Friendly Fraud vs. Chargeback Fraud: What’s the Difference?



    This blog post will define the slight difference between friendly fraud and chargeback fraud. Realizing that some companies use the terms interchangeably, we'll highlight the subtle difference(s) that can help you learn how to win the fight against chargebacks--whether it's an honest mistake by a cardholder or an elaborate scheme to defraud your business.

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    According to Chargebacks911, a 2023 survey of 300 merchants revealed that "friendly fraud was a much larger concern than criminal fraud." Business Wire continued in the press release, "when asked to estimate the percentage of chargebacks that were the result of friendly fraud, merchants reported an average of 44 percent—with retailers making more than $100 million in annual revenue being more likely to identify disputes as friendly fraud.

    As our identity verification technology partner, Ekata, noted in their blog post, "merchants are expected to pay over $100 billion in chargebacks this year with friendly fraud representing 61% of that total."

    But what is friendly fraud? Is it any different from chargeback fraud or true fraud? Is it the same thing as first-party fraud?

    By exploring these questions, you'll be better prepared to:

    • Avoid chargebacks.
    • Stop chargebacks.
    • Prevent friendly fraud.
    • Secure more transactions.

    What Are the Types of Chargeback Fraud?

    Chargeback fraud happens when a cardholder disputes the charge of a purchase or transaction with their card-issuing bank or credit card company. There are specific types of fraud that involve the chargeback process.

    • Merchant fraud - Merchant fraud, or second-party fraud, happens due to merchant errors and/or when merchant employees approve every transaction with no regard to fraud controls.
    • True fraud - True fraud, or third-party fraud, chargebacks happen when a bad actor uses stolen card information to make a purchase and the legitimate cardholder files a chargeback because they didn't authorize the purchase.
    • Friendly fraud - Friendly fraud, or first-party fraud, happens when a legitimate customer makes a purchase, receives the product, and then files a chargeback with their bank to reverse the transaction while keeping the product(s) or service(s).

    Chargeback fraud hurts merchants the most, sticking them with the overwhelming majority of the cost of chargebacks in addition to their lost product.

    With chargebacks, cardholders bypass the merchant's customer service team by going directly to their own financial institution and reporting the transaction as fraudulent. The fraud is malicious in both true fraud and friendly fraud instances, and it's almost impossible to prevent before it actually happens.

    Merchants are then hit with a fee by the bank when a chargeback happens, which negatively and directly impacts their revenue. In the aftermath of fraudulent chargebacks, merchants are operating at a loss since they're penalized with fees as well as both revenue loss and product loss.

    What Is Friendly Fraud?

    Friendly fraud is one type of chargeback fraud where the customer, a legitimate cardholder (not using stolen credentials), files an illegitimate chargeback against a merchant. To be clear, friendly fraud (also known as first-party fraud) is malicious and intentional fraud against merchants. But, there are ways for sellers to fight back!

    Why is it called friendly fraud? It's a misnomer based on the idea that "friendly" equals "known customer." In other words, because a customer's card credentials aren't affiliated with fraud indicators (stolen card, mismatched billing address, etc.) the merchant considers the customer "friendly."

    But, no matter how it's referred to--friendly fraud or first-party fraud--it is malicious fraud.

    When are chargebacks not actually fraudulent?

    Because of the misnomer, it's easy to mistakenly apply the "friendly fraud" title in the case of unintentional transactions. For example, a cardholder might review their transactions at the end of a month and not recognize a purchase because the merchant name is listed on their statement differently. Or, a cardholder's family member makes a legitimate purchase unbeknownst to the cardholder. These are honest mistakes and not intentional fraud.

    To recap, there are three primary categories for honest first-party chargebacks:

    1. Customer confusion. A customer forgets they made a purchase or doesn't recognize the company name on their bank statement.
    2. Poor customer experience. A customer may feel like they didn't get what they paid for, the product was a scam, or the merchant customer service team didn't offer a solution. As a result, the customer might initiate a chargeback.
    3. Family fraud. The customer's child or other family member made a purchase without the actual owner of the credit card knowing. The transaction is discovered on their bank statement and they request a refund for the mistaken purchase.

    These scenarios aren't necessarily malicious--although, the outcome is usually the same where a customer gets something they have not paid for, and the merchant is left footing the bill for it. But, it's not definitionally fraud, right?

    Consider the definition from Merriam-Webster: Fraud is the "intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right or an act of deceiving or misrepresenting."


    Chargeback Prevention and Chargeback Protection

    When should merchants rely on chargeback fraud prevention? Ideally, eCommerce merchants would have a chargeback management system in place before the first transaction ever happens. In reality, most merchants (and most human beings) are reactive rather than proactive!

    The good news is that it's never too late to implement chargeback protection services to help you navigate the chargeback management journey.

    But, what are some things that merchants should look out for to protect themselves against chargeback fraud?

    Honest and Ethical Businesses Win

    Be transparent about any additional fees that may be attached to an order so your customers aren't surprised when they look at their bank statements. Address any concerns that customers might raise about their order—within reason—rather than appearing like you're attempting to take advantage of them.

    Identifiable Descriptors Can Help

    If a consumer sees a charge on their credit card statement that they don't recognize, they often dispute it with their bank, even if it's a legitimate purchase that they made. If the descriptor listed on their bank statement is completely different from your company name, it can be an immediate red flag for consumers and they'll likely file a chargeback.

    Be sure to include your online business or store name as part of the descriptor so your customers will be able to identify where the charge is coming from. 

    Everyone Loves Great Customer Service

    Social media channels like Facebook and Twitter have become the primary place for customers to share their grievances with brands—sometimes because they don't get a response from a merchant's customer service team. If your customers can't get in touch with you or if your business's level of customer service is lacking, they are less likely to try to work with you to resolve the issue, and more likely to go straight to their bank to issue a claim.

    Customer Knowledge Goes a Long Way

    When customers place an order, be sure to provide a clear shipping estimate and send an immediate order confirmation via email, text, or both (even better). Once the order is placed, keep your customer in the loop as the order is being prepared, when it ships, and if the shipment is delayed for any reason, they should be the first to know. 

    Consumers who are aware that something is back-ordered or delayed are more likely to be patient and wait rather than disputing the charge with their credit card company or card-issuing bank. 

    Make a Naughty List and Keep It Updated

    Consumers who successfully file disputes are more apt to try it again. Why? Because it's their path of least resistance. If a customer repeatedly attempts chargeback fraud, you can (and should) prevent them from future purchases to protect your company.

    How to Put Together a Chargeback Prevention Strategy That works

    Finally, you should consider using a chargeback company to help you with chargeback disputes and chargeback alerts. However, all companies aren't built the same! Some third-party companies rely mainly on identity verification while others rely on risk scoring.

    A company like Vesta leads the industry in experience, technology, features, and effectiveness. Remember, chargeback fraud is only one type of fraud. eCommerce businesses should use fraud detection and prevention features that cover the entire spectrum of payment fraud.

    Best of all, Vesta was the first fraud-fighting company to offer chargeback guarantees with our Payment Guarantee solution. That means that our customers never have to pay for fraudulent chargebacks if the transaction was approved on the Vesta platform. Get in touch with us today to see how it works!

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