Friendly Fraud Chargebacks: Causes, Impacts, and Effective Solutions

When consumers use their credit cards to purchase goods, their card issuer completes the request. The merchant accepts this payout in exchange for goods or services, and the consumer supposedly “gets what they pay for.” However, this isn’t always the case—the consumer could turn around and dispute the transaction; if their dispute is illegitimate, the chargeback request is fraudulent. 

What is chargeback fraud? Chargeback fraud is part of a larger class of fraudulent behaviors, including both accidental and intentionally malicious disputes. Projections from Mastercard’s 2023 Trends Report suggest that this year will bring more annual chargebacks than ever for their institution, totaling over 330 million disputes. 

Further, the rise in chargeback disputes (an increase of 42% from 2023 to 2026 for Mastercard) connects to the ever-increasing use of consumer-oriented e-commerce solutions. As consumers continue their love affair with online purchases, they become more likely to make a purchase they later want to revoke. An estimated 70% of all credit card fraud links to chargeback disputes—many of these fraudulent cases come from “friendly” or “first-party” fraud.

For the consumer, an unwanted byproduct of merchants attempting to recoup their losses typically comes from increased service and goods costs, while the merchant suffers direct losses through chargeback fees. Understanding and addressing these chargeback disputes is vital for businesses today because of the potential for direct losses. 

What Is Friendly Fraud Chargeback?

US Federal Law protects chargeback disputes, specifically the Fair Credit Billing Act (FCBA). The FCBA establishes procedures for transaction billing errors and determines when creditors must respond. The FCBA guidelines let business owners know when to act, ultimately increasing their rates of successful fraud charges. 

The family tree of financial fraud is ever-progressing, with new branches appearing as fast as currency develops. Chargeback fraud is one such branch, its sister being refund abuse. Chargeback fraud is also “friendly” or “first-party” fraud, as implied above; however, there is a further forking of “friendly fraud,” where the cardholder commits the crime accidentally or maliciously. 

Moreover, friendly fraud chargeback refers to a specific situation—because, to be clear, deviation from this outline would indicate a different form of fraud—where the cardholder, or their presumed representative, makes a purchase and then requests an illegitimate chargeback to their account. 

A chargeback is not a refund of a purchase; it is a financial institution attempting to ‘right’ a supposed ‘wrong’ done by a merchant. As a result, businesses targeted by chargeback fraud lose money through the loss of product returns, imposed institutional fees, and even more money if the consumer pursues arbitration. Merchants undoubtedly bear the brunt of the friendly fraud war; subsequently, the business class will need a crash course. 

Causes of Friendly Fraud Chargebacks 

Are the friendly fraud chargebacks always intentional, or can they occur accidentally? Let’s see!

Accidental Disputes 

E-commerce has given rise to various purchasing platforms, including PayPal and Zelle, niche businesses, and countless third-party payment options. However, some unforeseen issues with these bank-linking partners are their seemingly random billing descriptors and unclear refund policies. 

Many friendly fraud chargebacks are accidental. The consumer who does not recognize a merchant’s “doing business as” name thinks they are doing the right thing by requesting a dispute. Accidental disputes are mainly avoidable, particularly when businesses prioritize teaching this information to their consumers. 

Misunderstandings or Miscommunications 

In the same vein as accidental disputes, chargebacks can also result from misunderstandings between interested parties. As mentioned above, unclear refund policies, misunderstood terms and conditions, unclear sales guidelines, and cancellation policies cause many friendly fraud disputes. 

Merchants can largely curb this cause for friendly fraud, though, particularly when they ensure consumers understand their rights (and the company’s rights). Well-written directives and policies go far in this sense, as higher accessibility will ensure everyone knows their obligations.  

Deliberate Abuse of the Chargeback Process 

As with accidental disputes, deliberate chargeback abuse comes in various forms. The form most likely to come to the fore is criminally malicious events. These chargebacks are always premeditated and usually involve some level of retaliation, which is difficult to prevent because the consumer may not recognize the account changes. 

