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Friendly Fraud vs. Chargeback Fraud: Knowing the difference is paramount

The following is a guest post by Scott Stone, CMO at Chargeback. Chargeback is the leader in automated dispute resolution for merchants.

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Team Maxio

October 19, 2016

The following is a guest post by Scott Stone, CMO at Chargeback. Chargeback is the leader in automated dispute resolution for merchants. Stone’s perspective comes from a decade in startups, mainly fintech.

It’s common practice to refer to all chargebacks that aren’t true fraud as friendly fraud. However, all merchants would benefit greatly by distinguishing friendly fraud from its sinister counterpart: chargeback fraud.

Even with the deployment of preventative measures against recurring billing chargebacks, they still manage to roll in month after month. It’s almost certain that your business is falling victim to fraud. Not at the hands of a cloaked hacker or organized crime ring, but at the hands of legitimate customers. Data from Lexis Nexis’ The True Cost of Fraud 2016 Study clearly shows that chargeback fraud and friendly fraud account for the bulk of fraud losses.

When looking specifically at chargeback losses, true fraud accounts for 29 percent of total revenue lost. Friendly fraud and chargeback fraud together are responsible for 71 percent of merchant losses to fraud. This is the first of two critical points that merchants should take note of: revenue lost to chargeback fraud and friendly fraud is recoverable, while revenue lost to true fraud is not.

To fully understand the differences between recoverable revenue and lost revenue, and ultimately the differences between chargeback fraud and friendly fraud, we first must understand the chargeback response map.

Reason Codes: Lagging Indicators, But Not Always Fraud Indicators

Every customer dispute is categorized using a card network specific chargeback reason code. There are 151 of these reason codes across Visa, MasterCard, American Express, and Discover. While each card network has dozens of reason codes, they generally fall under two types: fraud and non-fraud.


Fraud reason codes are those indicating disputes regarding fraudulent activity, authorization discrepancies, and EMV liability shift issues. Non-fraud reason codes represent customer disputes with product or services, shipping problems, and recurring billing chargebacks.

Just because a chargeback is categorized under fraud reason codes doesn’t mean that it’s actually true fraud. The only way to reveal the cause of the chargeback is to submit a comprehensive and complete response specific to the reason code used.

If the bulk of reason codes your business sees are fraud-related and you lose these chargebacks after submitting compelling evidence, true fraud problems are present. Fraud prevention basics such as CVV and AVS can be bolstered by adding advanced safeguards like automated transaction scoring, device ID and fingerprinting, and 3D secure tools.

It’s a clear sign that you need to examine business operations if the bulk of reason codes are non-fraud and lost after responding. Non-fraud chargebacks have a handful of corresponding reason codes, the bulk of which represent Recurring Billing, Goods Not Delivered or Merchandise Not As Described disputes.

Recurring Billing Chargebacks

Recurring billing chargebacks represent several dispute situations. The most common situations and their corresponding chargeback reason code(s) by card network are described in the table below.

Recurring Billing Dispute Situation

Applicable Chargeback Reason Codes by Card Network




American Express


The cardholder notified you (the merchant) to cancel the recurring transaction and the recurring billing continued to take place.









The cardholder claims they were unaware that they were agreeing to a recurring transaction.





The cardholder does not recognize your merchant descriptor on their billing statement.










The card on record was expired or not yet valid when the recurring billing transaction took place.





Of the four dispute situations above, a cardholder not recognizing your merchant descriptor is the most common. Your merchant descriptor should clearly state your business name as the customer would recognize it, and either include the URL to your website or a customer service phone number (depending on the nature of your business).

You can also consider using dynamic merchant descriptors that allow for the description field to be modified based on detailed transaction-specific information. There’s typically a 25 character limit, but including the nature of the product or service provided to the customer will help them recall the purchase and avoid a potential chargeback.

Goods Not Delivered Chargebacks

Non-fraud reason codes representing Goods Not Delivered disputes aren’t uncommon, but there could be serious shipping and delivery issues if they’re seen in large amounts and being lost. Are customers given a tracking number? Are they notified of any delays impacting arrival time? There could also be issues with a particular shipping provider that requires immediate attention.

