According to Mastercard, 25% of merchants report an annual chargeback volume higher than 1 million transactions. Friendly fraud accounts for at least 75% of all credit card fraud, fueled by a surge in online shopping and lax dispute policies. 2 in 5 or 40% of Americans say they know someone who committed friendly fraud.

That's not just a statistic. That’s millions in lost revenue, slipping away quietly, legally, and directly at the hands of supposed customers.

Friendly fraud isn't just a nuisance. It's a hidden epidemic draining eCommerce businesses dry. Merchants don't just lose revenue. They lose products, time, and peace of mind, and equally incur penalties.

This guide arms you with the knowledge and tools to fight back.

What is Friendly Fraud?

Friendly fraud, also called chargeback fraud or chargeback abuse, is when a cardholder disputes a legitimate purchase, claiming it's unauthorized or fraudulent, to get their money back, while often keeping the product.

Friendly fraud differs from other chargeback cases because the instigator, the cardholder, is most likely a customer rather than a third-party fraudster. In other words, the disputed transaction warrants no chargeback claim.

While the triggers and circumstances vary from case to case, cardholders commit friendly fraud for two main reasons:

1. They Forgot About the Transaction.

Cardholders commit unintentional friendly fraud when they don’t recognize a charge on their statement. This is either because the merchant’s name and transaction details aren’t properly highlighted or because the shopper forgot they subscribed to your service.

2. They Want to Steal From the Business.

This intentional abuse of the chargeback system typifies chargeback fraud, where the cardholder makes a transaction intending to initiate a chargeback. In other words, they want to forcefully get a freebie. Fraudsters often use this strategy to rip merchants off, retaining both merchandise and transaction funds.

Genuine buyers can also commit chargeback fraud. An example is when a buyer files a chargeback because they didn’t like what they bought, even though you, the seller, didn't misrepresent the merchandise or service in any way. Another example is when they regret the purchase and think the best way to opt out is with a chargeback.

“First-party misuse [FPM], chargeback fraud, and refund/policy abuse have become more widespread and more damaging, both to merchant businesses and to the issuers, acquirers, and other payment partners that support eCommerce transactions.” – Merchant Risk Council (MRC)

The Evolution of Friendly Fraud: From Novelty to Mainstream Fraud Strategy

Friendly fraud was first observed in the chargeback timeline in 2010. Before then, chargebacks categorized under fraud reason codes were generally rare. They’re almost always indicative of genuine card fraud.

Today, friendly fraud is a mainstream menace. It’s the main driver of the increase in cardholder disputes. A recent report by Visa Acceptance Solutions, the Merchant Risk Council (MRC), and Verifi reported that 79% of merchants experienced first-party fraud in 2024, up from 34% in 2023. This makes friendly fraud the top fraud type worldwide. The average dispute costs merchants ~$74. But that depends on your vertical.

What’s driving this meteoric rise in fraud losses, you ask? Let's break it down:

1. Digital Commerce Explosion

As several publications have highlighted, the pandemic supercharged eCommerce, expanding the attack vectors for fraud. More online transactions correlate to higher payment disputes, legitimate or not. However, eCommerce's convenience has a downside. It's increasingly easier for cardholders to dispute a transaction than to contact a merchant for remediation.

2. Shifting Consumer Behavior

Today's consumers are savvy and sophisticated. They expect more from merchants. Frictionless experiences like free shipping, easy returns, and instant refunds are the bare minimum to satisfy their demands for personalization and value-driven shopping experiences.

When merchants fail to meet expectations, most cardholders bypass merchant policies and seek remediation with a chargeback, either out of frustration or to “get even.” This entitlement mindset amplifies friendly fraud.

3. Chargeback System Complexities

The chargeback system was originally designed as a fair mechanism for resolving payment disputes. But it's deeply flawed. Banks and card networks prioritize the consumer. This systemic imbalance makes it much easier for cardholders to commit friendly fraud intentionally.

Many cardholders prefer to dispute a charge at the first sight of a problem rather than contact the seller. Winning those cases is no easy task for merchants. According to Mastercard, merchants win only a minuscule 8.1% of disputes they represent.

4. Social Media Influence

Many youngsters are now teaching their friends how to charge back legitimate transactions on Social Media. While that may seem like a harmless game and a valid alternative to seeking refunds, the impact on businesses is steep. Mastercard says: “Friendly fraud costs merchants over $132 billion a year – and that amount does not include the additional losses merchants absorb, like the loss of goods or services they ultimately refund.”

