Friendly Fraud vs. Chargeback Fraud vs. True Fraud Compared

When first dealing with chargebacks, I didn’t know the differences among the different types of fraud. That’s partially why I decided to write this post. To clear up any confusion.

I’ll explain the differences among friendly fraud, chargeback fraud, and true/malicious fraud. From there, I’ll provide examples of each and ways to help prevent them from happening.

Let’s see how much damage fraud can wreak on a business.

Key Takeaways

• True fraud involves stolen card information used for unauthorized purchases.
• Friendly fraud occurs when a shopper disputes a legitimate purchase.
• Chargeback fraud is when a buyer attempts to lie to dispute a legitimate transaction.
• Friendly fraud is more common and has a higher win rate among merchants (43.82%).
• Chargebacks stemming from true fraud have a 9.27% win rate.

Friendly Fraud vs. Chargeback Fraud vs. True Fraud

Friendly fraud centers around the customer disputing their legitimate purchase. They might fight it because they forgot they made the purchase. Or they might try to get their money back after changing their mind.

Chargeback fraud refers to disputes initiated by the cardholder. Regardless of the legitimacy. This can involve friendly fraud, where they dispute their own purchase, but it can also involve other situations. For instance, a customer could claim fraud on a purchase when there wasn’t.

True fraud involves a thief making purchases with stolen card information. The actual consumer isn’t involved in these transactions.

In this scenario, the shopper will report the fraudulent activity to their bank.

Chargeback fraud and true fraud are 2 of 3 chargeback types. We're only missing merchant error, which isn't relevant to this post. 

Why did I include merchant win rate in the table? What does it mean?

Chargeback win rates refer to how often merchants win chargebacks. True fraud chargebacks typically have a much lower win rate.

Friendly fraud/chargeback fraud has a much higher win rate than the average 30% of chargebacks that merchants typically win [1]. Both of them have the same chances of winning since many folks will consider them the same.

Why?

Because thieves typically have intricate systems to mimic the usage patterns of the people they stole from. Making it more difficult for merchants to provide sufficient evidence.

Summary: Friendly fraud involves the cardholder disputing their own purchase, chargeback fraud is broader and includes stolen card use, and true fraud centers on unauthorized purchases using stolen card information.

What Is Friendly Fraud?

Also known as:

• Family fraud
• First-party fraud
• Chargeback fraud
• Clean fraud
• Friendly chargeback fraud

Friendly fraud happens when a shopper uses their own card or payment information to make a purchase and unknowingly commit fraud. They then file a chargeback with their bank to get their money back.

This type of chargeback makes up for 75% of all chargeback disputes and result in more than $25 billion in losses each year [2].

It’s a type of chargeback fraud.

Sometimes, it involves refund abuse (a form of friendly fraud). This process involves customers abusing a seller’s refund policy to get free products.

The cardholder might do this with the intent to defraud the business. Other times, the cardholder might not remember making the purchase. They might also let a friend, relative, or acquaintance use their card and dispute the charge.

Summary: Friendly fraud occurs when a cardholder disputes a legitimate charge on their own card.

Examples of Friendly Fraud

Here are different examples of what could happen in a customer’s mind (or the actions taken) that leads to a friendly fraud chargeback:

• Buyer's Remorse: Buys something, then regrets their decision.
• Forgot the Purchase: Makes a purchase and then forgets about it. The customer sees the charge on their statement and disputes it.‍
• Doesn't Recognize the Charge: The business name on the statement is unfamiliar. The customer disputes the charge instead of contacting the business.‍
• Family Fraud: Someone in the household uses the cardholder's credit card. The cardholder doesn't recognize the charge and files a chargeback.‍
• Intentional Fraud: A customer gets a product or service for free. They filed a chargeback, claiming they never received it.

We provide more information on the chargeback process in general in a separate guide. Check it out.

Summary: Friendly fraud encompasses various scenarios where a shopper disputes a legitimate charge. Ranging from forgetfulness to intentional deceit.

How to Prevent Friendly Fraud

Here are ways businesses can use chargeback protection to combat friendly fraud:

• Clear Communication: Use recognizable billing descriptors on customer statements to prevent confusion.
• Detailed Policies: Have clear refund and return policies displayed upfront.
• Customer Service: Offer easy ways for customers to get help. This can prevent unnecessary chargebacks.
• Record Keeping: Maintain detailed order information for all transactions.
• Documentation: Keep records of delivery confirmations and customer communication.
• Fraud Prevention Tools: Use tools to detect and flag suspicious activity. Some software can analyze patterns and identify potentially fraudulent transactions.

Many of these tips are longer ways to keep records of transactions. Businesses will need this information to counter accidental and purposeful fraud. And the more evidence they can provide the bank, the higher of a chance they have to win.

The best way to prevent these chargebacks from happening is to have systems in place to discourage customers from preferring them over refunds. 81% of customers believe that businesses have too complex of return/refund systems and will prefer resorting to chargebacks [3].

From there, get as much chargeback protection software as possible. Mastercards’s Mastercom Collaboration and Visa’s Rapid Dispute Resolution (RDR) tools are great starting points in preventing disputes from escalating to chargebacks.

