An Answer to Friendly Fraud

Friendly fraud can account for up to 75% of all transaction disputes, writes Sara Craven, senior VP and CEO of Verifi, in the PYMNTS eBook, “Baseline 2022: What the Next Six Months Holds,” and combatting it requires merchants and issuers to work together to improve transparency on post-purchase practices.

As the world barrels into the first normal summer since the start of the pandemic, digital spending continues to hold strong through Q1 20221. Online purchasing is more seamless than ever, and interestingly with that, an opportunistic form of fraud is on the rise: friendly fraud (sometimes referred to as first-party fraud or first-party misuse).

When most people think of fraud, they think of stolen account numbers or identity theft, but friendly fraud, which can account for up to 75% of all transaction disputes², occurs when a consumer intentionally makes a purchase then disputes the legitimate charge. From what we’ve heard from merchants, with online and mobile purchases more seamless than ever before, this new opportunistic form of fraud is on the rise. This includes customers refuting valid purchases such as long-forgotten recurring subscriptions, or children given access to use their parent’s card to make purchases with parental approval. When consumers review their credit card statements, they see the forgotten transactions and contact their bank to dispute the charges — resulting in a false fraud claim against purchases authorized by the cardholder. According to the National Retail Federation and Appriss Retail, the losses from friendly fraud in 2020 totaled over $25 billion a year³.

At Verifi, we see it as essential for the health of the entire post-purchase ecosystem to reduce the losses incurred from friendly fraud, which has a very real and negative impact on merchants. We’ve seen first-hand how friendly fraud especially impacts merchants with subscription-based or recurring purchase models and those who take card-not-present (CNP), online or mobile payments, online markets, digital gaming, digital goods and streaming services. For merchants dealing with high volumes of low value transactions, the expense to fight a friendly fraud dispute is far greater than the value of the initial transaction and result in losses that can be up to double the original transaction amount. To make matters worse, the false fraud dispute increases the merchant’s dispute-to-sales and fraud-to-sales ratios.

With friendly fraud firmly cemented as a new baseline for digital transactions, Verifi is committed to reducing first-party fraud through data exchange within the post-purchase ecosystem. We have found that the primary driver of friendly fraud is transaction confusion which happens as a result of the limited transaction information available to the issuer and within the consumer’s mobile banking app. Verifi’s solutions aim to close the gap by working with merchants and issuers alike to help improve transaction visibility. It will be interesting to see how merchants’ post-purchase practices rebalance to create a more equitable ecosystem.

[1] Visa Internal Reporting

[2] Mercator Advisory Group. November 2021. Chargebacks: Increases in Credit Card Disputes Threaten Merchant Profitability.

[3] NRF: $428 Billion in Merchandise Returned in 2020