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:
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.”
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.
