Guilty Before Proven Innocent: The Impacts of Friendly Fraud


The democratic system of justice assumes the innocence of the accused before a fair trial weighs the evidence to the contrary. In other words, the burden of proof lies on the prosecution.

This assumption of innocence protects those of us fortunate enough to live within systems that uphold this value by limiting the ability to punish the accused without due process. Only if the evidence proves the accused guilty can a sentence apply. If the evidence cannot prove guilt beyond a reasonable doubt, the defendant is set free.

It’s an elegant yet delicate system, one depicted by the literal balance of the scales of justice. Tip too far to one side, and the scales topple.

The very system created to protect “we the people” inverts in cases of friendly fraud. The merchant or card issuer is “guilty” by assumption, while the claimant  is assumed innocent. This consumer-friendly stance makes combating friendly fraud difficult for merchants and card issuers alike. That’s why taking this type of fraud seriously is important.

What is friendly fraud?


Friendly fraud occurs when a customer places an order for goods or services and then makes a claim for a chargeback from either the merchant or the payment card issuer rather than making a return. Two distinct patterns of behavior prompt this type of fraud. But regardless of intent, it still amounts to theft, and the merchant or financial institution bears the cost.

Non-malicious intent

This type of friendly fraud occurs in a variety of ways, but it forces the merchant and/or payment issuer to refund the charge(s). Some examples are:

  1. The customer was unaware he or she had signed up for a recurring billing subscription at the time of purchase.
  2. The customer forgot he or she made the purchase.
  3. The customer was unclear on the terms or details of his or her purchase.

In cases such as these, the customer is not purposely trying to defraud the merchant and/or payment issuer, but the result is the same. The customer keeps the goods or service, and the merchant and/or payment issuer absorbs the cost of the refund. Additionally, merchant acquiring banks assess the merchant a fee on top of the refunded money to process the chargeback, making this process all the more costly.

Malicious intent

In cases where the customer’s intent is malicious, he or she intends to willingly defraud the merchant by making a knowingly false chargeback claim. There are various examples of this type of fraud, including:

  1. Despite receiving the order, a customer claims he or she didn’t receive the item purchased.
  2. A customer uses the his or her credit card issuer provides to falsely claim a legitimate purchase was made without consent.

Merchants are rightly averse to accuse customers of malicious intent when disputing a potential chargeback as it’s difficult to prove, and they risk alienating a legitimate customer.

History of friendly fraud

In the 1960s, Congress passed the Truth in Lending Act  as a response to shady lending and credit schemes that preyed upon unsuspecting consumers. This was a landmark victory for consumer protections, and it provided needed safeguards for customers experiencing fraud.

However, the astronomic rise of digital commerce and contactless payments has rendered the statute obsolete. When the law passed, nearly every transaction was done in person, face to face. Much of the ambiguity in disputing a customer’s claims for a refund could be mitigated by eyewitness testimony.

Today, nearly 12 percent of all U.S. transactions are made online. The ability to determine which customer disputes are valid and which are fraudulent is nebulous, to say the least, in these conditions. The protections for consumers are vast, but merchants and payment issuers have limited recourse to reclaim lost revenue due to abuses of these protections, including friendly fraud.

Identifying and preventing friendly fraud

The pervasive problem of friendly fraud requires a layered risk management strategy not only due to the high tangible costs associated with lost revenues and fees, but also to the intangible costs of potentially alienating good customers.

Unlike professional fraud rings, friendly fraud is normally perpetrated by ordinary individuals who take advantage of the zero dollar fraud liability of their credit cards — or simply don’t believe the merchant will investigate their claim.

Friendly fraud deterrence requires careful, detailed customer records to effectively spot an individual’s pattern. One chargeback during a customer’s life cycle may be normal, but multiple chargebacks may require additional investigation. A nuanced approach centered on  dynamic customer data such as email is the most effective deterrent.

Balancing the scales of justice

No one will dispute the importance of protecting customers from fraud. However, it’s equally important that merchants and card issuers have tools and strategies in place to protect themselves.

Emailage is your partner for thwarting would-be fraudsters from taking advantage of your business to profit from friendly fraud. With the right risk mitigation strategies in place, you can combat friendly fraud threats while peaceably growing and maintaining relationships with your bona fide customers. The scales of justice can be in balance once again.

Learn how the power of Emailage network intelligence can help your company outsmart friendly fraud.

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