Friendly fraud, also known as chargeback fraud or first-party fraud, is a type of fraud that occurs when a customer makes a legitimate purchase with their credit card or other payment method but later disputes the charge with their bank or payment provider, resulting in a chargeback. Unlike traditional fraud, where a criminal steals someone’s credit card information to make unauthorized purchases, friendly fraud involves the actual cardholder initiating the chargeback.

Friendly fraud can occur for various reasons, including:

  1. Forgetfulness: The cardholder may forget about a legitimate purchase or not recognize the charge on their statement, leading them to dispute it unintentionally.
  2. Miscommunication: A family member or authorized user of the card may make a purchase without informing the primary cardholder, leading to a dispute when the primary cardholder does not recognize the transaction.
  3. Dissatisfaction: The cardholder may be dissatisfied with a product or service but instead of seeking a refund through the merchant’s return policy, they initiate a chargeback to get their money back.
  4. Impulse purchases: Sometimes, people make impulsive purchases and later regret them. Instead of going through the hassle of returning the item, they dispute the charge.
  5. Confusion: Customers may be confused about the billing cycle or the terms and conditions of a subscription service, leading them to dispute recurring charges.

Friendly fraud can be costly for merchants because they often end up shouldering the financial burden of chargebacks, including the cost of the refunded transaction, chargeback fees, and potential damage to their reputation. To combat friendly fraud, merchants often implement fraud detection and prevention measures and work with payment processors to resolve disputes in their favor when appropriate.

Friendly fraud can have several effects on the economy, although its impact is relatively small compared to other forms of fraud and economic factors. Some of the effects of friendly fraud on the economy include:

  1. Increased Costs for Merchants: Friendly fraud can result in increased costs for businesses. When customers initiate chargebacks for legitimate transactions, merchants not only lose the revenue from the sale but also incur chargeback fees imposed by payment processors. These costs can add up, especially for small businesses, and may lead to higher prices for consumers in the long run.
  2. Resource Allocation: Merchants and payment processors must allocate resources to investigate and manage chargeback disputes, which can divert time and resources away from other business activities. This can be a drain on efficiency and productivity.
  3. Higher Prices: To offset the costs associated with friendly fraud and other types of fraud, businesses may raise their prices, impacting consumers. This can contribute to overall inflationary pressures in the economy.
  4. Impact on Payment Ecosystem: Friendly fraud can erode trust in the payment ecosystem. When customers dispute legitimate transactions, it can lead to disputes between merchants, payment processors, and banks. This can strain relationships within the payment industry and potentially lead to changes in policies and procedures.
  5. Potential for Over-Regulation: Repeated instances of friendly fraud and related disputes can lead to calls for increased regulation of the payment industry, potentially resulting in more stringent rules and requirements for businesses. While regulation can help protect consumers, it can also impose compliance costs on businesses.
  6. Consumer Confidence: Frequent instances of friendly fraud and chargebacks can erode consumer confidence in online and card-not-present transactions. This may lead some consumers to be more cautious when making online purchases, which can have implications for e-commerce and the digital economy.

It’s important to note that friendly fraud represents a relatively small portion of overall fraud in the economy, with other forms of fraud, such as identity theft and account takeover fraud, posing more significant challenges. Nonetheless, businesses take friendly fraud seriously and implement measures to prevent it, such as improving transaction documentation, offering clear refund and return policies, and using fraud detection tools.

Efforts to reduce friendly fraud can help maintain a healthier and more efficient payment ecosystem, benefiting both businesses and consumers in the long run.