We also work with RDR and other services. It’s difficult to integrate these businesses, though. However, we will integrate it for you at a much more affordable price. Making it more accessible to businesses.

Because the goal here is to prevent and mitigate chargebacks. As these affect businesses the most. I’ll explain why later.

Summary: Businesses can protect themselves against friendly fraud with clear communication, detailed policies, robust customer service, good record-keeping, fraud prevention tools, and proactive chargeback representment.

What Is Chargeback Fraud?

Also known as:

• Liar-buyer fraud
• Cyber shoplifting
• Friendly fraud

Chargeback fraud happens when a customer disputes a transaction with their issuer—payment processor, bank, or card network. Examples include buyer's remorse, forgotten purchases (friendly fraud), or deliberate fraud.

Here are the steps involved in filing a chargeback fraud claim:

1. Contact the Merchant: The customer tries to resolve the issue with the merchant first.
2. Contact the Bank: They contact their bank or credit card issuer to initiate a dispute.
3. Bank Investigates: Issuing bank reviews information from the consumer and seller.
4. Chargeback Issued (if approved): Bank reverses the transaction and charges the merchant.
5. Merchant can Contest: Business can provide evidence to fight the chargeback.

Summary: Chargeback fraud involves a customer disputing a legitimate charge, leading to the bank reversing the transaction and the merchant potentially contesting the dispute.

Examples of Chargeback Fraud

Here are some examples of chargeback fraud:

• Item Never Received (Not Stolen Card): A customer files a chargeback claiming they never received an item, but tracking information shows delivery.
• Warranty Claim, Then Chargeback: A customer uses a product's warranty, receives a replacement, and then files a chargeback for the original purchase.

Summary: Chargeback fraud, excluding friendly fraud and true fraud, can involve fake claims of non-delivery, fraudulent warranty claims, or bait-and-switch tactics.

How to Prevent Chargeback Fraud

Here are some ways to prevent chargeback fraud, focusing on scenarios beyond friendly and true fraud:

• Clear Product Descriptions: Provide accurate and detailed descriptions of products.
• Proactive Shipping Communication: Give customers tracking information and delivery updates.
• Address Verification Service (AVS): Use AVS to match billing and shipping addresses.

Summary: Businesses can prevent chargeback fraud by providing clear product details, proactive communication, robust security, fraud monitoring, and tracking their chargeback rates to identify potential issues.

What Is True Fraud?

Also known as:

• Malicious fraud
• Third-party fraud
• Criminal fraud
• Identity theft

True fraud is a type of card fraud where a thief uses someone else's credit card information without their permission.

Different ways the bad actor could have obtained the card’s information include:

• Phishing scams
• Physically stole it
• Found a lost card on the ground
• Bought the information off of a database
• Social engineering
• Rummaging through the victim’s trach

Upon obtaining this information, the fraudster uses the stolen information to make purchases. The actual cardholder (who’s now the victim) isn’t involved in these fraudulent transactions.

When the victim discovers unauthorized purchases on their statement, they report the fraud to their bank. From there, they rightly initiate a chargeback.

Summary: True fraud involves unauthorized use of stolen credit card information, and it's also known as criminal fraud, identity theft, third-party fraud, or malicious fraud.

Examples of True Fraud

Here are some examples of true fraud/malicious fraud that thieves might try:

• Stolen Credit Cards: Use stolen physical cards or card numbers. Transactions might occur in an unusual location compared to the cardholder's address.
• Phishing Scams: Trick customers into giving up card information online. Orders might include unfamiliar email addresses or shipping addresses.
• Account Takeover: Take control of a customer's account on a merchant website. They may then change shipping information and place orders.
• Card Testing: Make small purchases with stolen cards to test if they work.
• Triangulation Fraud: Set up fake stores to collect card information. They might then use this data to buy things from legitimate sellers.

Summary: Watch for transactions involving stolen cards, phishing scams, account takeovers, small test purchases, or unusual order details associated with fraudulent activity.

How to Prevent True Fraud

Here are a bunch of ways to help prevent malicious/true fraud:

• Secure Website: Use SSL encryption to protect data in transit. Regularly update website software to address vulnerabilities.
• Strong Passwords: Enforce password rules for customers (length, characters, expiration). Offer tools to help customers create secure passwords.
• Multi-Factor Authentication: Implement SMS, email, or authenticator app verification in addition to passwords.
• PCI DSS Compliance: Follow Payment Card Industry Data Security Standards for handling card data.
• Fraud Prevention Tools: Use software with customizable rules, risk scoring, and machine learning to flag potential fraud.
• Monitor Transaction Patterns: Track order velocity, unusually high order values, and shipping address mismatches.
• Shopper Education: Include information about phishing, scams, and password security directly on your website. Share tips via email and social media.

Summary: To prevent true fraud, enforce strong login security, verify billing addresses, and actively educate customers about fraud prevention.

Conclusion

Friendly fraud often stems from confusion; clear communication prevents it. Chargeback fraud requires proactive security and customer service to combat.

True fraud calls for more robust website security, data protection, and customer education.

We also offer a tool that aids in preventing chargebacks. Learn whether it’s right for your business.