Friendly fraud (also called chargeback fraud or first-party misuse) occurs when a customer makes a legitimate purchase with their own credit card, receives the goods or services, and then falsely disputes the charge with their issuing bank to claim a refund.A friendly fraudster gets to be the customer and impersonate true shoppers. No need to hack into systems and use stolen card information or conduct identity theft as they utilize a legitimate customer account to place a real purchase and then contest the charges within days after receiving a transaction confirmation. No need for a sophisticated method to commit such nefarious activity and in many cases friendly fraudsters are even found to utilize free return shipping instead of committing an outright fraudulent act and actually processing a return for a purchased item.
Friendly fraud has evolved into one of the most costly and troublesome types of fraud in today’s payment ecosystem. Because it involves a verified account holder who makes a legitimate purchase and then subsequently attempts to reverse charges, this type of first-party fraud is able to be channeled through consumer protection to pose even greater risk to compliance teams, payment platforms and risk managers of online merchants. It is also very hard to detect and embed itself within the legitimate disputes that most online merchants have on a regular basis and would trigger most traditional methods of fraud detection.
The following topics are going to be covered in this article:
- What is Friendly Fraud?
- The Friendly Fraud Spectrum
- Why It's Exploding
- The Merchant Cost Reality
- Detection Signals
- Network and Card-Brand Initiatives
- The Refund Fraud-as-a-Service Underground
- Internal Controls and Documentation
- Regulatory Position
- How Sanction Scanner Helps
1- What is Friendly Fraud?
Friendly fraud is an unintentional form of first-party fraud, where the cardholder themselves take advantage, unknowingly or accidentally, of a chargeback or return system. A merchant suffers from friendly fraud when a real cardholder makes a legitimate purchase online, subsequently filing a fraudulent dispute claim with their bank for a refund of that purchase. The cardholder falsely claims that they did not authorize a purchase or that they never received goods or services that had been shipped to their address. Their bank issues a chargeback for their fraudulently claimed dispute.
The main difference between friendly fraud and criminal chargeback fraud is the intent of the cardholder and their identity. Criminals use stolen card details for non-authorized purchases in criminal chargeback fraud. In contrast, the true cardholder makes the fraudulent claims in cases of friendly fraud. The initial transaction was legitimate and the fraud occurs after the fact when the cardholder contacts the bank for a chargeback claiming that they did not authorize the purchase or that they never received the products or services.
2- The Friendly Fraud Spectrum
Friendly fraud is not one size fits all and we must look at the issue in context rather than treating all cases of friendly fraud with the same solution. It’s a spectrum.
Fraudulent activity by a customer that is intended from the start can be classified as pure first-party fraud or “friendly fraud”. This type of behavior and activity is also known as “cyber shoplifting” and typically involves the customer purchasing high-value items such as electronics, software, digital licenses and luxury goods with the intention of disputing the charge later.
Buyer’s remorse fraud is usually a “rationalized” purchase, meaning that for some reason the buyer decides they don’t want the purchase. Instead of returning the items, however, they find a chargeback easier than dealing with the merchant. In reality, 65.3% of first-party fraud drivers are classified as buyer’s remorse fraud.
Family fraud occurs when an adult’s credit card is used by an unauthorized party, typically a child. This type of activity is commonly referred to as ‘ringed’ and often occurs when a child buys online using a parent’s credit card details that have been saved online by the card holder. When the card holder receives their next statement they dispute the charge in good faith with no knowledge that the purchase was made by a member of their family.
The most systematic form of friendly fraud is the chargeback abuse by repeat offenders. These individuals are aware that they can obtain a refund of a charge by filing a chargeback and they make this behavior a habit. They can target the same or different merchants on every transaction that they place.
3- Why It's Exploding
Three factors have recently converged to make “friendly fraud” (also known as “grey chargeback”) a growing industry.
First, card networks have implemented policies that make it easy for consumers to dispute charges. Issuers are operating under a zero-liability framework, meaning that when a consumer files a dispute, the consumer is not putting any of their own money at risk. Second, the digital economy has removed a lot of the social friction associated with returning items in person. While in the past, consumers had to get in their car and drive to a store to return an item, today they can file a dispute in seconds through their banking app. Third, the post-pandemic financial squeeze has decreased the psychological barrier to consumers engaging in fraudulent disputes that they might otherwise consider to be improper.
Data continues to highlight the issue. Forecasting global chargeback costs to reach $42 billion by 2028 with nearly half declared as being fraudulent, Mastercard’s 2025 State of Chargebacks report suggests that first-party fraud now represents 36% of all reported global fraud, up dramatically from a reported 15% in 2023, with this type of e-commerce fraud posing a $132 billion risk.
4- The Merchant Cost Reality
The damage done by a single refund is not confined to the actual amount of the refund. A chargeback incurs a number of additional losses for a merchant:
- The direct refund on the disputed transaction
- Fees on the chargeback by the payment processor processing the transaction (these typically are between $15 and $100 per chargeback).
- Additional costs for returned goods that were already sent to the customer.
- There are also processor monitoring thresholds. Most card networks will flag a merchant when their chargeback to transaction ratio reaches 1% or higher and start charging additional fees as well as begin to monitor that merchant for fraudulent activity. Ratios of 1.5% or higher can result in the processor actually terminating the merchant’s processing account.
