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April 25, 2022

What is Friendly Fraud or Chargeback Fraud?

When a consumer makes an online shopping purchase with their own credit card, then requests a refund or chargeback from the issuing bank after receiving the purchased goods or services.

If the refund or chargeback is approved, it will cancel the financial transaction, and the consumer receives a refund of the money they spent. When the chargeback occurs, the merchant is accountable, regardless of whatever measures they took to verify the transaction.

Physical products

A merchant that sells online physical products cannot fully protect themselves. Because the only way to have complete protection is to take an imprint of the card, along with photo ID.

That signature, in addition to information gathered online, can help in the resolution of chargeback disputes but contractually is no guarantee.

The merchant can also request the card security code on the credit card as extra protection when in a “Card absent environment” or “Card Not Present” (CNP) chargebacks. These are the three-digit codes on the backs of Visa, MasterCard, and Discover cards, and the four-digit code on the front of American Express cards.

Digital Transaction

Attempts by the merchant to prove that the consumer received the purchased goods or services are difficult. Here, the use of card security codes can show that the cardholder (or, in the case of the three-digit security codes written on the backs of U.S credit cards, someone with physical possession of the card or at least knowledge of the number and the code) was present, but even the entry of a security code at purchase does not by itself prove that delivery was made, especially for online or via-telephone purchases where shipping occurs after finalization of the contract.

Proof of delivery is often difficult, and when it cannot be provided, the cardholder gets the product without paying for it.

One method of combating friendly fraud for a service is to create a feature in the product that checks in with the merchant’s database. If a chargeback is issued, the merchant can tell the product to suspend service.

This tactic will also work for digital subscription services or any other online product that requires updates or logins. The merchant will usually still be charged a fee for incurring a chargeback, so this is not a complete solution.

Cost to Merchants

A 2016 study by LexisNexis stated that chargeback fraud costs merchants $2.40 for every $1 lost. This is because of product-loss, banking fines, penalties and administrative costs.

“2016 LexisNexis® True Cost of Fraud 7 SM Study”(PDF). LexisNexis. Retrieved 2016-05-01. 


Chargeback fraud costs merchants $2.40 for every $1 lost

Due to product-loss, banking fines, penalties and administrative costs.


A 2018 study by the Aite Group on charge back costs, stated that U.S. CNP fraud losses for 2017 were $4 billion and estimated that by 2020 they would rise to $6.4 billion.

Conroy, Julie (November 15, 2018). “The Global Chargeback Landscape” Aite Group LLC.

Prevention Methods

The increase of online payment methods, including mobile apps, and the increasing sophistication of the fraud, including bots, have made the task of detecting and preventing chargeback fraud, particularly online chargeback fraud, more complex.

According to a 2018 Gartner report on online fraud, retailers are increasingly turning to machine-learning based (or AI) fraud prevention system to make rapid, effective risk decisions.

Care, Jonathan; Phillips, Tricia (January 31, 2018). “Market Guide for Online Fraud Detection” Gartner, LLC. Retrieved 3 January 2019.

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