What the Heck Is 'Friendly Fraud' and Why Is it Costing Retailers $11.8 Billion?

Consumer chargebacks cost merchants a bundle, and if this refund trend continues, both retailers and consumers will be affected.
chargebacks friendly fraud

The words "friendly" and "fraud" may not seem to go together, but friendly fraud — also known as chargeback fraud — is a real problem for a lot of online merchants. Friendly fraud happens when a customer fraudulently reports to their financial institution that a charge on their credit card isn't legitimate; the customer will typically be refunded the money immediately, leaving the merchant on the hook for the cash.

Friendly fraud may be intentional theft, like shoplifting, but some customers may do it accidentally — reporting a charge because they don't realize another member of their household made the purchase or the charge information on their statement doesn't match up to a recognized retailer name, which can happen if the retailer uses a third-party payment system like PayPal. With identity theft at an all-time high and banks eager to reassure consumers that their identity (and their money) is safe with fraud protection guarantees, it's become increasingly easy for cardholders to use these protections to commit fraud.

Retailers Shoulder the Burden

Whether chargeback fraud is intentional or not, retailers are losing billions; Visa estimates $11.8 billion was lost to friendly fraud in 2012. For online merchants, who never physically swiped a card, it can be difficult to prove that a charge was legitimate — making chargebacks a game of he said, she said, where the customer usually wins. What's more, if a merchant has more than 1% of their charges reversed as chargebacks, they can find themselves shut down by Visa and MasterCard — which can mean going out of business entirely.

As a result, businesses are fighting friendly fraud in a lot of different ways. To protect themselves from chargebacks, many merchants require customers to enter credit or debit card' security codes in order to prove ownership and physical access to the card. Some merchants will only ship to the address associated with a charge card, which can be a nuisance when purchasing a gift. Merchants are also more likely to fight chargebacks, putting the burden back on the consumer.

Why Customers Should Care About Friendly Fraud

Friendly fraud may sound like a problem for merchants, and not consumers. But friendly fraud affects all of us. The most obvious side effect is an increase in a merchant's cost of doing business, which is often transferred onto the consumer in the form of higher prices and shipping charges.

Friendly fraud is also what's making credit card fraud protection weaker. Instead of just taking a consumer's word for it, banks are treating fraud or identity theft inquiries more cautiously. So, at the very least consumers will have to jump through more hoops for refunds and, at worst, may be liable for fraudulent charges that can't be proven as such.

Fortunately, there's no reason to panic. As we mentioned, retailers are pushing hard to reduce friendly fraud. Unfortunately, that push probably means that common consumers will have to accept some inconvenience as both retailers and financial institutions work to make chargeback fraud more difficult. So, have you ever disputed a charge on your credit card? Was the process easy or more time consuming than it was worth? Let us know your experience with "friendly fraud" or fraud protection in the comments below.

Elizabeth Harper
Contributing Writer

Originally working in IT, Elizabeth now writes on tech, gaming, and general consumer issues. Her articles have appeared in USA Today, Time, AOL, PriceGrabber, and more. She has been one of DealNews' most regular contributors since 2013, researching everything from vacuums to renters insurance to help consumers.
DealNews may be compensated by companies mentioned in this article. Please note that, although prices sometimes fluctuate or expire unexpectedly, all products and deals mentioned in this feature were available at the lowest total price we could find at the time of publication (unless otherwise specified).


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1 comment
"Fortunately, there's no reason to panic. ..... consumers will have to accept some inconvenience"

Herein lies the problem. WE consumers shouldn't be panicking in the first place as this is a shortcoming of the retail giants and their refusal to spend on security measures to stay ahead of the game and protect the customers who trusted them with their money, info, and business.
Just the same, customers should not have to accept inconvenience for what is again, a problem caused by exploiting the corporations lax security measures causing monetary damage to the customer, not the corporation. Their solution is for that same customer to accept some inconvenience. Pathetic. Boycott target and every other corp that doesn't care to spend what is necessary to secure your business, then protect it.