Introduction
It may sound harmless, yet “friendly fraud” is anything but. Every day, customers make legitimate purchases, claim they didn’t receive or authorise the order, and then dispute the charge with their bank/card company.
Some buyers accidentally commit this friendly fraud (also known as chargeback fraud, first-party fraud or first-party misuse) because they don’t recognise the transaction in their statement, and assume it came from a fraudster. However, others will take advantage of low-barrier refund systems to gain “free” products or services by deceptively and deliberately claiming back their money.
In the current system, a cardholder doesn’t have to provide any evidence – such as a police report – to claim that a purchase was fraudulent, either. Yet the merchant gets little to no chance to dispute or defend itself, even if it has valid proof of a legitimate transaction.
“More than one in five Brits have purposefully initiated a chargeback for something they genuinely wanted to buy and, in many cases, kept.”
— PAYSTRAX research
What’s causing friendly fraud?
Chargebacks have become one of the fastest-growing threats in e-commerce, costing merchants millions and eroding trust between brands and buyers.
Friendly fraud now accounts for the majority of global fraud claims – as many as three-quarters (75%) of all chargebacks, according to Visa. Around half of merchants view chargeback abuse as their primary fraud-related challenge, with merchants losing more than $117 billion globally to chargebacks back in 2023.
“In my view, we should define intentional chargeback claims for legitimate purchases as outright stealing. The research highlights just how widespread the issue is in the UK, raising the question of whether the card schemes are actually enabling and protecting this robbery in broad daylight.”
— Johannes Kolbeinsson, CEO and co-founder of PAYSTRAX
Four trends reshaping the friendly fraud landscape
Our research finds that only 15% of respondents believe payment service providers (PSPs) or card acquirers are accountable. While nearly a third (29%) of Brits say “no one in particular” is responsible, the most commonly blamed party is banks at 26%.
While consumers largely blame banks for fraudulent transactions, it is most often merchants who shoulder the financial loss when chargebacks are processed. Our data shows that only 10% of respondents think retailers are responsible for proving a transaction was fraudulent.
Younger people, especially those who have grown up in the digital era, are more likely to use their tech savviness to request chargebacks – including false ones. Two in five (40%) 16-24-year-olds have knowingly asked their bank to refund legitimate transactions over the past twelve months – compared to only 20% of 45-54-year-olds and just 5% of 55+.
Building a fairer future for hard-working business owners
Friendly fraud remains a significant issue for merchants, sparking wide-scale repercussions across retail, finance and the global economy. And while it’s up to consumers to curb this behaviour – and retailers to mitigate it where they can – the real onus lies on the card scheme duopoly.
At PAYSTRAX, we’ve crafted four simple steps we believe the industry must follow to negate the issue and improve fairness for merchants:
- Reclassify friendly fraud transactions as “cardholder disputes”
- Enable merchants to respond, refund or resolve issues directly with the cardholder before penalties are applied
- Request cardholders to present a police report or similar evidence when registering a fraudulent transaction
- Exclude friendly fraud transactions against merchants’ fraud ratios if they refund a transaction in good faith
“It’s all about removing the risk of friendly fraud, so that there’s no doubt that the customer is buying what they think they’re buying.”
— Johannes Kolbeinsson, CEO and co-founder of PAYSTRAX