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Tom-Chris Emewulu
Chargeflow's Digital Evangelist
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Friendly fraud isn’t friendly, especially since Chargeflow’s State of Chargebacks 2024 report shows they cause ~80% of all chargeback losses for merchants.

The global eCommerce landscape has seen remarkable transformations in recent years. There have been notable spikes in online shopping, fueled by a surge in subscription services and improved payment options.

Consumers are making more frequent online transactions. The industry is growing in double digits year-over-year. Analysts predict the sector will account for 33% of US retail sales by 2027, 31% higher than 2023 figures.

Yet, the surge in digital transactions has naturally led to a higher chargeback volume. With consumers wielding more power than ever, the line between genuine payment disputes and malicious claims is becoming increasingly blurry. A growing number of businesses are reporting a sharp rise in friendly fraud, also known as chargeback fraud.

As consumers become used to the chargeback system, many exploit it to avoid returns or steal from merchants. Our data shows that 80% of all chargebacks are friendly fraud. That’s why I’m here to share everything you should know about friendly fraud and practical prevention steps.

What is Friendly Fraud?

Friendly fraud is a wrongful card payment reversal mechanism where a cardholder makes a transaction and later disputes the charge as fraudulent or unauthorized, requiring their card issuer to reverse the bill.

Friendly fraud, also called chargeback fraud or chargeback abuse, 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 is legitimate warranting no chargeback claim.

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

  1. They honestly forgot about the transaction. Cardholders commit unintentional friendly fraud when they don’t recognize a bill on their statement. In this case, it’s either because the merchant’s name and transaction details aren’t properly highlighted or the shopper forgot they subscribed to your service. Sometimes it might also be that they regretted the purchase and think the best way to opt out is with a chargeback. This is often called “accidental chargeback fraud or first-party fraud.”
  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 get something for nothing. Fraudsters often use this strategy to rip merchants off, retaining both merchandise and transaction funds.

Genuine buyers can also commit chargeback fraud. For example, the buyer filed 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.

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 and almost always indicative of genuine card fraud.

Fast forward to the pandemic and incidental economic shocks, coupled with spikes in digital commerce, eCommerce merchants have become increasingly helpless prey of friendly fraud perps. Friendly fraud has become the main driver for the increase in cardholder disputes, with recent Mastercard statistics showing a 32% year-over-year uptick in cases. A similar research cited by PayPal revealed that ~75% of respondents in a 2023 survey of over 300 retailers reported a 19% rise in friendly fraud, with over 50% saying it is a significant or moderate concern for their business.

Another reason friendly fraud is so prevalent is that card networks make it easy for culprits. Card brands prioritize the consumer. That makes it much easier for cardholders to commit friendly fraud intentionally. Seriously, 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.

Source: Mastercard

Unraveling The Detrimental Impact of Friendly Fraud

Friendly fraud is a growing challenge for the entire eCommerce ecosystem. The multifaceted impact of this pervasive issue on businesses is understated. But they also affect banks – and even the perps themselves.

Here’s how friendly fraud affects merchants, banks, and cardholders.

How Friendly Fraud Affects Merchants

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

  • Revenue loss and financial difficulties.
  • Sales cannibalization, since lost goods often appear in secondary markets.
  • Extensive labor costs due to additional headcount to handle fraud-related issues.
  • Loss of goodwill; frequent friendly fraud drives away new customers and undermines trust with existing clientele.
  • Loss of sales due to strict store policies to combat rising fraud cases.
  • 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. It also complicates matters for banks as they become pulled into disputes between customers and merchants 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.

Consequently, banks are obligated to back cardholder disputes until and unless you, the merchant, can demonstrate 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

Even though false and fraudulent chargebacks hurt merchants the most, friendly fraud also has some repercussions for perps.

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

  • Loss of purchasing access as merchants suspend and blacklist cardholders who perpetuate friendly fraud.
  • Loss of banking rights as some banks terminate cardholder accounts of individuals known to engage in chargeback fraud.
  • Poor credit score, as losing banking rights damages the cardholder’s credit score due to a lack of credit utilization.
  • 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 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 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 also 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 transactions and recording transactions.
  • Use chargeback alerts to stay on top of friendly fraud before they happen.

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.

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How to Dispute Friendly Fraud Chargebacks

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

It’s a tough game. After all, the industry average chargeback dispute success rate is only 12%. But I sincerely assure you you can win 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. Because by so doing 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 – For this, you’ll need to gather comprehensive compelling evidence, submit documentation on time, in the right format, and follow through on every stage. I can’t guarantee you’d succeed with this approach. The chargeback process requires specialized knowledge and significant resources.
  • Option B: Automated chargeback dispute – Chargeback management systems like Chargeflow automate the entire chargeback lifecycles so you can win disputes without lifting a finger. The outcome has consistently been higher than the industry average.

I invite you to read this case study of Chargeflow client Elementor to understand how chargeback automation protects merchants from friendly fraud.

Final Thoughts

Every research, report, or commentary on chargeback trends has one reverberating conclusion: friendly fraud is a growing challenge for eCommerce businesses. It's an ongoing, costly challenge. And the threat gets even more pronounced with upticks in digital commerce.

When cardholders slap a vendor with friendly fraud, the predictable effect is financial losses, penalties, and 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.

Undoubtedly, you can’t possibly stop all friendly fraud cases. But you can minimize occurrences and win meritless claims that slip through the cracks. This guide will help you do just that.

eCommerce businesses are facing myriads of challenges these days. The last thing you need is to leave your chargeback management to chance. Automate your chargebacks today!

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