What is friendly fraud, and what are its consequences?

What is friendly fraud?

The "friendly" part comes from the fact that customers usually request these chargebacks due to confusion, not bad intentions. For example, people might forget they made a purchase or get confused about a store’s return policy and end up asking for a chargeback instead of contacting the seller.

Even though friendly fraud is often an honest mistake, it’s still considered fraud because the chargeback system is meant for real issues. When a customer misuses it, the merchant ends up losing money and has to pay extra fees.

The difference between friendly fraud and chargeback fraud

Unlike friendly fraud, which is usually a misunderstanding with no malicious intent, chargeback fraud is an intentional scam. It occurs when a customer makes a chargeback request by claiming the charge on their card was unauthorized, fraudulent, or incorrect. However, the customer has already received the item or used the service they were claiming the charges for.

The difference between friendly fraud and refund abuse

Friendly fraud happens when a customer accidentally disputes a legitimate charge, while refund abuse is when someone intentionally manipulates merchant’s refund policies to get products or services for free. Whether the refund abuse is planned or impulsive, both types are equally harmful.

What are some real-life examples of friendly fraud?

Because online businesses usually have to comply with chargeback orders from an issuing bank on principle, friendly fraud cases are surprisingly common. Here are some typical scenarios that cardholders and merchants alike should watch out for:

Fulfillment errors

A friendly fraud case can occur any time a customer fails to get their item on time, receives it in a damaged state, or finds problems with a product. These fulfillment errors can lead them to initiate a chargeback request. But the customer isn’t trying to unfairly reverse a legitimate charge — they’re most likely just looking for a refund.

Even if the complaint is valid, filing a chargeback for a late or damaged product is still considered fraud, though. Chargebacks are for unauthorized transactions, not for quick refunds. The customer should reach out to the seller first and follow their refund process. Skipping this step abuses the chargeback system.

Forgotten purchases

The "I don’t recognize the charge" excuse is definitely one of the most common when it comes to friendly fraud. Someone checks their bank statement, sees a charge they don’t remember, and jumps to the conclusion that it’s fraud. Their first instinct is to call the bank and request a chargeback without even double-checking. Such confusions usually happen because the business’s billing name doesn’t match the brand name so it looks unfamiliar.

People usually tend to forget about purchasing subscriptions. They sign up for a free trial, forget about it, and then panic when the auto-renewal proceeds. Instead of reaching out to the service provider to sort it out, they go straight to the bank and claim the charge was unauthorized. That’s where it crosses into friendly fraud — taking advantage of the chargeback system instead of taking responsibility for a purchase.

Children making unauthorized purchases

Another example of friendly fraud is when a child buys in-game currency, subscription, or other digital content on their parents smartphone using a saved payment method. Making purchases on platforms like Apple App Store, or Google Play are super easy if the card is already linked to the account. 

When parents notice the charges, they turn to their bank claiming fraud and asking for their money back, even though the purchase was made from their device. While such chargeback requests don’t have a malicious predisposition, they still count as fraud, because the customer abuses the system, although unknowingly.

Is friendly fraud illegal?

Friendly fraud isn’t technically illegal, but it’s still considered fraudulent behavior and can have legal consequences. Sometimes a chargeback dispute is just an honest mistake, like when people forget making a purchase. Even if they don’t have bad intentions, banks might still treat it as fraud. 

Moreover, repeated chargeback requests might also raise suspicion for banks and lead to account bans or even legal action. If a customer has an issue with a purchase, it’s best to try and resolve it with the merchant before filing a chargeback.

Can you go to jail for friendly fraud?

While exact rulings will depend on the laws of where the cardholder lives, going to jail for friendly fraud is possible — but usually not likely. If the cardholder can give reasonable evidence that their chargeback request is legitimate, the law will usually take their side.

Businesses, merchants, payment portals, or service providers have an inherent duty to provide what a client has paid for, as advertised, and within reasonable timeframes or expectations. If they fail to do this, then in many jurisdictions the customer has every right to request a chargeback.

This means that while friendly fraud is technically illegal, in some circumstances accidental friendly fraud can be excused. But given how difficult the situation can be to untangle if a chargeback is disputed, it’s best to avoid getting into this situation entirely.

Friendly fraud consequences

On the surface, friendly fraud seems to have a milder effect on a business or a cardholder compared to other types of fraud. Disputes can usually be solved by looking at the terms of purchase and/or transaction history.

However, even singular cases of friendly fraud can have lasting consequences depending on their context. Some of these include:

• Legal suits or filings if both parties do not agree on the results of the chargeback dispute.
• Loss of trust and reputation for merchants, payment portals, and banks for their susceptibility to fraud.
• Increased fees and penalties from the disputes filed with the bank, payment portal, or merchant.
• Overall reduction in revenue for unaddressed, long-term, or significant friendly fraud cases.
• Lower customer lifetime value for vendors who falsely flag legitimate chargeback requests.
• Waste of time and resources trying to dispute or settle the claims.

Because of the differences in regulation across banks, jurisdictions, and industries, disputing friendly fraud cases is best practice for merchants and banks, especially if they have reasonable evidence to prove fraud.

How to prevent friendly fraud

In most cases, banks and merchants will already have systems in place to detect or invalidate claims of friendly fraud. However, both sellers and their customers can take precautions to avoid cases of friendly fraud — or to detect legitimate complaints from bogus ones.

Request authorization

Merchants can enable security features that ask for authorization before allowing any charges to a card at all. While banks typically perform card authorization automatically, merchants can add extra measures like multi-factor authentication and identity verification to make sure that whoever is using the card is the actual owner.

Communicate charges

Some chargeback disputes are initiated when the customer doesn’t understand the terms of purchase and initiates a chargeback thinking they’ve been a victim of a scam. Clarifying the actual terms of service, purchases, and refunds/returns can help prevent cases of customer confusion and tighten cases against fraudulent chargebacks.

Provide dedicated customer service

Customers will often resort to chargeback requests if they’ve had a poor customer experience. By maintaining and creating good customer service, businesses are less likely to have customers frustrated enough to initiate chargebacks. Excellent customer support encourages clients to discuss disputes and prevents chargeback requests in the first place.

Confirm charges or purchases

It’s best practice to send a follow-up message (usually an email of their transaction or a copy of their receipt) to a customer when they purchase an item or service, especially for online transactions. This gives them time to review the charge or dispute the transaction if it happens to be truly fraudulent.

Should enterprises and customers be concerned about friendly fraud? 

Chargeback911 highlighted in 2024 that friendly fraud has increased by nearly 20% over the last three years, which means that merchants need to take extra steps to verify legitimate purchases made through credit or debit cards. At the very least, they’ll need to communicate their terms of purchase and pricing more clearly to customers and invest in ways to protect themselves from credit fraud.

For customers, simple awareness of the possibility of friendly fraud can often be enough to avoid accidental chargeback requests or disputes. In either case, it’s important to keep the lines of communication open as well as to know the risks and circumstances that lead to friendly fraud.