Over in Europe, the payments industry has recorded a new form of friendly fraud involving bank transfers rather than credit card payments. Scammers are taking advantage of new SEPA rules to recall SEPA credit transfers after settlement, as bank transfers are no longer permanent. This has heightened as some banks mishandle SEPA SCT Recall requests, reversing payments without consulting the payee, thereby allowing fraudsters to reclaim funds after receiving goods or services.

5. The Tech Tug-of-War

The ongoing AI arms race enables fraudsters to bypass traditional security measures. Merchants often struggle to detect fraudulent disputes until it's too late. As Stripe noted, today's fraudsters operate with industrial precision, employing sophisticated teams of engineers, managers, and data analysts to execute their schemes at scale.

However, AI is not just a tool for fraudsters. It's also a powerful weapon for prevention. The U.S. Treasury recently announced that machine learning AI helped prevent and recover over $4 billion in fraud in FY24. We'll shed more light on AI-driven chargeback prevention in a subsequent section.

Unraveling The Detrimental Impact of Friendly Fraud

Friendly fraud is an escalating threat across the eCommerce ecosystem, impacting merchants, banks, and even the perpetrators themselves. Here’s how friendly fraud affects these parties:

How Friendly Fraud Affects Merchants

The frequency of friendly fraud means businesses now spend more time and resources disputing meritless cases. The result?

1. Revenue loss and financial difficulties.
2. Sales cannibalization, since lost goods often appear in secondary markets.
3. Extensive labor costs due to additional headcount to handle fraud-related issues.
4. Loss of goodwill; frequent friendly fraud drives away new customers and undermines trust with existing clientele.
5. Loss of sales due to strict store policies to combat rising fraud cases.
6. Penalties from payment partners, including, in extreme cases, loss of payment privileges.

Despite new policies, like Visa’s Compelling Evidence 3.0, aimed at mitigating severe consequences for merchants, friendly fraud continues to be a costly problem with downstream impacts.

But it also complicates matters for banks as they become pulled into disputes between customers and merchants, which they would ordinarily not be involved in.

How Friendly Fraud Affects Banks

Card networks like Visa, Mastercard, Amex, and Discover have participation rules for banks issuing and processing their cards. These networks use chargebacks as an incentive to boost card usage and escape excessive regulatory scrutiny.

Hence, banks are obligated to back cardholder disputes until and unless you, the merchant, can show the case has no merit. If they side with the consumer because you couldn't prove misconduct, and you know their decision is wrong, that could lead to the financial institution losing your trust—and the trust of your community.

Furthermore, banks face financial liabilities for handling payment disputes. Banks must handle the transaction reversal process, pay additional fees, and invest in processing and investigations. As a result, they often incur losses (despite passing some of these costs to you as chargeback fees). Excessive friendly fraud can equally increase compliance burdens for financial institutions.

How Friendly Fraud Affects Cardholders

False and fraudulent chargebacks hurt merchants the most. But it also has some repercussions for perps.

While prison time is rare, cardholders who file false chargebacks still face consequences, including:

1. Loss of purchasing access as merchants suspend and blacklist cardholders who perpetuate friendly fraud.
2. Loss of banking rights as some banks terminate cardholder accounts of individuals known to engage in chargeback fraud.
3. A poor credit score, as losing banking rights, damages the cardholder’s credit score due to a lack of credit utilization.
4. Filing a frivolous chargeback means the cardholder forfeits any consideration for resolving their grievance, and if you win the case, the matter is permanently closed.

That said, the onus is still on merchants to close all loopholes that could result in friendly fraud.

How to Prevent Friendly Fraud

One of the reasons friendly fraud is incredibly challenging for merchants to deal with is that some claims are valid. Some cardholders are honest. The cardholder might have reported a true problem. For instance, a minor made the transaction, and the cardholder is trying to reverse it, but it's taking too long due to your store's policies.

With that in mind, below are preventive measures you can implement to prevent friendly fraud from burning a hole in your balance sheet.

1. Before you process a transaction:

• Authenticate the buyer’s identity to stop unauthorized transactions
• Require customers to review and confirm orders before finalizing their purchase.
• Outline your return policy and ensure the customer accepts the terms.
• Consider making a phone call to confirm the purchase and address discrepancies when a high-value transaction or new customer is involved.
• Use secure payment gateways that comply with necessary security standards.
• Collect as much data as possible, including order history and contact information, to help address potential fraud.