Moreover, when consumer accounts are overtaken, a merchant would not recognize a legitimate dispute as deliberate policy abuse. Another common form of deliberate policy abuse is regret/impulse purchasing, in which the consumer requests a chargeback to “undo” their previous choices. However, merchants can help avoid this situation by ensuring refund and cancellation information is openly accessible to their consumers.

Unauthorized Purchases by Family Members 

Some families allow certain members to make purchasing decisions on their credit cards, while others may discover unauthorized purchases later. Either way, if the cardholder requests a chargeback, it counts as friendly fraud. 

The status of the card user, whether authorized or not, has no impact on determining whether the event is fraudulent—because the cardholder either gave their explicit permission or didn’t, and investigating that claim can become a conflict of hearsay. A family member’s unauthorized card information use still counts as friendly fraud.

How Does Friendly Fraud Impact Businesses?

The risks range from losing money to losing a reputation and merchant accounts - all those vital components of your business that you don’t want to compromise. 

Revenue Loss 

The most immediate impact on businesses from friendly fraud is revenue losses. Merchant accounts lose any payment related to the transaction in addition to a standardized chargeback fee. 

If chargebacks continue hitting the merchant account, additional consequences trigger, ranging from heavier fees to closing financial accounts. Multiple chargeback disputes can lead to significant issues, as small businesses may not have the resources to pay. 

Increased Chargeback Fees 

Chargeback fees, also called chargeback penalties, enforce variable costs for merchants that do not provide consumers with what they promise. Traditional fraud options do not care if the consumer receives their goods or services; however, friendly fraud assumes that the consumer has purchased and received the promised goods. It becomes fraud when the consumer wrongfully claims the transaction was illegitimate. 

Merchants and businesses that receive multiple fees face increasing fines. Financial institutions are responsible for protecting both the consumer (from receiving poor goods) and the merchant (from fraud). So, a long series of chargebacks may result in penalty hikes that can ultimately foreclose a business. 

Damage to Merchant Reputation 

Repeated chargebacks also have social repercussions for businesses. A merchant’s relationship with consumers is tested, as are their connections to payment processors and financial institutes. A merchant’s reputation plummets with reoccurring chargebacks, as they may come to have an “unreliable” status from stakeholders. 

These disputes also signal challenges for the customer experience; expert merchant analyzers can largely blame elements like poor representative interactions, incorrect mailing information, and other service errors for consumer discontent. Consequently, businesses prioritizing these potential issues protect themselves from incurring chargeback damage. 

Risk of Losing Merchant Accounts 

Enough chargebacks on a merchant’s account may lead to a processor’s account termination; this is the equivalent of a bank closing a checking account for a user who overdrafts their balance every month. 

If this occurs for a small business, it could spell the end of business for the owners, particularly if they cannot scrape together enough resources to appease their processor’s policies. The good news is that it takes many chargebacks for this consequence to trigger, so merchants are rarely surprised when this event occurs. 

How To Prevent Friendly Fraud Chargebacks 

Are there ways to prevent yourself from falling prey to friendly fraud chargebacks? Yes! Here are some preventive tactics:

Use Clear Billing Descriptions 

One of the best ways to prevent friendly fraud is to use consistent and recognizable business names and promote detailed descriptions in all statements and transactions. Although detailed documents are somewhat time-consuming, they are the key to successful, friendly fraud charges. Moreover, using consistent business names, or at the very least, slightly similar ones, will reduce accidental disputes. 

Communicate Policies Clearly 

Accidental disputes can be further reduced when merchants educate their consumer base on returns, refunds, and cancellations. The more time spent teaching these policies to the consumer, the better they can choose to adhere to and comply with them—having now understood these expectations ahead of time. 

