Fraud is never friendly: Friendly fraud and legitimate customer chargebacks

What makes this type of criminal fraud so common is that it can be difficult to verify. It could be an attempt at a legitimate transaction on the part of the customer. Fraud detection, when friendly fraud occurs, is rarely straightforward. This is why you need to make sure that’s exactly what you’re dealing with if and when it happens.

If a family member does this (usually a child), it’s called family fraud. If the customer initiates the charge dispute with the intent of getting a chargeback on an item they already bought or used, it’s chargeback fraud.

The term “friendly” comes from the fact that these chargebacks can be legitimate. Additionally, there are situations where a legitimate purchase is refunded because of merchant error, payment failure, and other reasons. But for most cases of friendly fraud, these chargebacks are maliciously initiated by the customer.

Two types of fraudulent chargebacks are usually associated with friendly fraud:

• Chargeback fraud: 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.
• Refund abuse: Occurs when the customer knowingly uses their card for an item/service and then claims a refund within the applicable time, essentially using the service for free.

Both of these are similar, but the key difference lies in intent. Chargeback fraud can still be initiated accidentally, especially for cardholders who have had poor customer service or experienced delivery delays. Refund abuse is the willful manipulation of the refund policies to gain products or services for free.

Because online businesses will usually have to comply with chargeback orders from an issuing bank on principle, friendly fraud cases are surprisingly common. Here are some common 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.

These cases are usually attributable to customer confusion about return/refund policies rather than genuine malice. However, merchants and banks need to do their due diligence to make sure the customer isn’t lying.

Interruption of services

Customer confusion also accounts for most service-related chargebacks. It’s possible that the customer wasn’t paying attention to the billing schedule, upgraded to new services without properly reading, or was careless with the use of their card regarding the service.

These cases usually have very little impact on merchants because their legal teams would have included disclaimers that buyers are the ones held liable for these mistakes. However, some banks may still issue chargebacks by default, which could lead to disputes from the vendor.

Third-party involvement

Perhaps one of the clearest cases of chargeback fraud is when a third party has managed to gain access and/or control of a customer’s credit card. Cases like BIN attacks or phishing attempts can lead to fraudulent chargebacks. These should be addressed immediately by the issuing bank, the merchant, and the original cardholder.

Alternatively, a smaller number of cases are because someone close to the cardholder — like a family member or their children — has gained access to their credit or debit card. These chargebacks are usually negotiated and managed on a case-by-case basis.

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 possibilities 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.

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 the customer has every right to demand a chargeback.

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

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 verify 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.

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.

Better card security

For customers, taking steps to protect their cards is equally important. Aside from the aforementioned authorization measures, even simple actions like keeping credit or debit cards out of children’s reach can be enough to prevent unauthorized transactions that can be flagged as friendly fraud.

Insider Intelligence highlighted in 2022 the growing rate of friendly fraud incidents, which means that merchants need to take extra steps to verify legitimate purchases done 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.