2. After you process a transaction:

• Send the buyer a detailed order receipt, including transaction description, order number, and details, and ensure they can access the same online.
• Provide real-time tracking to limit buyer’s remorse or delivery doubts.
• Follow up with customers after delivery to confirm receipt and satisfaction; you need this tool when a chargeback arises.
• Encourage customer reviews and feedback to identify lapses or showcase your brand image to prospects.
• Follow industry best practices for posting and recording transactions.
• Use chargeback alerts to prevent friendly fraud before it happens.

📍 Explore our guide on actionable strategies for mitigating chargebacks through consumer psychology for more insights. I also suggest you read this piece on how digital goods sellers can combat rising chargeback fraud.

How to Dispute Friendly Fraud Chargebacks Successfully

If you’re wondering whether friendly fraud claims are winnable, the answer is YES!

It’s a tough game. But I sincerely assure you, you can win against friendly fraud and recover lost revenue. Seriously, you don’t have to keep writing off those losses as the cost of sales, which is a double negative. By doing so, you’re inadvertently telling scammers to keep it coming. And, as we’ve already noted, excessive chargebacks affect your payment processing privileges. If you can't keep your dispute rate under the card network-approved margin, you'll move into the card network monitoring program and face severe fines.

So, how do you dispute friendly fraud and win? There are two strategies you can explore:

Option A: Manual Chargeback Representment

Traditional chargeback management practices are becoming increasingly ineffective, as cardholders can now file disputes with a single click. The process is time-consuming, time-consuming, and often yields poor results. Many merchants decide it's safer and more economical not to respond at all.

If you choose to pursue manual representment, be prepared to gather comprehensive, compelling evidence, such as:

1. Delivery proof (e.g., signed receipts, order tracking),
2. Cardholder signatures or IP address match for online transactions,
3. Copies of purchase receipts,
4. Return policy screenshots from checkout.
5. Relevant customer communication, e.t.c.

You must also submit documentation on time, in the right format, and according to network rules, and then follow up in case additional evidence is requested.

As previously mentioned, the odds of success are low: just 8.1%. Even major financial institutions and card networks acknowledge the complexity of the traditional chargeback process.

“The chargeback process is costly and time-consuming. So, it should not be surprising that FIs are steering away from manual human review toward analysis supported by automation or AI-based models.” – Mastercard

‍

Option B: Automated Chargeback Dispute

Cutting-edge systems like Chargeflow automate the entire chargeback lifecycle so you can win disputes without lifting a finger. The outcome has consistently been higher than the industry average, above 75%.

The wonderful thing about an automated chargeback management system like Chargeflow is that it:

1. Uses AI to scrutinize customer footprint in real-time to pinpoint impending friendly fraud, focusing on customer intent rather than identity.
2. Trains machine learning models on historical data to track inconsistencies between real transactions and fraudulent chargebacks, staying ahead of the curve in dispute prevention.
3. Streamlines chargeback processing, minimizing manual tasks and empowering merchants to recover revenue with ease.
4. Helps you block unwanted customers or stop chargebacks before they happen.

By the way, you only pay for successfully disputed chargebacks.

With chargeback volumes surging, 261 million this year alone, merchants now prioritize such advanced technology and tools to streamline chargeback management.

🛑Read this case study of Chargeflow client Elementor and see how chargeback automation protects merchants from friendly fraud.

Final Thoughts on Friendly Fraud

Every research, report, or commentary on chargeback trends has one reverberating conclusion: friendly fraud is a growing challenge for eCommerce businesses. It's a $132 billion-per-year challenge with no end in sight.

When cardholders slap a vendor with friendly fraud, the predictable outcome is financial losses, penalties, and a damaged reputation. Without proactive measures, such as addressing fraud loopholes before processing transactions and using automated chargeback management to guard against con artists, it'll be extremely tough to survive friendly fraud.

Granted, you can’t possibly stop all friendly fraud cases. But you can minimize occurrences and win meritless claims that slip through the cracks. So act now! Automate your chargebacks today.

eCommerce businesses are facing myriad challenges these days. The last thing you need is to leave your chargeback management to chance.

Key Takeaways

1. Scale: At least 75% of chargeback losses (or $132 billion) tie to friendly fraud.
2. Prevention: Verify buyers, clarify charges, be responsive, offer refunds when necessary, and use dispute alerts to stop chargebacks in their tracks.
3. Disputes: Merchants are shifting from manual representment to the more effective automated chargeback processing, which offers higher win rates with no stress.

This guide blends real examples, trust data (Mastercard, Visa, MRC), and actionable steps to empower merchants of all sizes to conquer friendly fraud in these times. All the best!