Prevent Friendly Fraud Chargebacks: 8 Best Practices for Merchants

What is a friendly fraud chargeback? 

A friendly fraud chargeback is when a cardholder requests a refund from their bank or credit card provider, claiming a purchase they made using their card was fraudulent. Their goal is to keep the purchase and have their money refunded. 

Because they use their legitimate credit card and identity, a friendly fraud chargeback is hard to detect and prevent. 

It’s worth noting that a friendly fraud chargeback isn’t the only type of friendly fraud. It’s just one of the many methods fraudsters use to defraud a business using their legitimate information. 

What’s the difference between a true fraud chargeback and a friendly fraud chargeback?

In a true fraud chargeback, a fraudster steals the victim’s credit card information or hijacks an existing account to make a purchase. In a friendly fraud chargeback, the merchant is the sole victim. 

In true fraud, the crime happened before the chargeback

With true fraud, a bad actor steals a victim’s credit card details to make a purchase. The fraud occurs at the moment of purchase, and the chargeback is the legitimate step the rightful cardholder takes to reverse the theft. 

A criminal might place an order with an online grocery merchant using a stolen card, for example. If the credit card owner spots an unfamiliar transaction, they can request a chargeback from their bank. This is legitimate, and what the chargeback process was designed for. 

In friendly fraud, the chargeback is the fraud event

In friendly fraud, the same chargeback mechanism is used—only this time, it’s used to defraud the merchant. First, the fraudster makes a purchase using their own credit card. The fraud doesn’t occur until they contact their bank with a false story about a purchase made with stolen credit card details. 

Unfortunately for merchants, this type of fraud is widespread. The schemes, incidents and even the definition of friendly fraud or fist-party fraud has been increase in recent years. Signifyd saw an 8% year-over-year increase in such attempts early last year, for instance. 

What are common triggers for friendly fraud chargebacks?

The fraud plays out the same way in every instance, but stems from multiple triggers: 

• Buyer’s remorse: If a customer regrets making a purchase but doesn’t want to return it (or is unable to), they bypass the merchant and request a chargeback from the bank. 
• Intentional “liar-buyer”:  If someone has had a seamless chargeback experience in the past, they may exploit this process down the line to acquire something they want without having to pay for it.. 
• Criminal intent: Some professional fraud rings specifically target friendly fraud chargebacks, sharing strategies and information on how to exploit merchant weaknesses. 

Experienced fraudsters are well aware of the challenges merchants face in differentiating between legitimate claims by rightful cardholders and friendly fraud. They also know the reputational harm merchants suffer if they accidentally challenge a genuine chargeback, which provides added incentive to  intentionally exploit these realities. 

In other instances, a disgruntled customer may take a dispute directly to their credit card provider, or an opportunistic, low-level fraudster may encounter loopholes in the system and continue exploiting them. 

How does a friendly fraud chargeback work? 

In first-party chargeback fraud, the fraudster bypasses the merchant and goes straight to the bank to falsely claim a refund. It plays out like this: 

1. A cardholder makes a legitimate purchase using their own credit card.
2. Without contacting the merchant, the cardholder goes directly to their credit card company and requests a chargeback, claiming the product never arrived or that it was damaged, for instance. They keep or resell the product. 
3. The credit card company cancels the charge, and the money is refunded automatically from the merchant. 
4. Usually, the merchant is notified only after the chargeback is initiated. 

Here’s an example: A cardholder purchases a dress for an event. When the dress is damaged, another guest tells her he’s successfully secured chargebacks shopping with the same online retailer. 

Knowing the dress is unreturnable, the customer calls her credit card company and files a chargeback claiming the dress was damaged when it arrived. 

In the age of agentic commerce and generative AI, the potential for friendly fraud claims is even greater than it was even a year or two ago. As cases in which bots actually influence or even complete the purchase increase, so does the ambiguity around what exactly the human customer expected the AI agent to buy and for what price and under what fulfillment circumstances. Beyond that, merchants are seeing an increase in damage claims backed by photos that have been doctored with gen AI tools.

Why the dispute process favors cardholders, not merchants

From an issuing bank’s perspective, the credit card holder is the customer, not the merchant. The bank is incentivised to take the customer at their word. They operate under the Fair Billing Act, which was created for consumer protection and places the burden of proof on the merchant. 

