Fraud is most often associated with anonymous cyber criminals using stolen credit cards in shady backrooms. But what if the biggest threat to businesses came from their own customers?
Welcome to the world of friendly fraud - a deceptive yet increasingly common issue that's costing merchants billions each year. Unlike true fraud where criminals make unauthorized transactions, friendly fraud is when customers dispute legitimate transactions and charges with their bank in an attempt to gain goods or services for free.
In these cases, there is no merchant error. But as well as losing the goods already dispatched, merchants are often also left with chargeback fees from the customer's credit card company plus their own administrative costs.
This blog explores how friendly fraud impacts businesses, the different types that merchants face, and the best strategies to prevent it.
The difference between true fraud & friendly fraud
While most people are familiar with the term 'fraud', there's an important distinction between two types: true fraud and friendly fraud.
Understanding these differences is important for merchants looking to safeguard their bottom line and minimize the impact of these costly issues.
True fraud
True fraud happens when a cybercriminal gains unauthorized access to sensitive customer data, typically through methods such as hacking, phishing, or data breaches.
The fraudster then uses the debit or credit card information to make a fraudulent transaction without the cardholder's knowledge or consent. Since the cardholder didn't initiate the transaction, they are often left unaware until the charges show up on their credit card statement.
True fraud is a direct violation of a cardholder's trust, typically resulting in a chargeback request and dispute charges to the merchant.
For businesses, true fraud with malicious intent (such as identity theft) is a serious concern, as it leads to financial losses and diminished consumer trust. Thankfully, chargeback systems exist to protect legitimate customers and mitigate the impact of unauthorized purchases.
Friendly fraud
Friendly fraud (sometimes also referred to as 'first party fraud' or 'chargeback fraud'), on the other hand, has an additional layer of complexity. Unlike true fraud, this occurs when a customer disputes a legitimate charge that they have previously authorized.
In this case when a customer requests a chargeback via their card's issuing bank, they may fraudulently claim they didn't make the purchase, receive their product, or authorize the transaction.
While it may seem like a minor issue to some, false claims impact businesses significantly - with estimates indicating that friendly fraud is responsible for more than $100 billion in losses annually.
Accidental Friendly Fraud vs Intentional Friendly Fraud
Friendly fraud can happen either intentionally or accidentally.
In accidental friendly fraud, a customer might not recognize a transaction on their credit card statement, mistaking it for something they didn't make or forgetting about the purchase. This might be due to a forgotten subscription, the merchant's billing descriptor on the card statement being unfamiliar, or a lack of clarity among transaction records. In this case, the refund request is often resolved once the customer recognizes the charge.
However, intentional friendly fraud is a form of chargeback abuse and occurs when a customer files a dispute deliberately against a legitimate purchase. These fraud claims are typically motivated by the consumer's desire to get something for free, take advantage of refund policies, or avoid paying for a product or service they have already received.
Types of friendly fraud
Friendly fraud is a deceptive but complex form of first-party fraud, where a legitimate cardholder disputes a charge they previously authorized.
While it may seem like an innocent mistake, the financial consequences for merchants are anything but minor.
Understanding the various types of friendly fraud can help businesses better recognize, prevent, and mitigate its impact.
Chargeback fraud
Chargeback fraud occurs when a customer commits friendly fraud by disputing a legitimate transaction with their bank or credit card issuer, falsely claiming that the charge was unauthorized, fraudulent, or that they never received the product.
Since banks often side with the consumer to maintain consumer trust, merchants are then left with financial losses, additional fees, and a damaged reputation.
Some customers may use a fraudulent chargeback dispute to get a product or service free, making this one of the most damaging types of friendly fraud.
Refund abuse
Refund abuse, often referred to as 'return fraud', happens when customers exploit a merchant's refund or return policy. This can take many forms, such as purchasing an item, using it, and then returning it for a full refund. Or it could be falsely claiming an item arrived damaged or was never received.
Subscription services are particularly vulnerable to refund abuse, as customers may sign up, consume content, and then make a refund request afterwards.
This type of fraud can force businesses to tighten their refund policies which is likely to negatively impact the claims processes for genuine customers.
The Difference Between Friendly Fraud & Refund Abuse
While both friendly fraud and refund abuse cause significant financial losses for merchants, they stem from different customer behaviours and impact businesses in distinct ways.
Friendly fraud occurs when a customer disputes a legitimate charge through their bank rather than seeking a refund directly from the merchant.
Refund abuse, on the other hand, involves customers deliberately taking advantage of a merchant's return policies. Unlike friendly fraud, refund abuse is more often a premeditated act designed to manipulate a retailer's refund system for personal gain.
