What is "friendly fraud" and how is it dealt with? (Cases where cardholders dispute legitimate transactions)

[Student]

Friendly fraud in the context of carding is a specific type of fraud that stands apart from classic carding, which is associated with the use of stolen credit or debit card data. For educational purposes, we will examine this phenomenon in detail: what is friendly fraud, how is it related to carding, its consequences, methods of combating and preventive measures, as well as examples from real practice.

What is friendly fraud?​

Friendly fraud is when a cardholder (or someone with access to the card with their permission) initiates a dispute (chargeback) over a legitimate transaction made by them or with their permission, in order to obtain a refund without paying for the goods or services. This may be intentional abuse or the result of an error or misunderstanding.

Unlike carding, which is fraud that involves using stolen card details to make unauthorized transactions, friendly fraud assumes that the transaction was originally authorized by the legitimate cardholder. However, after the purchase is made, the cardholder disputes it with the bank, claiming that the transaction was unauthorized, the goods were not received, the service was not provided, or the quality was not as expected.

Connection with carding​

Although friendly fraud and classic carding are different phenomena, they intersect in the context of financial losses for businesses and the use of the chargeback system. Here are the key points of intersection:

1. Abuse of the chargeback system:
   • In carding, fraudsters use stolen card details to make purchases, and then the victim (the cardholder) initiates a chargeback because the transaction was unauthorized.
   • In friendly fraud, the cardholder (or their trusted representative) initiates a chargeback, despite the fact that the transaction was made with their consent. This creates similar financial risks for the business, as in both cases the merchant can lose money and goods.
2. Difficulty of distinction:
   • For businesses and banks, it can be difficult to distinguish friendly fraud from real carding. For example, a customer may claim that the card was stolen, when in fact they made the purchase themselves.
3. Exploiting payment system vulnerabilities:
   • As with carding, friendly fraudsters exploit weaknesses in payment processing processes, such as insufficient authentication or difficulty in proving delivery/use of the service.
4. Digital goods:
   • In both cases, digital goods (games, subscriptions, software) are particularly vulnerable because they are difficult to track once "delivered." Fraudsters (both carders and friendly fraudsters) can claim that they never received the goods, even if they used them.

Types of Friendly Fraud​

To understand the context, it is important to classify cases of friendly fraud, as they can be either intentional or accidental:

1. Intentional fraud:
   • Disputing authorized transactions: A customer purchases an item (such as an expensive electronic item), receives it, and then files a chargeback claiming they did not make the purchase.
   • Family fraud: A parent allows a child to use a card to make a purchase (such as at a game) and then disputes the transactions, claiming they were unauthorized.
   • "Pay first, dispute later": A customer orders a service (e.g. a subscription), uses it, and then demands a refund, claiming the service was not provided.
2. Accidental/Mistaken Fraud:
   • Forgetfulness: The customer has forgotten about a subscription or recurring payment and is disputing the charge, believing it was an error.
   • Misunderstanding of terms: The customer does not understand how the subscription works or expects a different product/service, which leads to a dispute.
   • Mistaken Identity: The customer does not recognize the transaction on the statement due to the unclear name of the merchant.
3. Mixed cases:
   • For example, a customer may genuinely believe that an item was not delivered when in fact it was sent but was lost in transit. This may be perceived as friendly fraud if the customer does not attempt to resolve the issue directly with the seller.

Consequences of Friendly Fraud​

Friendly fraud creates significant problems for businesses, payment systems, and even customers themselves. Here are the main consequences:

1. For business:
   • Financial Loss: The seller loses money for the product/service and also pays chargeback fees (usually $10-50 per incident).
   • Loss of goods: In the case of physical goods, the seller loses not only the money but also the goods themselves, since they have already been delivered to the customer.
   • Reputational risks: Frequent chargebacks can damage the merchant's reputation with payment systems, leading to increased fees or acquiring restrictions.
   • Administrative costs: Processing chargebacks requires time and resources to prepare documents and communicate with the bank.
2. For payment systems and banks:
   • The increase in the number of chargebacks creates a burden on banks and payment systems (Visa, Mastercard), which are forced to deal with disputes.
   • A high level of chargebacks may indicate security or service quality issues with the merchant.
3. For clients:
   • Conscientious customers may face stricter purchasing rules (for example, mandatory two-factor authentication).
   • Abuse of chargebacks may result in card blocking or restricted access to services.

Methods of combating friendly fraud​

Combating friendly fraud requires a comprehensive approach that includes technological, organizational and legal measures. Here is a detailed description of the methods:

1. Transparency of transactions​

• Clear description of products/services: On your website or app, include full terms of purchase, shipping times, return policy, and subscription details (e.g., "Monthly subscription for $9.99, auto-renews").
• Merchant name on statement: Make sure the customer's bank statement displays a recognizable company name, not an acquiring code. For example, instead of "XYZ123PAY," use "XYZ Store."
• Purchase Confirmations: Send customers emails or notifications with order details, including date, amount, product description, and contact information.

2. Strengthening authentication​

• 3D-Secure (EMV 3DS): Use Verified by Visa, Mastercard SecureCode or their modern versions (3DS 2.0), which require additional verification of the customer's identity (for example, entering a code from an SMS or biometric authentication).
• Two-factor authentication: For online purchases or subscriptions, request verification via email, SMS or app.
• CVV and Address Verification (AVS): Verify the card's CVV code and that the delivery address matches the cardholder's details.

3. Documenting transactions​

• Activity logging: For digital goods, keep evidence of usage (e.g. app login logs, IP addresses, download times).
• Proof of Delivery: For physical items, use tracking and require a signature upon receipt.
• Contracts and Consents: Keep digital copies of customer-signed user agreements or records of consent to automatic charges.

4. Effective customer support​

• Customer support availability: Provide 24/7 support via chat, phone or email so customers can resolve issues directly rather than through the bank.
• Payment Reminders: Send notifications about upcoming subscription charges or when a trial period ends.
• Customer Education: Provide FAQs or instructions on your site on how to cancel a subscription or request a refund.

5. Analysis and monitoring​

• Anti-fraud systems: Use machine learning tools to analyze transactions and identify suspicious patterns (e.g. frequent chargebacks from one client).
• Chargeback Monitoring: Track your chargeback ratio and identify customers abusing the system.
• Blacklists: Maintain a database of customers who commit friendly fraud and restrict their access to purchases (within the law).

6. Working with banks and payment systems​

• Disputing chargebacks: Provide banks with full documentation (proof of delivery, customer consent, activity logs) to protect against unjustified refunds.
• Seller Protection Programs: Participate in Visa Claims Resolution (VCR) or Mastercard Dispute Resolution programs, which make the dispute process easier.
• Partner with acquirers: Work with payment providers that offer tools to minimize chargebacks.

7. Return Policy​

• Returns flexibility: Create a simple and transparent returns policy so that customers choose to come to you instead of their bank.
• Partial Refunds: In some cases, offer a partial refund to resolve the dispute without a chargeback.
• Refund restrictions: Specify in the terms that abuse of chargebacks may result in account suspension.

8. Legal measures​

• Customer Agreements: Include clauses in your user agreement prohibiting abuse of chargebacks and specifying consequences (e.g. taking the case to court).
• Contacting Law Enforcement: In cases of obvious fraud (e.g. multiple disputes of large transactions), file a complaint with evidence.
• Arbitration: For major disputes, use arbitration procedures where available under law.

9. Technological solutions​

• AI and ML: Use AI systems to identify fraudulent patterns such as repeated chargebacks from the same customer.
• Tokenization: Replace card data with tokens to improve transaction security.
• Geolocation and behavioral analysis: Check whether a customer's IP address matches their location and purchase history.

Examples from practice​

1. The case of digital goods:
   • A customer buys a subscription to a streaming platform, uses it for a month, and then initiates a chargeback, claiming they never subscribed. The merchant provides activity logs (movie viewing time, IP address) to challenge the chargeback. Resolution: The bank rejects the chargeback because there is evidence of service usage.
2. Case with physical goods:
   • A customer orders a smartphone, receives it with proof of delivery, but a week later files a chargeback, claiming the item was not delivered. The seller provides a tracking number and the customer's signature upon receipt. Decision: chargeback rejected.
3. Family Fraud:
   • A child uses a parent's card to make purchases in a mobile game (e.g., in-game currency). The parent disputes the transactions, claiming they are unauthorized. The merchant provides the IP address and device used to make the purchases, as well as the account activity history. Solution: The bank may reject the chargeback, but the merchant offers a partial refund to maintain customer loyalty.

Statistics and trends​

• Scale of the problem: According to Visa and Mastercard (2023–2025), friendly fraud accounts for 60–80% of all e-commerce chargebacks, particularly in the digital goods, subscriptions, and retail industries.
• Growth during and after the pandemic: With the growth of online commerce during the COVID-19 pandemic (2020–2022) and the rise of subscription models, friendly fraud cases have increased by 20–30% (according to Chargeback Gurus).
• Vulnerable industries: Most susceptible to friendly fraud:
  • Digital services (streaming, games, SaaS).
  • E-commerce (clothing, electronics).
  • Tourism and travel (hotel and airline ticket booking).
• Technological changes: The implementation of the EMV 3D-Secure 2.0 standard has reduced the number of successful chargebacks by 10-15% in regions where it is mandatory (e.g. Europe).

How to Minimize the Risks of Friendly Fraud?​

1. For business:
   • Invest in anti-fraud and monitoring systems.
   • Train your employees on how to handle chargebacks and customer complaints.
   • Partner with payment providers that offer protection tools (e.g. Stripe Radar, PayPal Fraud Protection).
   • Regularly analyze chargeback data to identify problematic product categories or customers.
2. For clients:
   • Check your card statements and contact the merchant before filing a chargeback.
   • Please read the terms of purchase and subscription to avoid misunderstandings.
   • Use two-factor authentication to protect your card.
3. For banks and payment systems:
   • Improve algorithms for detecting fraudulent chargebacks.
   • Educate customers on how to properly use the chargeback system.
   • Implement stricter authentication standards (e.g. PSD2 in the EU).

Conclusion​

Friendly fraud is a serious problem that, despite its "friendly" nature, causes significant damage to businesses, especially in the e-commerce and digital services sector. Unlike classic carding, it is more difficult to detect, since transactions are initially authorized. Effective combat requires a combination of transparent communication, enhanced authentication, transaction documentation, and active work with customers and banks. For educational purposes, it is important to understand that prevention and technological solutions play a key role in minimizing risks.

If you have a specific example or scenario related to friendly fraud or carding, write to me and I will analyze it in more detail!