What Is Friendly Fraud Chargeback? Explained For Beginners

As an e-commerce store owner, I’ve dealt with friendly fraud chargebacks. That experience has inspired me to write this blog post. To help other businesses detect and prevent such chargebacks.

I’ll explain what friendly fraud chargebacks are, the different types, how to manage them, the challenges of these chargebacks, and other important information.

Let’s see how serious friendly fraud is.

Key Takeaways

• Friendly fraud is when a customer deliberately or accidentally commits fraud by disputing a legitimate chargeback.
• 75% of all chargebacks stem from friendly fraud.
• Reasons include unrecognized charges, dissatisfaction, or wanting to avoid returns.
• 90% of customers who win friendly fraud disputes are likely to strike again.
• Types include chargeback fraud (lying about a purchase) and refund abuse (exploiting return policies).
• Prevent friendly fraud with clear communication, good customer service, and fraud detection tools.
• Friendly fraud costs businesses money, time, and can damage their reputation.

What Is Friendly Fraud?

Also known as:

• Clean fraud
• First-party fraud
• Chargeback fraud
• Family fraud: A specific scenario within friendly fraud where a family member (usually a child) uses someone else's card (often a parent's) to make unauthorized purchases.

Friendly fraud is when a customer uses the chargeback process to get a refund for a legitimate purchase. They then (unknowingly) commit fraud. Hence, the term “friendly.”

This type of fraud makes up 75% of all chargeback disputes [1].

This differs from true fraud. A type of fraud that involves a stranger stealing someone's credit card information.

A family member might be the culprit in friendly fraud disputes because they have access to a person's card and purchase history.

For instance, a child may have had access to the customer’s phone and accidentally (or purposefully) bought digital items in a mobile game without the family member’s knowledge.

Here are some situations that lead to the customer initiating a friendly fraud chargeback:

• Doesn't recognize the purchase on their statement.
• Isn’t satisfied with the product or service.
• Forgot they made the purchase.
• A family member made a purchase without permission.
• Wants to avoid the return process.

However.

You may see different definitions floating around the internet. For instance, some folks will say that friendly fraud involves customers purchasing from a seller and then claiming they didn’t get the item. Though, they did.

Summary: Friendly fraud is a term for when a customer or family member uses the chargeback process to get a refund for a legitimate purchase unfairly.

Examples of Friendly Fraud Chargebacks

Here are different scenarios in which friendly fraud can happen:

1. Takeout Misunderstanding: A customer orders takeout from their favorite restaurant and selects the "pick-up" option. Due to miscommunication, they arrive at the restaurant after closing hours and their food is no longer available.

They initiate a chargeback, claiming the order never arrived.

2. Streaming Service Confusion: A person subscribes to a streaming service for a free trial. Intending to cancel before the paid period. They get busy, forget to cancel, and later dispute the charge. Claiming they never agreed to a paid subscription.

3. Unauthorized Game Purchase: A teenager uses their parent's credit card, saved for convenience on Steam (game distribution service), to buy games or downloadable content. The parent sees the unfamiliar charges and initiates a chargeback, believing their card information was compromised.

4. "Wardrobing" Scheme: A shopper buys a new dress for an event with the intention of returning it. They attend the event wearing the dress, then file a "not received" chargeback to keep the dress without paying for it.

5. Impatient Return: A customer has a problem with a product and knows they can return it, but finds the store's return policy inconvenient. They file a chargeback with their card issuer to get a refund, claiming the product was defective.

This is more common than you might believe.

More than 72% of consumers don’t know the difference between chargebacks and refunds. Meanwhile, around 70% of them find chargebacks easier to deal with than returns.

Thus, reasons friendly fraud may occur is due to the ways businesses set up their return and refund policies.

Types of Friendly Fraud

Here are the 2 forms of chargebacks or loss in revenue that typically come from friendly fraud:

• Chargeback Fraud: Cardholder claims there was a fraudulent purchase when there wasn’t.
• Refund Abuse: Customer exploits a store's return policy to get a refund they don't deserve.

Chargeback fraud involves lying to the bank to get a refund. Refund abuse involves exploiting store return policies for unfair refunds.

Chargebacks bypass the merchant and involve the customer's bank. Refund abuse involves working with the merchant directly.

