What every merchant needs to know about friendly fraud

Fueled by the pandemic, the digital economy has grown significantly in the past two years. At Visa, we are continuously listening to and learning from all members of the payments ecosystem. What we’re hearing is that while online purchases are more seamless than ever before, an opportunistic form of fraud is on the rise: first party misuse (sometimes referred to as friendly fraud, or first party fraud).

When most people think of fraud, they think of stolen account numbers or identity theft, but first party misuse, which can account for up to 75 percent of all chargebacks¹, is when a cardholder disputes a legitimate purchase that they intended with their issuer. This includes customers refuting valid purchases such as long-forgotten recurring subscriptions, or children given access to use their parent’s card to make purchases with parental approval. As none of these purchases are considered unauthorized by the cardholder, the chargebacks negatively impact merchants in both cost and time spent responding to the false claim. 

Those ramifications for merchants include losses that can be up to double the original transaction amount and increase a merchant’s chargeback ratio, which can impact their business and their bottom line.  

A recent study by SIFT found that nearly one in five consumers who have filed a chargeback dispute have committed first party fraud by submitting false claims in order to get their money back on legitimate purchases. In fact, according to the NRF, the losses from friendly fraud totals over $25 billion a year².

At Visa, our goal is to reduce all types of fraud in the ecosystem and we’re taking action to do so. To relieve the burden of these losses, starting on April 15, 2023, merchants will be able to better fight back against first party misuse with a change to our dispute program developed in partnership with clients, the Merchant Risk Council (MRC) and Merchant Advisory Group (MAG). With this change, if merchants can provide additional data or evidence to show that the disputed charge is valid, then the dispute will be invalid. 

“Reducing the impacts of first party misuse on small businesses requires industry-wide support,” says Julie Fergerson, CEO at MRC. “We stand with Visa in their commitment to ensuring the entire ecosystem is taking the right steps against inaccurate chargeback disputes and protecting merchants from bearing the weight of these costs.”

“We’ve seen first-hand how first-party fraud is a financial burden for merchants. The updates Visa is making will help improve protection for small businesses and merchants against friendly fraud,” says John Drechny, CEO of the Merchant Advisory Group.

This change will empower merchants to protect themselves against first party misuse by enabling them to submit additional evidence that a purchase was indeed legitimate and authorized by the cardholder in order to stop the dispute claim. Additional examples that can help identify that a purchase is legitimate include a customer using the same payment credential previously at the merchant, login credentials, proof of use of a product and more. 

“Friendly fraud is not always friendly, especially from a merchant’s perspective,” said Mike Lemberger, Senior Vice President of North America Risk at Visa. “At Visa, we’re evolving our disputes program using technology and insights that help level the playing field for the entire ecosystem. When we give merchants and issuers the tools to take more fraud out of the equation — everyone wins.”

Learn more about Visa Security. 

¹Mercator: Chargebacks: Increases in Credit Card Disputes Threaten Merchant Profitability, Nov 2021

²NRF: $428 Billion in Merchandise Returned in 2020