This makes contesting chargebacks expensive and time-consuming. Merchants must provide evidence such as proof of product delivery, transaction documentation, return policies, customer authentication records and evidence of prior chargebacks. Not to mention, they risk significant reputational damage if it turns out the chargeback was, in fact, legitimate. 

Retailers can seek professional help to alleviate the drain on finances and time that chargebacks cause. Signifyd, for instance, offers chargeback recovery for merchants with fully automated representment, freeing up fraud and risk professionals to focus on higher priorities. 

How to prevent friendly fraud chargebacks

The most effective way to prevent chargebacks is to stop them before the order is processed. Security checks designed to catch true fraud, like CVV verification or two-step authentication, aren’t enough when the fraudster is also the legitimate credit card holder. 

It’s an unfortunate reality, but some chargebacks are inevitable. That said, there are steps merchants can take to significantly reduce them:  

Strengthen front-end fraud and abuse checks

Front-end fraud and abuse checks are designed to stop chargeback fraud before it happens. Every front-end abuse protection system should incorporate the following: 

• Identity and shopping patterns: Provide insights into the identity and intent behind an order while identifying suspicious patterns in shopping behavior. 
• Prior chargeback history: Determines the likelihood of a purchase leading to chargeback fraud — a customer with a high chargeback rate is more likely to claim another chargeback. 
• Address verification: This is key evidence a merchant can use in a chargeback dispute—they may be able to prove a purchase was made at a customer’s address.

Stay updated on fraud trends 

Fraudsters’ methods are constantly evolving and becoming more sophisticated. Merchants stay on top of the latest scams and best fraud prevention practices through regular communication with their payment processors.

Provide clear product descriptions

Clear, accurate product descriptions make it less likely a customer returns a product because they didn’t understand what they were buying (also known as SNAD, or Significantly Not As Described). Equally, properly informed customers are less likely to claim buyer’s remorse.

On the other hand, people who feel misled are more likely to bypass a merchant, and resolve the issue with a trusted credit card provider. 

Order confirmation and delivery tracking

Every purchase should trigger an automatic email with the customer order number, product description, shipping information, and tracking details. Keeping customers informed of delivery timelines can ease anxiety and frustration and avoid false INR claims filed out of frustration in the face of the unknown. 

Ensure that merchant’s billing description in recognizable

Accidental friendly fraud can occur when an unfamiliar billing description appears on a customer’s credit card statement. Merchants can prevent this with more accurate and easily recognizable transaction descriptions, referencing both the product and the business name. 

Improve post-purchase communications 

Merchants should take extra steps to keep their customers informed throughout the customer journey. This includes prompt order confirmations, shipping updates, and delivery notifications, and a post-delivery email with product return instructions. 

Offer reliable customer support

If a customer can easily access reliable customer support to resolve an issue (if a product didn’t look as they expected, for example, or arrived late), a dispute is less likely to escalate to a chargeback. Merchants should remove barriers to successful dispute resolution with an accessible customer support number, a clear ecommerce return policy and helpful support staff. 

Make exchanges and refunds easier for trusted customers

If a customer finds the refund process too complicated or time-intensive, they’re more likely to initiate a chargeback. Merchants can minimize this temptation by streamlining the return process for legitimate customers.

Additionally, customers who receive an instant refund upon scanning their return package for its return trip are 23% more likely to make an additional purchase from that merchant within 30 days, according to Signifyd data. 

Data-driven systems are the key to managing ecommerce returns

While there are steps merchants can take to reduce their rate of friendly fraud chargebacks, manual review techniques and updating front-end security checks only go so far. Monitoring customer data in real-time and performing additional checks when red flags arise can be effective, but without an automated, machine learning system, it’s resource-intensive and time-consuming. 

Signifyd is an ecommerce protection partner offering complete chargeback protection and chargeback recovery. Signifyd offers its customers automatic representment, meaning their teams don’t need to manually compile chargeback evidence. On average, merchants that partner with Signifyd see a 50% higher chargeback win rate.

Learn how Cuts partnered with Signifyd to eliminate chargebacks and confidently expand their business to new, international markets.