You should have everything you need to know from this section. To learn more, keep reading.

1. Chargeback Fraud

Chargeback fraud involves a customer intentionally deceiving their bank, payment processor, or credit card company to get a refund. Though they legitimately made the purchase and received the product or service. They will claim that a fraudulent, unauthorized, or merchant-error charge happened with their card when one didn’t.

This can involve making false claims such as:

• Reporting a purchase as unauthorized
• Claiming a product never arrived
• Exaggerating or faking a product's defects

It's important to note that chargeback fraud is different from a genuine dispute, where there's an actual problem with the transaction.

Summary: Chargeback fraud is a deliberate act of dishonesty in which a customer lies to their bank or credit card issuer to obtain a refund for a legitimate purchase.

Friendly Fraud vs. Chargeback Fraud

Friendly Fraud:

• Includes accidental and intentional unfair refunds.
• Can result from confusion or misunderstanding on the customer's part.

Chargeback Fraud:

• A specific type of friendly fraud.
• The customer knows the purchase was legitimate.
• The cardholder lies to initiate a chargeback.

Friendly fraud is a broad term that covers chargeback fraud and refund abuse. And it’s considered a type of chargeback fraud. Chargeback fraud is always intentional and involves deliberate deception.

Friendly fraud can sometimes be unintentional, like when a customer doesn't recognize a charge.

Learn more about the differences in a separate guide.

Summary: Chargeback fraud is a subset of friendly fraud, characterized by the customer's intentional dishonesty to obtain a refund.

2. Refund Abuse

Refund abuse happens when a customer takes advantage of a merchant's return policy to get refunds they don't deserve. They do this by making chargeback claims. It's a way to get products or services for free.

Here's an example:

A shopper buys a dress for a special event. They wear the dress to the event. Then, they return the dress to the store, claiming it's unused. From there, the merchant processes the refund, not knowing the dress was worn.

Other examples of refund abuse include:

• Returning used items as new.
• Claiming an item was defective when it is not.
• "Wardrobing"—buying, using, and then returning clothes.
• Excessively returning items, making it unprofitable for the merchant.

If these refund abusers win friendly fraud chargeback disputes, they’re 90% likely to strike again because they know they can game the system [2].

Summary: Refund abuse occurs when customers exploit a store's return policy to unfairly obtain refunds while keeping the purchased items or services.

Friendly Fraud Management

The following sections will cover the following areas regarding friendly fraud management:

• Causes
• Prevention
• Detection
• How to deal with them

Learn how to deal with friendly fraud.

1. Causes of Friendly Fraud

Here's a breakdown of the causes of friendly fraud, along with potential mitigation strategies:

1. Unrecognized Charges: Buyers genuinely don't remember a purchase or don't recognize the business name.

• Mitigation: Clear billing descriptors, detailed receipts. Instead of a generic item name, include the product's specific description (size, color, model number) and perhaps a small product image.

2. Dissatisfaction: They’re unhappy with the product or service, and resort to a chargeback.

• Mitigation: Send a post-purchase follow-up email confirming the order and offering support. Also state the exact number of days allowed for returns (ex: 30 days from delivery).

3. Buyer's Remorse: Shopper makes an impulse purchase and regrets it later.

• Mitigation: Limited return windows, emphasize the cost of returns. Aim for a return window of 14–30 days. The exact number of days will depend on the industry and monetization model.

4. Unauthorized Use: A family member or third party uses the card without permission.

• Mitigation: Order verification systems (address, phone verification).

It's important to note that some friendly fraud is intentionally deceptive. Making it harder to prevent.

Summary: Friendly fraud stems from unrecognized charges, customer dissatisfaction, buyer's remorse, unauthorized use, and sometimes outright deception.

2. How to Prevent Friendly Fraud

Most cases of friendly fraud chargebacks involve customers abusing the business’ refund policy, or the chargeback system in general. There’s not many prevention tactics businesses can employ.

Many friendly fraud cases may not be worth fighting. However, if you, the merchant, decide to fight the chargeback. You’ll need to prove you did everything on your part to prevent the “fraudulent” transaction.

Dot your i's and cross your t’s.

And that’s what we’ll cover in the following sections.

