Dishonest consumers are upping their fraud game as “friendly fraud” becomes the No. 1 problem in credit card disputes, but tech providers and merchants alike are upping their ability to fight through data and AI. 

Friendly fraud and chargeback fees cost businesses more than $117 billion in 2023, according to a PayPal report.

Friendly fraud, sometimes called “family fraud” or “first-party misuse” (FPM), refers to a cardholder identifying a purchase on their transaction statement as fraudulent although the purchase was made by another person in their household, according to Mastercard.  

Friendly fraud started as an unintentional purchase on a cardholder’s behalf, but now is becoming a fraudulent practice, Mike Lemberger, senior vice president and chief risk officer at Visa, told Bank Automation News. 

To fight FPM, merchants are combining manual and digital screening tactics to monitor transactions, according to the 2024 Global eCommerce Payments and Fraud Report by the Merchant Risk Council (MRC), Visa Acceptance Solutions and software company Verifi. The report surveyed 1,100 merchants, including small businesses and mid-market and enterprise merchants. 

In fact, more than half of merchants reported using technology to signal fraud during purchase and payments stages, according to the report. 

Small business losses

According to the 2024 Global eCommerce Payments and Fraud Report, more than 60% of merchants experienced an increase in first-party misuse during the past year.  

The report also found: 

• First-party misuse accounts for 20% of all disputes; 

• The average cost to resolve a single FPM dispute is $74; and 

• Thirty-one percent of merchants cited an increase in FPM of 25% or more. 

Friendly fraud on the rise

So, why is FPM growing?  

According to the 2024 Global eCommerce Payments and Fraud report, the uptick is due to: 

• An increase in e-commerce; 

• Inflation; 

• New payment solution providers; 

• Changes in cardholder protections; and 

• New sales channels. 

In today’s digital world, friendly fraud started as more of a “glitch in the technology,” Lemberger said. For example, card-on-file transactions picked up so accidental Amazon purchases became more common. 

“We’re dealing with all of that stuff sitting inside the network as we’ve gotten more digitized,” he said. 

To combat charges from card on file, Visa is working to tokenize cards to ensure that transactions are authorized, Lemberger said.  

Innocent chargebacks

Some FPM is somewhat innocent: For example, consumers dispute charges they believe they did not make, Guy Harris, chairman of the board at chargeback fintech Chargebacks911, told BAN.

This type of unrecognized transaction is the most benign kind of dispute, and occurs when the descriptor for a charge on a statement is unclear to the consumer, Lemberger said. 

Making more information — like a stronger descriptor — available earlier in the transaction would decrease the number of disputes, Harris said. In such a case, it’s a transactional interaction that needs to be sorted out rather than a chargeback issue. 

Visa is working to clean up its transaction data to ensure clear descriptions and decrease such disputes, Lemberger said. 

Bad actors 

On the other hand, malicious actors increasingly are taking advantage of the chargeback system, Lemberger said. 

For example, Visa’s “Zero-Liability Policy” states that if a Visa card is used for any unauthorized transaction, the cardholder is not held liable, he said, noting that fraudsters know this rule and dispute all their charges. 

Then there are the consumers who fall somewhere between the fraudsters and the innocents; they use the chargeback system to get money back for a subscription they forgot to cancel, or for items they have bought after missing a return window, Lemberger said. 

Whichever category the FPM falls into, merchants are left without cash they had been counting on receiving, Lemberger said. 

Authorized vs. unauthorized transactions

To combat the fraud, merchants and card issuers must determine early on whether a transaction is legitimate, Lemberger said. This is where automation and compelling evidence come in.  

According to the 2024 Global eCommerce Payments and Fraud report, compelling evidence includes: 

• Tracking consumer IP addresses; 

• Identifying user logins; 

• Tracking delivery and shipping addresses; and 

• Checking identification. 

When it comes to compelling evidence, the more data a merchant or issuer has, the easier it is to make a decision about the need for a chargeback, Lemberger said. Using bank data, merchants, third-party vendors and card companies can track repeat offenders and stop disputes early, he said. 

Combatting chargebacks with tech

With FPM on the rise, tech providers are entering the market to identify the issues and innovate to help combat the fraud that is eating away at the business economy.    

Automated chargeback dispute platform Justt, for one, aims to stop fraud before it happens, ahead of chargeback, co-founder and Chief Risk Officer Roenen Ben-Ami told BAN. Justt has removed the manual process of recovering a chargeback and instead uses technology, including AI, to recover more money for merchants. 

“We’re able to pull automatically the chargeback data of that specific merchant from their payment processor into our system,” he said.  

Then, third-party data is pulled and a tailored automated response is formed with all the needed compelling evidence included to dispute a chargeback, he said.

“We’re able to not only tailor our response for a specific merchant in their end-user flow, but for each specific chargeback,” Ben-Ami said.  

Before working with Justt, clients said “we have humans [doing these chargeback recovery responses] they could tailor it more than you can,” Ben-Ami said. “And then they saw, once they started working with us, that we can tailor it to a higher degree than the human can.” 

This allows Justt clients, like Best Buy, to take on more cases with top quality evidence. For example, one month with human intervention could review 1,000 cases but the next month, with Justt, they could get to 10,000 cases, he said. 

With Justt, it’s about identifying weak spots and improving the win rate over time, he said. One client, which was not named, started at a 12% win rate on chargebacks; now they have a 40% win rate to date. 

Chargebacks911 also automates the dispute process, as does Visa’s Compelling Evidence 3.0 solution, which offers compelling evidence meant to reverse or prevent chargebacks.  

The goal behind Visa’s Compelling Evidence 3.0, which launched in 2021 and has been updated as rules and regulations have changed over the past several years, is to reduce the number of chargebacks and losses associated with chargebacks, according to Visa’s website. 

The dispute solution is expected to save small businesses more than a billion dollars in losses by 2028, according to Visa’s site. 

The earlier the better

It’s best to catch FPM early in the process — before the need for a dispute, before the need for a chargeback and before losses are incurred.  

That’s why Visa is improving its Compelling Evidence 3.0 solution with an updated version called Compelling Evidence 4.0, Lemberger said.  

“We heard the industry on this one,” he said. 

The 4.0 version will have more integrated data sources, more codes for disputes and the ability to get pre-dispute data into the authorization stream rather than post-dispute, Lemberger said. 

As tech providers work to fight fraud, the idea is to address a problem that’s rapidly growing, while recognizing there remains a need for chargeback technology, Chargeback911’s Harris said.  

“We’re not trying to do ourselves out of business; what we’re trying to do is for the good of the industry that should just recognize this problem is a manifesting, growing problem,” he said. 

Early-bird registration is now available for the inaugural Bank Automation Summit Europe in Frankfurt, Germany, on Oct. 7-8! Discover the latest advancements in AI and automation in banking. Register here and apply to speak here.