What is friendly fraud?

What is friendly fraud?

Friendly fraud occurs when a customer makes a legitimate purchase, receives their product or service, and then disputes the charge with their bank—often under false or misleading pretenses. Unlike traditional fraud, the cardholder themselves initiates the dispute, typically claiming they didn’t authorize the transaction or never received what they paid for.

Where did the term friendly fraud come from?

Friendly fraud emerged alongside the rise of e-commerce and card-not-present (CNP) transactions in the early 2000s. Without face-to-face verification, and with buyers and sellers often separated by thousands of miles, the opportunity for disputes grew rapidly.

The term was coined informally within the payments and fraud prevention industry to distinguish between:

• Malicious fraud: Involving stolen cards or identity theft
• Friendly fraud: Initiated by legitimate cardholders, either accidentally or deliberately

In the early days, friendly fraud was often accidental—people would forget about a recurring charge, mistake a purchase for fraud, or fail to recognize a business name on their statement.

Over time, however, it has expanded to include intentional misuse of chargeback systems. Some consumers have learned that by filing a dispute, they can receive a refund from their bank while still keeping the product. Others may use it as a tool to skip merchant return processes, delay payment, or avoid restocking fees.

This behavior is now a growing concern across retail, digital services, online marketplaces, and even subscription-based platforms.

How does friendly fraud typically happen?

The process typically follows these steps:

1. A customer places a legitimate order using their real credit or debit card
2. They receive the item or service—sometimes using or consuming it
3. Rather than contacting the merchant with an issue or requesting a return, the customer contacts their card issuer and files a chargeback, often claiming the item never arrived, it wasn’t as described, or they didn’t authorize the purchase
4. The bank temporarily reverses the charge and opens an investigation
5. Unless the merchant provides strong, time-sensitive evidence, the funds are permanently withdrawn, and the merchant pays additional processing fees

Because chargeback systems were built to protect consumers, the burden of proof falls on the merchant. Even with tracking numbers, delivery confirmation, or digital access logs, it can be difficult to definitively prove that the customer is misrepresenting the situation.

Friendly fraud is especially common with:

• Digital goods (like streaming services or gaming credits)
• Subscription products
• High-value electronics
• Dropshipped or cross-border items
• In-app purchases and mobile commerce

What does friendly fraud impact?

Friendly fraud has become a leading cause of chargebacks, accounting for a wide range of disputes in some industries. Its impact includes:

• Lost revenue: Merchants not only lose the sale, but are rarely able to recover the goods
• Chargeback fees: Processors charge additional fees for each dispute, whether you win or lose
• Increased processing risk: Too many chargebacks can raise your chargeback ratio and jeopardize your ability to accept cards, leading to fines
• Customer service costs: Businesses must devote time and resources to resolving or disputing claims

What can you do about it?

While no method fully eliminates friendly fraud, companies that understand it can take steps to reduce risk and recover losses:

1. Strengthen your evidence stack:

• Use tracking and delivery confirmation, especially for high-ticket items
• Save communication records, including support chats and customer emails

2. Improve transparency pre- and post-sale:

• Make product descriptions and images as accurate as possible
• Offer clear return, refund, and cancellation policies
• Send follow-up emails confirming delivery or product access

3. Encourage direct customer contact:

• Promote fast, responsive support channels so customers are more likely to contact you before initiating a dispute
• Automate post-purchase check-ins to uncover dissatisfaction early

4. Monitor fraud patterns:

• Use machine learning or manual review to spot unusual chargeback activity from specific customers, products, or payment methods

TL;DR

Friendly fraud happens when customers make legitimate purchases but dishonestly dispute the charges through their bank. They end up with both the product and the refund, leaving your business with the bill.

It’s a growing problem for merchants in an increasingly digital economy, where chargebacks are easier to conduct. Growth-minded teams must find ways to balance proactive fraud prevention with a smooth customer experience.