What is friendly fraud?

Friendly fraud, sometimes called chargeback fraud, is when a cardholder identifies a purchase on their transaction statement as fraudulent and disputes it sparking the chargeback process. In actuality, though, they or someone else in their household may have made the purchase.

While payment card fraud remains a major concern for issuers and merchants alike, there’s another far more costly problem confronting merchants and issuers today: friendly fraud.

Friendly fraud accounts for as much as 70% of all credit card fraud, costing the industry over $132 billion a year, according to a 2020 report by FIS Global. That amount does not include the additional losses merchants absorb, like the loss of goods or services they ultimately refund.

Read on to find out more about how the impacts of friendly fraud can be prevented.

What causes friendly fraud?

There are two main causes of friendly fraud:
  • Transaction confusion—The cardholder doesn’t recognise the purchase when checking their banking statement and believes they were a victim of fraud, and so they dispute the charge.

  • “First-party fraud”—Someone else in the household—an unauthorised user—makes a purchase without letting the cardholder know. This can happen when, say, a household member pays to stream a movie online using the credit card that’s on file with the streaming service.

Why is friendly fraud growing so much?

There has been a convergence in trends leading to the increase of friendly fraud. First, the boom in ecommerce and people increasingly using digital transactions—as well as the sheer increase in payment card transactions versus cash payments—have led to a surge in transaction confusion. The transaction descriptions shown on card statements frequently don’t include a clear and recognisable merchant name, leading cardholders to think a transaction is fraudulent when it’s not.

Moreover, as a growing array of connected devices store payment card information, from voice-activated speakers to online video and music streaming services, there’s far higher chance that someone other than the authorised cardholder could make a purchase using a card on file.

Many issuers continue to have zero-liability policies so that cardholders are not liable for unauthorised purchases—so they will generally issue a chargeback if a purchase is disputed unless they can confirm that the transaction was legitimate (and the cardholder or someone in their household authorised it).

How does friendly fraud hurt merchants and issuers?

Merchants and issuers are hurt by friendly fraud in a variety of ways:
  • More chargebacks—When someone disputes a charge—regardless of whether it’s genuine fraud or friendly fraud—it usually leads to a time-consuming chargeback process. If a chargeback is granted, the merchant must refund the customer in addition to paying a chargeback fee.

  • Poor customer experience—Anytime a customer experiences transaction confusion or feels the need to dispute a purchase, it’s not an ideal experience. In fact, a 2022 study by Ethoca and PYMNTS.com found that 71% of ecommerce transaction disputes evaluated were initiated due to service errors—such as their package being sent to the wrong address.

  • Bad data—When a friendly-fraud dispute is coded as genuine fraud, it can lead to an uptick in false declines—where cards are denied due to suspected fraud, even though they shouldn’t be.

How can merchants and issuers prevent friendly fraud?

Reducing transaction confusion is a key way to prevent friendly fraud and the related chargebacks—while enhancing the customer experience. Today, there are collaborative solutions that can help.

Ethoca Consumer Clarity™ allows merchants and issuers to greatly reduce transaction confusion—and jog customers’ memory—by putting a clear merchant name and logo and rich transaction details right in the digital banking apps that consumers use to review their transaction history. It also provides those same details to the issuer’s call center representatives and back-office support teams.

When it comes to fighting friendly fraud, it’s critical that merchants and issuers work together to put more clarity and information at customers’ fingertips—before they decide to dispute a legitimate charge.