Friendly fraud — which refers to customers requesting a refund for an otherwise legitimate payment — is getting worse, increasing the danger of financial losses and the risk of security overreach to fight the problem.
Officially called first party fraud, this scam has always been a problem, but it has expanded in recent years — particularly during the growth of e-commerce during and after the pandemic, and through the recent bout of high inflation.
"When friendly fraud occurs, the merchant is often left to absorb most of the losses of the dispute, despite providing a legitimate good or service to the consumer," said Paul Fabara, chief risk officer at Visa. "We've seen that these ramifications can include losses that can be up to double the original transaction amount, which can impact merchants' businesses and their bottom line."
Visa and Mastercard have updated their dispute policies to address friendly fraud, while trying to avoid adding
"First -party fraud is still a significant issue, and it's not just in the U.S. but a growing problem globally," said David Mattei, strategic advisor for the fraud and anti-money laundering practice at Datos Insights."This form of fraud continues to grow annually and stopping it is difficult. It is also one topic that both merchants and financial institutions can wholeheartedly agree upon. A solution is needed to stop this."
Visa's new compelling evidence policy allows merchants to submit proof of a pattern of legitimate transactions to demonstrate that a disputed payment was probably legitimate, and thus an indicator of friendly fraud.
"We're adding a set of checks and balances to ensure we are identifying accurate fraud disputes, and providing the necessary information when a trusted cardholder participates in a transaction," Fabara said.
Mastercard has also updated its
The card networks' changes have been live for several months. But it may take time, and some complicated technology work, for the updated chargeback dispute polities to gain adoption at scale. There is enough data to piece together evidence of first-party fraud, Mattei said, adding that merchants have some of this data while issuers have the rest.
"Putting these two data sets together can shine the light on consumers abusing the dispute or chargeback process," he said. Visa's compelling evidence policy provides the conduit for information sharing, but it will take time for broad industry adoption as IT development is needed, he said.
Friendly fraud gets worse
First-party fraud has become the top form of e-commerce fraud, up from the fifth leading contributor in 2020, according to
The growth of e-commerce creates new opportunities for misunderstanding and outright fraud, said Aaron McPherson, principal at AFM Consulting.
"Given the expense and difficulties, many merchants just accept chargeback fraud as a cost of doing business," McPherson said.
Visa and Mastercard are attempting to lower these costs through the updates to their first-party fraud updates, which will lead to more challenges from merchants alleging friendly fraud, according to McPherson.
"This may also be a competitive response to the third-party organizations," McPherson said, of firms that sell dispute resolution services, such as Chargebacks911 and Chargeback Gurus. "I suspect there is also a desire to do something to lower the cost of acceptance without affecting pricing," McPherson said.
Merchants appear to be in favor of the card networks' updates, with 72% saying they are aware of the updates, 49% saying the updates will help a lot, 40% saying the rules will help "a little," and 8% saying the updates won't help, according to Cybersource.
Banks also plan to spend more to prevent payment fraud. Thirty-seven percent of banks plan to increase technology spending this year to reduce transaction fraud, according to research from
Why people falsify chargeback claims
Inflation is often given as a cause of friendly fraud — 52% of current incidents are due to high prices, according to Cybersource. But friendly fraud can occur by accident, such as misuse—34% of cases are due to changes in payment technology, or adding new digital services, according to Cybersource.
That could become more of a problem as payments process faster and more commerce happens in digital channels.
"While fraud generally evolves with the changing payments landscape, we can't say for sure if an increase in faster processing is contributing to a rise in first-party fraud," Fabara said. "Although, with these new forms of payments, cardholders may be more likely to not recognize a transaction or forget they made a transaction, resulting in an inaccurate dispute claim."
Consumers can also be tricked into committing friendly fraud.
Fraudsters are savvy and they continue to make use of technological advances. "While first-party fraud is a different type of fraud and may not come from a place of ill intent, fraud trends like social engineering and scams may confuse consumers where they end up disputing a charge they authorized as a part of a fraud scheme," Fabara said.
The development of Visa's new dispute policies caused concern that the updates could increase costs for banks and merchants by prompting banks to invest in prevention and merchants to add friction for consumers while vetting "legitimate" purchases.
Visa says the updated first-party fraud policy would increase transparency, access to data and analysis that will lower the overall costs of first-party fraud and the associated risk management for merchants and banks.
Issuers are able to utilize the information on the relationship between the merchant and cardholder as a part of their investigation, according to Fabara. The issuer can either rebill the consumer or assume the financial loss.
"Merchants will be able to leverage data they have on hand to create a historical footprint of the relationship between cardholders and merchants," Fabara said. "Issuers will receive and review this anonymized evidence to efficiently understand the nature of the transaction. This helps business owners keep money rightfully theirs while protecting legitimate cardholder activity."
Friendly fraud is more awkward to combat than phishing or other attacks that come from criminals. The payments industry doesn't like "throwing consumers under the bus" by taking a hard line on first-party fraud, partly because of friction that comes from adding security steps, according to Monica Cardone, CEO of Chargebacks911, which sells payment-dispute services.
"There is a mentality among consumers that says 'look, my bank will take care of it,'" Cardone said. "The cardholder is relying on banks to give them their money back because of buyers' remorse."
Chargebacks911's data, released earlier this year, found that 86% of chargebacks are friendly fraud. Sixteen percent of consumers admit to committing friendly fraud, with the average amount increasing from $166 in 2021 to $192 in 2022, according to fraud technology firm Sift.
There are several preventative measures that merchants can take to prevent friendly fraud beyond the card network's updated policies, Fabara said. For example, providing clear merchant descriptors and contact information on statements will make it more likely for consumers to recognize transactions instead of believing the purchases "aren't real."
It's also important for merchants to have accessible customer service channels to address transaction concerns, and when possible, merchants should have the ability to intercept or prevent shipment of goods when fraud is reported, Fabara said.