Strengthen Customer Authentication 

Besides stronger communication, businesses benefit from using the appropriate authentication methods for their industry. Multi-factor authentication is always the best way to ensure the right person is making a transaction, especially when the process incorporates various contact options. These methods commonly include phone, email, or texting verification codes, good for a limited time only. 

Offer Responsive Customer Support 

Some of the accidental chargeback population includes consumers who attempt to resolve a dispute via the merchant’s customer service options before issuing the chargeback. These events allow the merchant to showcase their effective support; more than this, analyzing escalations can give insight into potential future occurrences of (even unmentioned) chargebacks. 

Monitor and Analyze Transactions 

Analyzing account status and customer service data overlap provides a metric for anticipating future chargeback potential, but this isn’t the only data to monitor. All merchants utilizing fraud detection tools are better prepared for other cybersecurity events.

Monitor tools can flag unusual activity on the dark web and are helpful when consumer information is exposed following a data breach. But these tools can also monitor medical, personal, and consumer-identifiable information—protecting everyone from financial and economic abuse. 

How To Dispute Friendly Fraud Chargebacks

What’s the strategy to seek justice when you’ve been attacked by fraudsters? 

Collect Strong Evidence 

Of course, if the goodwill fails, there’s always evidence. Detailed records like transaction receipts, delivery confirmations, and communication logs lay the groundwork for all successful dispute charges. Evidence can include any interactions between the merchant and the consumer, including details about products, shipping records, communications, and product details/specifications. 

Respond to Chargebacks Promptly 

Merchants should always respond to disputes as quickly as possible. Each party must meet deadlines, and failure to comply may result in dropped charges. Merchants will also want to investigate the dispute claim, but waiting to respond may result in the chargeback succeeding without interruption. 

Use Chargeback Management Tools 

The internet is a bazaar of management tools; finding a platform that will automate your business’s dispute process and respond to financial threats will be easier than ever. These same tools can also allow merchants to leverage and track chargeback trends, further preparing the business for a future of making money.

Work with Payment Processors 

Ideally, these are the most partisan parties involved in a chargeback. They are typically only interested in resolving the dispute effectively; as a result, providing them with applicable records and documents early on can help them render the appropriate judgments faster. Further, repeated collaboration usually has favorable impacts later. 

Long-Term Solutions to Minimize Friendly Fraud 

Certain long-term strategies target root causes of friendly chargeback fraud and implement preventative measures. By combining customer education, data tracking, and collaboration, merchants can effectively reduce the impact of chargebacks over time. Here are a few strategies to consider:

Educate Customers 

The more informed a consumer is, the more likely they are to abide by predetermined rules; consumers may try to wiggle them around, but they aren’t likely to argue they didn’t understand the guidelines. Educating buyers and consumers about transaction processes, details, and company policies can help minimize occurrences of friendly fraud, just as consumer credit monitoring can help reduce the appearance of identity theft for everyone. 

Establish a Denylist of Repeat Offenders

Of the consumers who initiate a friendly fraud chargeback dispute, a select percent will repeat the dispute multiple times. Merchants should track each dispute and establish a denylist of consumers with a history of chargeback abuse.

Collaborate with Industry Partners 

Merchants are stronger and more successful when they work together; joining fraud prevention networks can allow merchants in similar situations to share experiences, insights, lessons, and resources - and offer a niche community of industry tools and resources that competitors may not have.

Let’s say a consumer is lying in bed, scrolling through the websites of their favorite products, making some purchases, and falling asleep. The following day, they realize their mistake (in horror) and make chargeback requests, presumably attempting to bypass refund “paperwork.” If they’ve committed friendly fraud, they’ll get a refund, and the merchant will suffer a loss. 

However, there are hidden elements to friendly fraud that can help merchants anticipate and prevent future chargeback fraud, regardless of the original reason it happened. Taking proactive fraud management strategies to heart and balancing business revenue with reputation and customer service initiatives can go far in helping to prevent friendly fraud