Friendly Fraud Vs Criminal Fraud- 101

Backspace Tech
5 min readJun 2, 2023

In recent years, with the rise of online transactions, fraud has also grown astronomically. There is a good chance that we have either seen fraudulent activity or have been the victim of fraud at some point. And the next logical course of action when that happens is to lodge a complaint with the issuer or ombudsman who can handle this incident. This incident is also otherwise known as Criminal Fraud.

Yet, fraud is not only hackers stealing an individual’s information, and there is also another segment called the Friendly Fraud. Both are equally detrimental to the concerned parties, and it is a quite surprising fact that the category of friendly fraud has overtaken criminal fraud in recent years.

Now, let us know about criminal fraud and friendly fraud in the world of chargebacks in detail.

Criminal fraud:

Criminal fraud aka true fraud is one of the primary reasons that chargeback was created. The chargeback was created under the Fair Credit Billing Act, 1974, (Federal Law imposed by the US to protect consumers from unfair credit billing practices during the credit card boom). This chargeback type is highly justifiable from a cardholder’s perspective as they were a victim and usually the verdict is on their side. Criminal fraud occurs when a fraudster steals the card and makes an illegitimate purchase out of it. Criminal activities that can lead to chargeback request includes:

  • When a new forged card is generated with stolen card information
  • When the stolen card information is cloned onto a fake card
  • When the stolen account information is used for making a card not present transaction.

How to prevent criminal fraud?

As fraudsters evolve everyday with new techniques of forgery, preventing it can be a complex task. As directed by card networks, issuer and acquirer have a stringent rules and regulations to cut down the malicious activity right at the beginning. Some of the measures to minimize the criminal fraud occurrence are:

  • To protect the cardholder’s data, the issuer must guide the cardholder to set strong passwords/pins for performing transactions. Meanwhile, the cardholder should be diligent in securing their sensitive information.
  • The issuer should educate the cardholder about the latest fraud trends at frequent intervals and provide the cardholder with proper avenues for fraud reporting.

Friendly Fraud:

Friendly fraud aka chargeback fraud occurs when a cardholder unintentionally or purposely initiates a chargeback for a legitimate transaction. Cardholders are legally entitled to file a charge only,

  • When they have been the victim of true fraud, or
  • When the merchant has been uncooperative or unresponsive, and they have not received the good or service they paid for.

Even when the above instances did not happen, sometimes the cardholder makes assertions that look genuine and believable to get a refund (so it is referred to as “friendly fraud”). In brief, whenever a cardholder demands a chargeback without a valid cause to do so, then that cardholder is engaging in friendly fraud.

A table listing the difference between friendly and criminal fraud
Difference between friendly and criminal fraud

Friendly Fraud Types and its occurrences:

Accidental friendly fraud:

Friendly fraud can happen inadvertently through ignorance, or by a fair error or when a cardholder misunderstood the charge on their statement. The common source of friendly fraud chargeback is family fraud. This happens when the family member of the cardholder, for example, a child has access to the cardholder’s payment information and uses it to make a transaction without the cardholder’s knowledge.

Circumstances that may result in unintentional friendly fraud chargebacks are:

When the cardholder,

  • Doesn’t recognize the merchant’s billing description because of a confusion in merchant’s name.
  • Doesn’t understand the distinction between chargebacks and refunds.
  • Unaware of the payment made by their child for in-app purchases.
  • Demanded a refund, but it took longer than anticipated or merchant denied the refund/was unresponsive.
  • Forgot about a purchase and its subsequent recurring payment.

In the above circumstances, cardholders did not intend to hurt the merchant with the chargebacks as their primary intent was to get their money back.

Intentional Chargeback Abuse:

Contrastingly, there are cardholders who purposely misuse chargebacks for their own benefit. The most outright example in practice is “cyber shoplifting”, this occurs when cardholder purchases a product/service with the intent of filing a chargeback later. This is not the only incident that falls under the intentional chargeback fraud. Cardholders might submit false chargebacks when:

  • They wanted to return the product, but the time limit for return has expired.
  • They want to deceive the merchant by initiating a double refund situation.
  • When the merchant has a clear no-refund policy and the cardholder doesn’t want to bear the charge, they initiate a chargeback.

How to minimize friendly fraud?

Detecting a friendly fraud in the initial stage is difficult, as there are no right tools available. The only proactive measures that can be followed to minimize the incidents of friendly fraud are where:

  • The issuer must educate their cardholder about frauds and let them know in what situations they can raise a chargeback.
  • The issuer must apprise the cardholder of the chargeback raising limits.
  • The issuer should analyse the cardholder’s chargeback behavioural pattern and should check whether they have a history of friendly fraud and must take appropriate measures to curb that behavior.

While all this sounds good and is a perfect textbook approach to lower instances of friendly fraud, why not see how we can help?

Unified Dispute Management aka UDM helps and equips both issuers and acquirers to identify, respond or stop friendly fraud instances. Let’s see the both perspectives of the issuer and acquirer:

Issuer:

As UDM rests within the issuer’s chargeback system, it can help issuers analyze behavioral data patterns of the cardholder to identify if they have a penchant for friendly fraud. And if yes, the issuer can take steps to stop this behavior and not accept the cardholder’s chargeback request.Likewise in the case of criminal fraud, UDM will itself file the chargeback on behalf of the cardholder with the right reason code and trigger the chargeback cycle.

Acquirer:

UDM helps in fighting the chargeback by adhering to the guidelines of Compelling Evidence 3.0 wherein the cardholder’s behavioral pattern with the merchant is captured. Furthermore, it becomes easier for the acquirer to help their merchant win the chargeback as UDM will send notifications about the type of documents required for the representment package.

Interesting right?

Then Get in touch with us today to know more about UDM and how it can help regulate, tailor and modernize chargeback process and responses.

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Backspace Tech

Backspace Tech offers Fintech-as-a-Service to automate,simplify, and disrupt the payment industry by handling chargeback requests through a plug-and-play model.