1. Clear Communication

Use clear billing descriptors that customers will easily recognize on their statements. They need visibly posted, detailed return and refund policies to clarify potential avenues for recourse.

Here’s an example of a good and bad descriptor:

• Original Descriptor: "ABC Company"
• Clear Descriptor: "ABC Clothing Store (Chicago)"

This revised descriptor clarifies the purchase and includes the store location. Making it easier for the shopper to identify the transaction on their statement.

Providing clear contact information for customer support inquiries encourages direct communication if a problem arises. Preventing a buyer from resorting to a chargeback.

Remember, most consumers consider initiating chargebacks easier than dealing with refunds.

Don’t be a business in this statistic.

2. Proactive Customer Service

Offering quick and effective resolutions to issues prevents frustrated customers from resorting to chargebacks out of desperation.

Proactively following up with shoppers after a purchase can reveal potential dissatisfaction and allow early intervention.

3. Fraud Detection Tools

Some software can analyze customer data and transaction patterns to spot the signs of friendly fraud. These tools flag potentially fraudulent orders for review before they ship. Allowing businesses to investigate.

Businesses can also set up rules within these systems to automatically decline high-risk transactions, preventing losses.

3. How to Detect Friendly Fraud

It's challenging to definitively identify friendly fraud, but here are some tactics businesses can use to spot potential red flags:

1. The customer has a history of frequent chargebacks or returns.
2. Purchase is unusually large or outside of typical buying patterns.
3. Shipping and billing addresses differ.
4. Cardholder claims an item was never received, but tracking shows delivery.
5. Customer reports an item as defective but ignores offers for a replacement.

Fraud detection tools also help analyze data for risk trends. These are indicators, not proof, of friendly fraud.

Moreover, don’t put too much weight into point number 3.

Many customers will use virtual mailboxes, PO boxes, or mail forwarding software to forward their packages elsewhere. Or the difference in addresses could stem from them gifting the purchase in question.

Summary: Businesses can look for suspicious patterns and utilize fraud detection tools to flag potential friendly fraud transactions.

4. How to Deal with Friendly Fraud

Consider fighting chargebacks when evidence points to deliberate fraud, like repeated chargebacks on the same card or suspiciously high-value claims. Fighting large-value chargebacks is typically worthwhile due to potential revenue saved.

However, merchants have the lowest chance of winning high-value transaction chargebacks (on orders more than $300). It’s a 27.64% win rate. Versus the 46.85% win rate they see when dealing with transactions less than $29.99.

The actual numbers will vary by industry, though.

Anyway.

Here's how businesses should respond to friendly fraud chargebacks, regardless of whether they fight them:

• Gather evidence like order confirmation, delivery receipts, and communication logs.
• Be clear and concise in their response to the bank.
• Meet the bank's deadlines for responding to a chargeback.
• If the customer is at fault, the business can rerepresent the chargeback.

Even if not fighting the chargeback, a business might try contacting the buyer. Resolution might result in the consumer dropping the dispute. This result benefits everyone.

Summary: Businesses should fight fraudulent chargebacks with compelling evidence or high value, and respond promptly to all chargebacks regardless.

Industries Most Likely to Experience Friendly Fraud

Friendly fraud chargebacks are more likely to happen in the following industries:

1. Video Gaming

Digital product delivery makes it easy for customers to claim "non-receipt" falsely of in-game items or subscriptions. Additionally, people share accounts. Leading to unauthorized purchases by family members or friends.

Subscription models with some games also cause confusion over recurring charges. Thus, some customers might dispute them.

2. Retail

A major problem in retail is "wardrobing", where customers buy clothes, wear them to an event, and then return them. Dishonest shoppers will abuse refund situations with this scheme.

Online purchases make it easier for consumers to avoid direct contact with the retailer. Making them more likely to resort to a chargeback rather than resolving issues directly.

3. Travel

Bookings for flights, hotels, or experiences are often made far in advance. Increasing the likelihood of cancellations, which can lead to chargeback disputes.

Complex pricing, convoluted cancellation policies, and unexpected trip disruptions can contribute to customer confusion and trigger chargebacks. Even when the travel provider has fulfilled their obligations.

