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friendly fraud

What is Friendly Fraud?

Just about everyone has been the victim of fraud or known someone who has been a victim at some point in their lives. It can be devastating, but most financial institutions have safeguards in place when it does happen. The same thing can’t always be said about friendly fraud. Friendly fraud is a case of fraud in which the “victim” had prior knowledge of a transaction on their account and somehow benefits from it. In simpler terms, it occurs when someone files a chargeback after a legitimate purchase has been made. If all goes according to the fraudster’s plan, they receive a refund for the transaction. Meanwhile, whatever was purchased in the allegedly fraudulent transaction is kept for free.

This kind of fraud can be notoriously difficult to prove. When someone files for a chargeback, they need to convince their financial institution that an unauthorized transaction did indeed take place. Thanks to Consumer Protection Regulations and the fact that no physical card needs to be used for eCommerce transactions, financial institutions are often forced to take customers at their word and issue a refund. To make matters even more confusing, friendly fraud is often committed by accident. Some people claim that there was an unauthorized charge on their card only to find that their children purchased something without their knowledge, while others might simply forget that a transaction was made at all. As innocent as these mistakes often are, they can still defraud financial institutions of thousands of dollars and make it easier for actual scammers to get away with fraud.

friendly fraud

The Consequences

At first, it only seems like the real victim in these fraud cases is the financial institution who has to issue a refund, but friendly fraud can do more damage than that. First of all, the fraud generally occurs weeks or even months after the transaction takes place. There is no way to know exactly what happened by that point, which makes things even easier for the scammer to get away with their money. Second of all, the merchant who made the sale in the first place often has to pay for what happened. They end up ostensibly providing a good or service for free, and they might lose money to process the payments for the chargeback. This might not hurt a major franchise too badly, but it can all but cripple a small business if they have to pay too many fees.

Fortunately, financial institutions such as Ethoca are doing what they can to prevent cases of friendly fraud from causing too much damage. This includes communicating with businesses in real time when an incident takes place and gathering as much information as possible when a chargeback claim is made. Incidents still happen, but companies and financial institutions are well aware of what is going on and can put a stop to at least some of them by being diligent when working with customers.

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