Merchandise Not As Described Chargebacks

Losing non-fraud Merchandise Not As Described chargebacks usually means that the product you’re describing is not representative of the product the customer actually receives. When was the last time you showed your product descriptions some love? Merchandise Not As Described chargebacks point to product description problems. With product descriptions, the more specifications, videos, reviews, and related information you can provide, the more ‘Merchandise Not As Described’ disputes you can avoid.

Winning a Customer Dispute (Fraud or Non-Fraud)

winning-chargeback-disputes (1)

When a chargeback is ruled in your favor, it’s an understandable relief. Unfortunately, winning a chargeback means that your business was almost the victim of friendly fraud or chargeback fraud. Which brings us to the second critical difference in the types of fraud: friendly fraudsters should be nurtured, chargeback fraudsters should be blacklisted.

Friendly Fraud = Honest Mistake

A customer who commits friendly fraud isn’t a menace or a threat to your business. Instead, the friendly fraudster is likely confused, misguided, or even forgetful. Customers who commit friendly fraud do so as the result of an honest mistake.

For subscription merchants, this usually manifests in customers who legitimately agreed to recurring billing, but were genuinely unaware of what they were agreeing to. No matter how many fail-safes and opt-ins your business uses, there will always be a customer who overlooks the terms of an agreement. That doesn’t mean the customer won’t be interested in your services in the future.

Nor does it mean that the customer should be banned from making legitimate purchases from you moving forward. You should work to understand the root of the customer’s misunderstanding. That way, you can prevent it from happening in the future.

Chargeback Fraud = Malicious Intent

On the other hand, customers who commit chargeback fraud are a threat to revenue. These purposeful and malicious attempts are dishonest and deceitful, at the very least. Chargeback fraud is essentially online shoplifting, and those who attempt to carry it out should be handed the same consequences as a you would a serial thief in a brick-and-mortar setting.

Blacklisting a customer is a serious consequence. But in the case of chargeback fraud, it’s the appropriate response to protect your business and its revenue.

Distinguishing Friendly Fraud from Chargeback Fraud

When your response can be as severe as blacklisting a customer, you want to be certain that chargeback fraud is really present. The best way to tell whether a won dispute was chargeback fraud or friendly fraud is to talk to the customer who initiated the dispute. It’s likely that you’ve already spoken to the customer regarding the transaction at hand, so continuing communication shouldn’t be too challenging.

Either way, you’re presented with a valuable opportunity to gain insights into the customer experience. Discerning between chargeback fraud and friendly fraud is revealed as you speak to the customer responsible.

How Chargeback Fraud is Revealed

Customers who tried to commit chargeback fraud typically try to avoid contact from you altogether. If you do manage to get ahold of them, they’ll remain adamant about being the victim of fraudulent activity.

How Friendly Fraud is Revealed

Customers who tried to commit friendly fraud are usually very transparent regarding their confusion around the transaction. Whether they weren’t sure how to get in touch with you or they didn’t recognize how your company name appeared on their billing statement, it’s clear that bad intentions weren’t the culprit.

For example, let’s say you respond to, and win, a chargeback from a customer who subscribed to your online education resource for several months. From your company’s internal data, it’s clear that the customer accessed the account regularly and downloaded multiple resources. Yet they disputed the transactions and claimed they never utilized the service. When presented with this information, a customer who committed friendly fraud would likely acknowledge their mistake and accept the conclusion of the dispute. However, a customer who attempted chargeback fraud would still deny ever using the service.

At the end of the day, there’s enough on your plate with actually running your business without having to trudge through the headaches that inherently appear. Optimizing your subscription billing practices is key in preventing chargebacks in the first place. But as long as you accept payments, customer disputes will happen.

The good news is that through understanding chargeback reason codes and submitting compelling responses, you can win back revenue for your business and identify customer relationships that need nurturing and those that need terminating.

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