Friendly Fraud

Friendly fraud is the practice of a cardholder disputing a genuine purchase with their card issuer, claiming it was unauthorised, never delivered or not as described, in order to recover the money through a chargeback while keeping the goods or service. Card networks call the deliberate form "first-party misuse". The name is a misnomer: it is "friendly" only because the person disputing is the real customer, not a stranger with a stolen card.

Friendly fraud is a narrow, card-focused type of first-party fraud. It is most common in card-not-present (CNP) sales such as digital goods, subscriptions, travel and online gaming. The term covers both deliberate abuse and honest confusion, which is one reason it is hard to fight and is often called "chargeback fraud".

Think of a shop that lets customers return items without a receipt if they tell the manager something went wrong. Most people use that fairly. A few buy a jacket, wear it to a wedding and then claim it was faulty. Others genuinely forget they bought it, or a teenager used a parent's card without asking.

A card chargeback works like that no-receipt return, except the customer talks to their own bank, not the shop. The bank usually believes its customer first and takes the money back from the seller. The seller then has to prove the purchase was real, often weeks later. Friendly fraud is the gap between how easy it is to complain and how hard it is for the seller to answer.

Several different situations end in the same type of dispute:

• Deliberate abuse. The customer knowingly claims a purchase was fraudulent to get something for free.
• Family use. A child or partner used the card, and the account holder does not recognise the charge.
• Unclear billing. A confusing merchant descriptor on the statement makes a real purchase look unfamiliar.
• Forgotten subscriptions. A free trial rolls into a paid plan and the customer disputes rather than cancels.
• Avoiding the merchant. The customer finds the bank easier to deal with than the seller's refund process.

Only the first is fraud in a strict sense, but the cost to the merchant is similar in every case: lost goods, lost revenue, a chargeback fee and a hit to its chargeback ratio.

The cardholder contacts the card issuer, which may first send a retrieval request or go straight to a chargeback under a fraud or "goods not received" reason code. The money is pulled from the merchant through its acquirer. The merchant can then fight back through chargeback representment, submitting evidence such as delivery confirmation, login records, IP address, device data and proof of earlier undisputed purchases.

Visa's Compelling Evidence 3.0 rules, which apply to disputes from 15 April 2023, give merchants a clearer route against first-party misuse in card-not-present fraud disputes. If the merchant can show at least two earlier undisputed transactions with the same card, made 120 to 365 days before the dispute and sharing identifying data such as the device ID, IP address, shipping address or customer account, the liability can shift back to the issuer. Mastercard has introduced similar first-party trust measures. Disputes coded as "goods not received" or "not as described" follow different evidence rules, so merchants need delivery and usage records as well as identity data.

Merchants cannot stop every false dispute, but they can make each one easier to defeat and less likely to start:

• Clear descriptors and receipts. A recognisable billing name, order emails and easy self-service cancellation remove much accidental friendly fraud.
• Authentication. 3-D Secure (3DS) shifts liability for many fraud-coded disputes to the issuer when the cardholder was authenticated.
• Evidence capture. Recording device fingerprinting data, IP addresses, delivery signatures and usage logs creates the record needed for representment.
• Dispute alerts. Network and third-party alert services tell merchants about a dispute early so they can refund before a chargeback is recorded.
• Blocking repeat abusers. Customers with repeated disputes can be refused future orders.

Friendly fraud is hard to count because issuers often code it as third-party fraud. Merchants usually estimate it by reviewing disputed orders that show strong signs of genuine use, such as a streamed film watched to the end or goods delivered to the customer's usual address. High levels can push a seller over network monitoring thresholds, raise its fraud-to-sales ratio and, in serious cases, lead to the loss of its merchant account. Sellers in sectors prone to disputes are often treated as a high-risk merchant for this reason.

• Visa
• Mastercard