For high-volume merchants, even a slight increase in dispute rates can be enough to have you put into a monitored status. Once you have been put into a monitored status it can have long lasting negative effects to your reputation and how you do business
5- Detection Signals
Friendly fraud can typically be detected before a dispute ever occurs or even after the fact by gathering data and reading for signals of such activity on several different levels (customer, order, pattern).
Customer indicators for friendly fraud could be previous disputes on the account, an account to first high-value purchase time frame that is too short, and billing address vs. shipping address that does not fit typical gift buying patterns.
Examples of order level indicators of Friendly Fraud are:
- (i) large value purchases of digital goods and services which are non returnable and are instantly delivered to the customer;
- (ii) requests for expedited shipping on large value items; and
- (iii) purchases of gift cards which are very difficult to follow the cash trail after they have been delivered to a customer.
Fraud detection using behavioral analytics across the customer lifecycle is the new baseline for detecting “friendly” fraud.
6- Network and Card-Brand Initiatives
The two major card brands have rolled out programs to help merchants with first-party fraud to better contest invalid disputes.
Visa Compelling Evidence 3.0 (launched 2023) introduces additional information merchants can use to prove a transaction was legitimate when disputing a chargeback. This includes proof of prior undisputed transactions from the same device/IP address amongst other details. This information will help control a cardholder's statement of unauthorized spending.
Mastercard’s First-Party Trust Program which was launched in the U.S. in 2024 and is now expanding globally to additional markets, enables merchants to provide additional information in relation to transactions. This information can be provided at the time of the payment authorization or during the subsequent dispute process. Such information could include device information, the account holder’s previous transactions as well as delivery confirmation etc. The information can then be reviewed by the issuer to assess the validity of the chargeback request in relation to potential instances of first-party fraud as opposed to unauthorized card use by another party.
Both programs embody the same strategic premise: Data shared in advance of disputes is far more powerful than the same evidence assembled in defense of a batch of ill-founded chargebacks.
7- The Refund Fraud-as-a-Service Underground
Another evolution in fraud that’s become more professionalized in 2024-2025 is the friendly fraud refund services being peddled on Telegram and other online forums such as Discord. For a percentage of the transaction these refund services will file a chargeback on behalf of the customer who doesn’t want to take the risk of processing the transaction in the first place and not get fully refunded if a chargeback is granted.
Utilizing sophisticated methods to carry out large-scale fraud these refund services utilize scripted dispute descriptions for chargebacks, and have in-depth knowledge of the banks’ escalation processes. In some cases, these services have even obtained the assistance of issuer employees who have been bribed and are part of their fraud ring. As such, it is not uncommon for merchants to realize that the party filing the dispute is not the actual consumer who made the purchase, but rather a component of a larger organized fraud ring utilizing consumer protection as a means to carry out their attacks.
The nature of the service-based fraud ecosystem is such that it is easily disrupted because it is decentralized and there is no single operator. However, once one service is taken down, fragments of the same service reappear in dozens of other anonymous communication channels, under reams of new brands, and get promoted in general consumer communities such as Facebook and other online communities and forums by word-of-mouth by new operators. Some of the operators have even shifted to a subscription-based service where they get paid a monthly fee to provide their customers with step-by-step dispute templates, merchant-specific refund guides, and real-time updates on changes to the cardholders’ dispute policies by the respective card networks. In short, for the compliance and fraud departments, the threat is not a static attack pattern, but a dynamic service that monitors and responds to the same industry-wide methods to combat it.
8- Internal Controls and Documentation
The best method to combat a Friendly Fraud chargeback is through an operational methodology as opposed to a technological method. For the most part, merchants and financial institutions alike that win their chargeback disputes follow similar core practices that are outlined below:
Delivery confirmation discipline is key, so for every shipment, obtain verifiable proof of delivery (e.g. signature confirmation for high-value shipments, integrate carrier tracking with customer info in your database, and keep a record of delivery time and method for all shipments).
IP and device logging at the point of purchase to create a permanent record tying a transaction to a device and IP address at the time of purchase (information that the new programs by Visa and Mastercard are designed to pull).
Interaction logs with customers who file a chargeback for friendly fraud before and after they contact a merchant’s customer service department can greatly help to confirm a merchant has made good faith efforts to solve problems with a customer before a chargeback is filed. In many cases this can be enough to have a chargeback denied as being not in good faith.
9- Regulatory Position
Chargebacks, particularly friendly fraud, are considered to fall into a gray area in terms of legality. When a consumer files a false chargeback, they are stating that a transaction was unauthorized, when in fact it was not. This type of activity could be considered wire fraud or mail fraud depending on the circumstances and the location of the parties involved. Most countries have laws that are similar to those found in the U.S. regarding these types of fraud. However, individual instances of such activity are rarely prosecuted due to the low value of the transaction.
However, merchants have found that sending legal threat letters to documented serial fraudsters, those who are filing chargebacks on merchants across the internet, is highly effective at securing their compliance or obtaining a release of liability and cessation of further false chargebacks after having been threatened with civil or even criminal action, even when automated systems of prevention have failed. Here, the letters of legal counsel are typically sufficient to get the desired result, without having to file a lawsuit. Again, the fact that the fraudulent transactions are of low value, typically in the hundred of dollars, which would not be worth the FBI’s time to investigate and prosecute as a matter of criminal fraud, does not mean that there are not viable candidates for civil or even criminal action.
