Friendly fraud (also referred to as chargeback fraud or first-party fraud) occurs when someone makes an online purchase then later requests a chargeback from the bank. The person has received the goods or services, but claims they were defective or the transaction never authorized. Sometimes this happens because of buyer's remorse—the customer just doesn't want to have to explain his or her regret to the merchant, preferring to initiate a chargeback and let the bank resolve it with the merchant. Sometimes the buyer's remorse comes from a child making purchases, particularly digital goods, using the parent's card, or when a merchant's refund time limit has passed but the cardholder still wants to be reimbursed.
While there certainly can be legitimate disputes, friendly fraud is becoming a growing problem for e-commerce merchants. Not only are the merchants out the cost of the goods or services, but they also incur administrative costs and fees from the card-issuing bank. Companies selling digital goods, office supplies, or electronics—as well as auction sites—seem to be the most frequent targets of friendly fraud, but other types of businesses can also be affected.
One of the main difficulties merchants experience in combating this fraud is predicting or recognizing when it first occurs, since it often occurs on the account of a "good" customer. And with these remote purchases, the merchant is at a disadvantage in determining if a legitimate cardholder made the purchase or the goods were actually received by the cardholder.
Because the burden of proof is on the merchant, the merchant community has started to implement a number of tactics to help reduce this increasing problem. In our next installment on this topic, we will discuss some of those tactics.
By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed