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. Essentially, the cardholder requests an illegitimate refund or chargeback that they are not actually entitled to (when they believe they are).
The ‘friendly’ part of “friendly fraud” comes from the fact that this type of fraud is often unintentional. Accidental friendly fraud can happen, for instance, if a person doesn’t recognize a charge on their payment card statement, a family member uses a person’s payment card to purchase something without their knowledge, or an error is made on the merchant’s end.
Technically, any intentional version of friendly fraud would amount to another form of fraud, such as chargeback fraud or refund fraud; whereas any legitimate chargeback or refund claim wouldn’t constitute fraud at all. When it comes to friendly fraud, the person committing it may not even realize what they are doing is taking advantage of the merchant or that it’s costing them money, goods, or services.
Friendly Fraud vs. Chargeback Fraud
Friendly fraud is a type of chargeback fraud or refund abuse committed by the actual cardholder—because of this, the term ‘friendly fraud’ is often used synonymously with chargeback fraud. There is a difference between them, though.
True chargeback fraud is a case of first-party fraud where the cardholder intentionally exploits the chargeback system by claiming a chargeback they know they are not legitimately entitled to.
Friendly fraud is a case of first-party fraud where the cardholder unintentionally makes a chargeback or refund claim that they don’t know is illegitimate. It still counts as ‘fraud’ though, because the claim itself is still illegitimate, coming at the cost of the merchant, financial institution facilitating the transaction, or both.
Friendly fraud occurs when consumers don’t understand the nuances of the refund policy, and are requesting a refund they aren’t actually entitled to (based on the condition of the item, for example). It could also be because of an error on the merchant’s end, at least in part. It could even simply be due to customer confusion—where the customer doesn’t remember the purchase or thinks it was supposed to be for a different price.
Friendly fraud is commonly referred to as chargeback fraud, because it commonly involves an illegitimate chargeback request on behalf of the cardholder. However, it can also be related to refund abuses where the customer isn’t aware that they are attempting to gain something they aren’t legitimately entitled to—such as a refund, a replacement item, or a lower price.
Is Friendly Fraud Illegal?
As a type of chargeback fraud and refund abuse, friendly fraud is counted by the laws of some jurisdictions as a form of payment card fraud or wire fraud. So can you go to jail for friendly fraud? It’s technically possible, but not very likely. There are two major reasons why.
The first is that it’s difficult to prove intent with friendly fraud. As mentioned, most friendly fraud chargebacks are merely the result of misunderstandings or honest mistakes by customers or merchants. Rarely does a customer commit friendly fraud to defraud a merchant intentionally. With friendly fraud, it’s almost impossible to prove their intent to defraud a merchant or organization unless there are repeated attempts to exploit the system—and even then, the consumer may not realize what they are doing amounts to fraud.
The second reason is that a single customer usually doesn’t commit friendly fraud often enough, or for high enough purchase values, to justify a merchant spending the time and money necessary to take legal action against them. In some cases, however, if the same customer repeatedly commits friendly fraud, leading to significant inventory and sale losses for a merchant, the merchant may file a civil lawsuit against that customer—or even a criminal one, in extremely serious cases.
Unfortunately for merchants and financial institutions, this question of intent makes it exceedingly challenging to identify friendly fraud from legitimate chargeback fraud or refund fraud attempts—and even harder to prove in a court of law.
There are other friendly fraud consequences, though. A merchant may stop allowing a repeat friendly fraudster to return items, or stop doing business with them altogether. Financial institutions may also penalize frequent friendly fraudsters by downgrading their credit scores, or by not allowing them to bank with that institution anymore.
