wrongfully submitted. The merchant must provide sufficient and compelling evidence against a chargeback to prove they are right. This process is largely known as chargeback representment; but at Riskified we refer to it as chargeback dispute resolution.

Two ways to streamline the chargeback dispute management process:

01. Do it manually: As you might imagine, disputing a chargeback manually with an in-house team is a tremendous effort. And, it’s a lot of tedious, grunt work. The team spends countless hours going through the process of aggregating data from different sources, then copy-pasting credit card, customer, and transaction information to find compelling evidence to prove it’s an authorized transaction. A single chargeback can take 30 minutes or more to compile the needed evidence.  

02. Automate: Automation technology streamlines key steps of the chargeback management workflow and reduces the monotonous, manual work. Automation helps compile data for compelling evidence in the dispute resolution process as well as tracks performance of the disputes in the resolution process. An automated chargeback system can recover two times more revenue than doing it manually. Instead of your team spending 30 minutes on this process, automating it will give them 25 minutes back. 

Manage friendly fraud and grow your business

Friendly fraud is never going away, and some industries like fashion and retail are more prone to it than others. But with a plan for a successful process for managing chargeback disputes, while maintaining exceptional customer service and clear policies, you can keep friendly fraud at bay. 

Frequently asked questions

What is “Chargeback Insurance?”