The primary distinction between friendly fraud and refund abuse lies in its intent. Friendly fraud is often accidental and stems from confusion surrounding the purchase, whereas refund abuse is an intentional effort to exploit a store's refund policy.
Both, however, lead to financial losses, increased operational costs, and a breakdown of trust between businesses and consumers.
To protect your business, implement clear customer communication and return policies. These must educate customers about refund procedures and use fraud detection tools to identify suspicious patterns before they escalate into costly disputes.
Family fraud
Family fraud occurs when a purchase is made by a household member or friend of the cardholder - often a child, spouse, or relative - without the primary holder realizing it.
Later, when reviewing their credit card statement, the customer initiates a dispute, believing it to be fraudulent even though the transaction was made within their household.
This type of friendly fraud chargeback is particularly common with digital transactions such as video games, in-app purchases, or streaming services, where family members may not recognize or remember authorizing the transaction.
Accidental friendly fraud
Not all friendly fraud involves cruel intentions - many chargeback disputes arise due to simple misunderstandings.
Customers may not recognize a charge on their bank statement because the billing descriptor is unclear or because they forgot about a recurring subscription. Others may mistakenly believe that initiating the chargeback process is the only way to resolve an issue with a merchant, rather than directly contacting customer service for a refund or replacement.
Although these cases are unintentional, they still add to the financial burden of friendly fraud.
Buyer's remorse
Impulse buying is common in the world of eCommerce, where discounts, flash sales, and social media ads encourage quick decision-making.
However, once the excitement wears off, customers often regret their purchase. But instead of requesting a return through the proper channels, they file a chargeback with their bank.
This type of friendly fraud is particularly frustrating for merchants, as the customer authorized the transaction but later decided that they no longer wanted the item or service.
The impact of friendly fraud on businesses
Friendly fraud consequences are more than just a frustrating cost of doing business - it's a growing threat that affects revenue, operational stability, and long-term customer relationships.
While it may seem like a minor issue at first, the cumulative effect of repeated chargebacks can have serious financial and reputational consequences for merchants.
Immediate financial losses
Every time a customer files a chargeback, the merchant loses not only the revenue from that sale but also the product or service that was delivered.
In addition, chargeback fees - typically ranging from $20 to $100 dispute - quickly add up, further cutting into profitability.
Unlike traditional refunds, which allow businesses to retain customer goodwill, chargebacks leave merchants with no opportunity to resolve the situation or recover costs.
Increased chargeback ratios & account risks
Excessive chargebacks can lead to serious consequences for merchants, as payment processors closely monitor chargeback ratios.
If a business surpasses the typical threshold - typically 1% of total transactions - it may face higher processing fees, penalties, or even have its merchant account suspended. This can force businesses to seek high-risk payment processing solutions, which come with significantly higher costs and more restrictive systems.
Damage to reputation & customer trust
Beyond financial losses, friendly fraud can erode trust between businesses and their customers, especially if the same customer commits fraud more than once.
When merchants begin implementing stricter return policies or fraud prevention measures to protect themselves, legitimate customers may feel alienated or frustrated.
Additionally, negative experiences from disputed transactions can lead to bad social media reviews, further harming the reputation of the business.
A complicated & costly dispute process
Many merchants find it challenging to fight back against illegitimate chargebacks. Issuing banks often favor the cardholder in dispute scenarios, making it difficult for businesses to reclaim lost revenue.
On top of that, the chargeback process requires time, documentation, and resources - efforts that may not always be successful.
Some businesses hesitate to dispute chargebacks at all, fearing it may harm customer relationships or result in further complications.
A growing burden on merchants
Interestingly, merchants report higher rates of friendly fraud than issuing banks, suggesting that financial institutions may underestimate its prevalence.
This discrepancy makes it even more difficult for businesses to get the support they need in resolving fraudulent disputes. As a result, many merchants absorb these losses, leading to long-term financial strain.
Effective fraud prevention strategies
When friendly fraud occurs regularly in parallel to other types of payment dispute, the revenue of a business can be impacted in addition to its reputation, and operational stability.
While it's impossible to eliminate it, merchants can take proactive steps to combat friendly fraud and mitigate its impact on their bottom line.
Clear & recognisable billing descriptors
One of the most common reasons for friendly fraud chargebacks is customer confusion. When a billing statement displays an unclear or unfamiliar merchant name, customers may mistakenly believe they are being charged for unauthorized transactions.
To prevent this, businesses should ensure clear communication:
- Ensure that their billing descriptor matches their brand name or website name
- Include relevant details such as customer service contact information
- Avoid vague or abbreviated descriptors that may confuse customers
By making billing statements more transparent, merchants can reduce the risk or resolve chargebacks raised by accident due to unrecognized transactions.
