First-party fraud (or “friendly fraud”) is hard to predict, prevent, and quantify, but the biggest challenge is that businesses aren’t ready to recognize it as crime.

Recently, Ann ordered something from an online merchant marketplace. It didn’t arrive on time and her attempts to contact the individual seller went unanswered. When she contacted the online marketplace, it refunded her money without question.

Three days later, the item in question arrived on Ann’s doorstep. If she chose not to contact the online marketplace again to notify them that she received the item, Ann committed friendly fraud.

Friendly fraud, also referred to as first-party fraud, occurs when the direct customer of a company initiates chargebacks or requests refunds for goods or services that they have in fact received. Sometimes, like in Ann’s case, these start out as legitimate claims. Other times, the friendly fraud is more intentional, and is committed over and over by dedicated fraudsters disguised as good customers.

A recent report by analyzed a sampling of 100,000 chargebacks originating from digital transactions between 2015 and 2019, which may make it the most comprehensive look at friendly fraud ever conducted.

According to this report, friendly fraud actually accounted for the largest percentage of all fraud (44.16%) among the investigated transactions, and was much more likely to occur (56%) than third-party fraud.

This is due to four significant challenges unique to friendly fraud.

  1. Friendly fraud is hard to detect.

Monitoring systems find friendly fraud hard to spot since it’s committed by legitimate customers doing legitimate transactions. Though sometimes the friendly fraud starts as a true claim, like Ann’s, what the customer chooses to do ultimately determines the outcome.

In most instances ‘customers’ (real, or disguised fraudsters) are more intentional with their crime; they may claim they didn’t receive items that they did, or they might state that the item received didn’t match the online description, the service provided didn’t meet their expectations, or they don’t remember making the purchase. Each of these instances can be very hard to detect since reports of this nature are often legitimate.

  1. Friendly fraud is hard to predict.

Because friendly fraud is usually committed by what appears to be legitimate customers, it’s extremely hard to predict when it will occur. Sometimes, the fraudster may only request a chargeback for a portion of their order, or they may be an ongoing customer who normally doesn’t dispute anything but then chooses to dispute a rare order. It may not even be something they were initially planning or intending to do, but the fraud occurs when they knowingly accept a refund for something they know they should be paying for. 

  1. Friendly fraudsters wait longer to initiate their chargebacks

The report by found that friendly fraud takes approximately 40% longer for a customer to report than third-party fraud. Third-party fraud is committed by someone who is not the cardholder or the merchant. Examples include identity theft and account hacking. So, a customer who notices a fraudulent charge on their account committed by a third party reports that fraud up to 11 days sooner than when attempting to commit first-party fraud. This time difference can affect the merchant’s anti-fraud attempts, return policies, accounting processes and more.

  1. Businesses are reluctant to flag friendly fraud

Perhaps the biggest issue that online businesses face is a general unwillingness to mark these returns as fraud. Merchants using rules-based scores typically assign only 17% of the risk to a first-party fraud order as they assign to its third-party equivalent. Merchants blacklist first-party Fraudsters only 15% of the time compared to over 85% in third-party Fraud scenarios.  This enables the first-party perpetrators to continue their schemes, often habitually.  On average, the first-party fraudsters committed 9 instances of fraud, 3 times more than their third-party counterparts, and are likely still continuing their fraudulent behavior undeterred. Finally, for every chargeback received, merchants issue 7.5 refunds.  We estimate that for every first-party Fraud chargeback, there are 2 refunds that are given directly to the fraudster, heading off the necessity for a chargeback. Therefore, the true out-of-pocket cost attributable to first-party fraud is 3 times the recorded cost of ‘friendly’ fraud chargebacks.

Friendly fraud prevention

Because their crimes are hard to recognize, successful friendly fraudsters are often habitual offenders. However, there are some methods you can put in place to minimize risk to your company.

  1. Participate in a consortium data partnership, where merchants and payment processors share anonymous data about bad actors in their systems.
  2. Establish a robust first-party fraud monitoring program that includes flagging repeat offenders.
  3. Incorporate deep learning models to detect the sometimes subtle patterns of first-party fraud 

You can find more details in the full report.

Download the full report today!