As the e-commerce sector grows bigger and bigger, more online businesses are beginning to encounter different challenges – among which is friendly fraud. While the argument exists that not much is done to protect businesses, it’s important to examine the root cause of friendly fraud, its long term implications and how merchants, as well as customers, can insure themselves.

Friendly fraud is anything but friendly. Friendly fraud has grown in recent years with the rise of e-commerce. A customer makes a purchase online for a product or service with their credit card and then contacts their credit card issuer to dispute the charge. This type of fraud is often referred to as friendly fraud because the customer will make claims that seem believable and honest. But in actuality, if this type of fraud was occurring in a brick-and-mortar shop, it would be called theft or shoplifting.

Friendly fraud happens when a customer (an authorised cardholder) denies what appears to be legitimate deductions on their credit or debit cards. Authorised cardholders may do this for a variety of reasons which include:

  • They may have forgotten they made the purchase.
  • Someone close to them, maybe a friend or family member made the purchase and they don’t recognise the transaction.
  • They want to avoid paying for the order in question.
  • They find it difficult understanding the transaction descriptor associated with the purchase.

Some customers commit friendly fraud by mistake simply because they do not understand the difference between a return from an online merchant and a bank-issued refund – the former involves two parties (customer and merchant) and can be quickly resolved, the latter involves multiple parties (customer, merchant, payment provider and issuing bank) and could escalate to more fees, sanctions, customer blacklisting and even litigation.

Friendly fraud vs. chargeback fraud: Knowing the difference is paramount

It’s important to consider that friendly fraud doesn’t occur as a standalone entity. Here are two other forms of chargeback related disputes merchants stand to face:

True Fraud

Also known as identity theft, true fraud begins with payment acceptance from a stolen card. The fraudulent purchase is disputed by the cardholder which results in the card account being closed and a new account number and card being issued to the customer.

Friendly Fraud

While closely related to chargeback fraud, friendly fraud involves no malicious intent from the cardholder. Being forgetful, family members making unknown purchases, and misunderstandings of merchant return policies can all be at the root of friendly fraud.

Chargeback Fraud

Chargeback fraud is the fraudulent request for a return or refund in the form of a chargeback. The transaction passed fraud prevention but is disputed by the cardholder in an attempt to regain the transaction amount while retaining the product or services rendered. Most card issuers maintain zero-liability policies and because e-commerce is based on CNP (card not present) transactions, most card issuers tend to believe cardholders when they file for a chargeback and thus initiate a stressful and time-wasting chargeback process.
The flowchart below depicts the process that occurs when a cardholder files for a chargeback:

Most merchants would rather refund a customer on the spot than go through the arduous process of filing for a chargeback which is rarely won by the merchant. Online businesses see chargeback fraud as a necessary evil, giving it a tab in their budget. Based on the two most common ways of transacting business online – paying for physical goods/services and paying for virtual assets (tokens, games or apps) here are a couple of scenarios that could prompt an authorised cardholder to commit chargeback fraud.

Typical Scenarios

Paying for physical goods

 A customer visits an e-commerce store, places an order for a pair of sneakers and pays $20 via card. The store processes the order and delivers it to the customer. As soon as the delivery agent is gone, the customer contacts their bank and either claims that their card was charged for transactions they never made or that the purchase they made was never delivered and demands a refund. Typically the first reaction of the card issuer – be it a bank or otherwise would be to accept the complaint and contact the online store to refund the charged amount to the customer’s card. The online merchant is faced with losses of both their merchandise and their money as well as chargeback costs which they have to bear. Of course, the merchant could try to prove the customer actually received what they paid for but this process would be far more expensive than the initial cost of the item – $20. Thus they’re willing to overlook this and view it as part of running cost (which shouldn’t be the case).

Paying for virtual goods

A smartphone user downloads a mobile game and links their credit card to it but hasn’t made any in-game purchases yet. A friend gets a hold of the user’s phone and begins to play the game. To make the game more interesting, this person buys virtual merchandise such as coins, spells and “power-ups” – not realising that these cost real money and will be deducted from the user’s credit card. As soon as the owner of the smartphone realises what their friend has done, rather than claiming responsibility, they choose to lodge a complaint to the card issuer and request a chargeback. Just like the online store in the first scenario, the game producers have to reimburse the customer.

Possible solutions for merchants

With friendly (benign) and chargeback (malicious) fraud on the rise, it’s important that merchants take adequate steps to insulate themselves and protect their customers as well. A few ways merchants could reduce both cases of fraud include:

Clear transaction descriptors

Merchants should protect their customers by describing their transactions in ways the customer can understand when they see these transactions in bank statements or debit alerts. Descriptors that are difficult to understand may confuse customers and prompt them to initiate a refund. A good idea is using your brand or product name in the transaction descriptor as it helps customers identify where they made the transaction.

Advanced verification

Online stores that deal in both physical and virtual goods could protect themselves by further requiring an additional layer of security such as facial identification or fingerprints at the checkout page of their mobile applications. 

3D secure

Although most merchants don’t prefer it due to a reduction in conversion rates, 3D secure decreases chances of fraudulent chargebacks. Liability is also transferred when merchants use 3D Secure thus online stores are protected against careless chargebacks.

Communicate effectively with customers

When you run an online service, it’s a great idea to have customer support 24/7. Customers should be able to reach you and share whatever issues they may have. Your policies on refunds and chargebacks should also be effectively communicated on your website. Customers who file in complaints about not recognising a transaction should be contacted via a phone call, this can reduce cases of friendly fraud.

Refund policy and delivery tracking for physical purchases

Implementing a delivery tracking structure is important for merchants of physical goods. Require customers to provide proof of identification and sign on receiving delivered items. Also, have a policy on refunds and ensure you properly communicate it to your customers. If customers understand that there’s a chance they might get their money back from you, they will be less willing to initiate a chargeback – saving you potential losses in recurrent transfer fees.

How we handle chargebacks

Should a chargeback occur, a merchant may rely on their online payment provider – should they have a reliable one, to bear the brunt of its cost while investigations are going on. Flutterwave does this by acting on our chargeback policy which entails contacting the merchant via email with details of the chargeback and requiring a response within 48 hours. The merchant can respond by logging evidence that the chargeback was made in error and value was provided for the transaction. Flutterwave can then work out the details of the chargeback with the card issuer – allowing merchants to go about their usual business pending the results. A chargeback is in either one of three states – won, lost or pending. Won meaning the merchant provided sufficient evidence that the chargeback was in error and thus is absolved of all liabilities, Lost implying that the merchant has to pay the costs and fees associated with the chargeback. A chargeback could be lost due to providing insufficient evidence that it was lodged erroneously.


It’s important both merchants and customers understand the threats of an erring chargeback and its implication to the future of e-commerce. Advances in technology can certainly help but of course – that’s not a sure fix. Financial institutions should adopt more flexible approaches as this could help to curtail occurrences of friendly and chargeback fraud.

Written by Raphael Ugwu, Developer Advocate at Flutterwave