Maintain comprehensive records
Businesses should keep records of:
- Purchase receipts and invoices
- Delivery tracking and confirmation details
- Customer communications, including emails and support tickets
When a chargeback occurs, having these records readily available can help merchants provide compelling evidence to the payment processor, improving the chance of proving friendly fraud.
Utilise advanced fraud prevention tools
Modern fraud detection technologies can help businesses identify and prevent fraudulent transactions in real-time.
Various solutions use machine learning, behavioral analytics, and risk scoring to detect suspected online fraud before a transaction is processed. These tools can:
- Flag high-risk transactions for manual review
- Detect anomalies in purchasing behavior
- Reduce false declines, ensuring legitimate customers are not blocked.
By integrating these tools, businesses can stay ahead of evolving fraud tactics and prevent disputes before they escalate.
Strengthen customer service & communication
A significant portion of friendly fraud stems from customers misunderstanding refund policies or believing chargeback is the only way to resolve an issue.
To counter this, businesses should:
- Offer clear and fair return and refund policies that apply to every payment method
- Provide easily accessible customer support channels - like live chat, phone, and email
- Educate customers on proper dispute resolution processes instead of resorting to chargebacks
Proactively resolving customer concerns can help businesses avoid unnecessary disputes and maintain strong customer relationships.
Implement chargeback alerts & prevention programs
Chargeback prevention services allow businesses to receive real-time notifications when a chargeback is initiated.
This enables merchants to take immediate action, such as:
- Issuing a direct refund to the customer before the dispute progresses
- Providing additional transaction details to the bank to clarify misunderstandings
- Preventing repeat offenders from abusing chargeback policies.
These services provide a crucial layer of protection, giving merchants a chance to resolve disputes before they turn into costly challenges.
Nuvei's advanced fraud detection & chargeback management tools
Nuvei's advanced fraud detection and chargeback management tools provide merchants with a powerful, AI-driven solution to help prevent friendly fraud, and reduce chargebacks filed as well as financial losses.
By combining machine learning algorithms with manual review processes, Nuvei helps businesses identify suspicious transactions in real-time, preventing unauthorized chargebacks before they occur.
Our fraud prevention system enables merchants to make data-driven decisions, leveraging insights into transaction processes and potential fraud risks.
These measures will also help protect merchant relationships with legitimate cardholders.
In addition to fraud detection, Nuvei's chargeback management tools offer merchants a comprehensive way to track and analyze disputes. By identifying trends and root causes behind chargebacks, businesses can proactively adjust their strategies to minimize future risks.
Nuvei also collaborates with payment processors and issuers, enhancing visibility into chargeback reasons and improving dispute resolution outcomes.
With chargeback-guaranteed solutions, merchants can further safeguard their revenue from the financial impact of chargeback fraud and other types of disputes, ensuring more stability and security in their payment processing solutions.
Through these innovations, Nuvei empowers businesses to stay ahead of evolving fraud tactics while maintaining seamless and secure transactions.
How can Nuvei help merchants protect their revenue?
Nuvei helps merchants protect their revenue by providing cutting-edge fraud prevention and chargeback management solutions that leverage real-time data, machine learning, and behavioral analytics.
By continuously monitoring transactions, Nuvei identifies unusual purchasing patterns that may indicate potential friendly fraud, allowing businesses to take proactive measures before disputes arise.
Our AI-driven tools enable merchants to automate responses to suspicious activities with customizable rules, reducing fraud risks while maintaining a seamless customer experience.
Beyond fraud detection, Nuvei supports merchants in documenting chargeback disputes, equipping them with the necessary evidence to effectively contest friendly fraud and other types of illegitimate claims.
By working closely with payment processors and issuers, Nuvei enhances visibility into chargeback trends, helping businesses refine their fraud prevention strategies.
With real-time insights and automated security protocols, Nuvei empowers merchants to mitigate losses, prevent fraudulent transactions, and safeguard their revenue without disrupting genuine customer transactions.
Conclusion
Friendly fraud is a growing challenge for businesses, but with the right strategies in place, it doesn’t have to be an inevitable cost of doing business.
By understanding the different types of disputes - whether accidental, opportunistic, or outright malicious - merchants can take proactive steps to protect their bottom line.
From clear billing descriptors to robust fraud prevention tools, there are numerous ways to reduce chargebacks and maintain customer trust without sacrificing revenue.
Nuvei's cutting-edge fraud detection and chargeback management solutions help businesses stay ahead of evolving threats by leveraging AI-driven insights and real-time monitoring. With powerful tools designed to identify suspicious activity and prevent unauthorized disputes, merchants can safeguard their transactions and minimize financial losses.
Ready to take control of your fraud prevention strategy? Partner with Nuvei today and start protecting your revenue with confidence.
.svg)