Consequences of Friendly Fraud for Merchants

Consequences of friendly fraud for merchants include:

• Lost revenue from the original sale and often the merchandise.
• Chargeback fees for every incident.
• Merchants spend time and money investigating claims and fighting chargebacks.
• Damaged reputation with banks and payment processors.
• Merchants might experience higher processing fees in the future.
• Another instance of friendly fraud is more likely to occur.

Summary: Sellers suffer financial losses, increased fees, wasted resources, potential reputational harm, and the threat of future higher processing costs due to friendly fraud.

True Fraud vs. Friendly Fraud

In short:

• True Fraud: Card wasn’t in the cardholder’s possession and a criminal used the card.
• Friendly Fraud: Cardholder has the card and made the purchase.

True fraud happens when a criminal uses a stolen credit card to make a purchase. Meanwhile, the legitimate cardholder is unaware of the fraudulent purchase. The purchase is unauthorized, and the customer is the victim.

Friendly fraud occurs when the actual cardholder makes a purchase. Later, the customer disputes the charge with their bank for their money. The customer's intent is the key difference.

The intent of siphoning money from the business leads to chargeback fraud. Unknowingly committing fraud is friendly fraud.

Sometimes, cases can happen due to purchases made by family members.

Challenges of Friendly Fraud

Here are the many challenges that businesses could face due to friendly fraud.

1. Revenue Loss

Each successful friendly fraud case means money lost for the business. The seller loses the value of the product or service and cannot resell damaged or used items returned fraudulently.

Then there’s the lost labor costs put into developing, marketing, and selling said product.

This direct loss of revenue can significantly hurt a business's bottom line.

If there was a chargeback (and not a refund) involved, there’s also chargeback fees.

2. Chargeback Fees

Banks, payment processors, and/or credit card companies charge fees for every chargeback, ranging from $20–$100 per incident.

High-risk businesses—those that breach payment processor chargeback thresholds—can pay thousands a month for chargebacks.

Failure to reduce the number of chargebacks could eliminate the seller’s ability to use a specific card network (e.g., Visa) or payment processor (like PayPal).

Chargeback fees occur even if the business wins the dispute. These fees add up, creating an additional financial burden for businesses already dealing with the loss from the fraudulent refund itself.

3. Difficulty in Prevention

Friendly fraud is hard to distinguish from legitimate disputes because customers filing these claims appear to be genuine.

Hence, the term “friendly.” This forces businesses to invest in fraud-detection systems, which adds complexity to operations and costs a lot.

4. Increased Operational Costs

Businesses spend time and money handling chargeback disputes. This involves investigating claims, gathering evidence, and responding to banks. They could have spent these resources on growing the business.

5. These Fraudsters Wait Longer to Start Chargebacks

Customers who engage in friendly fraud typically take 40% longer to report an instance of fraud [3]. This creates a challenge for businesses because the delayed reporting leaves them unable to immediately identify patterns and take steps to counteract familiar fraud schemes.

6. Reluctance to Flag

Businesses actively avoid flagging friendly fraud cases due to fear of alienating customers or damaging their reputation.

They may not want customers to perceive them as overly aggressive with fraud investigations, which could potentially drive away legitimate buyers.

7. Money Hold & Risk Of Closure

Stripe typically withholds 20–30% of your current payout to mitigate potential losses from fraudulent transactions and refunds. The amount of time they’ll hold your funds will vary. For most industries, it’s 14 days. And if you’re in Brazil (a high-risk country), they’ll hold it for 30 days [4].

They can legally hold onto your funds for up to 180 days [5].

A higher chargeback rate can lead to Stripe holding onto your funds for a longer period. Not past 180 days, but likely past 30 days (depending on your risk profile).

If they consider you a large enough risk, they could do the following to your account:

• Temporary Hold: Temporarily freeze your account.
• Freeze Your Account: You cannot process new transactions.
• Termination: Terminate your account.

This is because high chargebacks indicate a greater risk of future issues. Stripe might need more time to assess the situation and ensure they have sufficient reserves before releasing the funds.

Conclusion

Friendly fraud is a serious problem costing businesses money and time.

It's often unintentional, stemming from misunderstandings or dissatisfaction with products. By focusing on clear communication and great customer service, businesses can reduce friendly fraud.

You can also prevent refunds from escalating to chargebacks. We offer a tool to help with that. Learn more now.