Rise in Friendly Fraud Is Here to Stay

By Ronen Shnidman

eCommerce fraud rises when the amount of eCommerce grows as it did during the Covid-19 pandemic over the past year. eCommerce in the U.S. skyrocketed 44 percent year on year to $861 billion in 2020, according to Digital Commerce 360. One form of fraud in particular, friendly fraud, is believed to have grown significantly over the period due to the growth in card-not-present transactions and the large number of people hurt economically by the pandemic-fed recession. 

Friendly fraud is when a person demands a chargeback on their credit card because they do not recognize or do not wish to recognize a purchase that they or a member of their household has made. Illegitimate friendly fraud chargebacks comprise on average over 80 percent of total chargebacks filed. Already in 2019, the Mercator Advisory Group predicted there would be $50 billion in friendly fraud in 2020 – a figure that was likely surpassed due to the impact of the pandemic.

Merchants need to take the fight against friendly fraud seriously on the individual company level as well based on anti-fraud vendor Fraud. net’s 2020 Benchmarking Report for Friendly Fraud. The survey of 100,000 chargebacks from orders processed by large eCommerce merchants over three years found that friendly fraud can reduce merchants’ net profit margin by 25 percent. A bottom-line impact like that highlights the role that can be played by a solid chargeback defence.

Chargeback mitigation service AcroCharge fought this profit-killing surge in friendly fraud during the pandemic, winning 83 percent of cases challenged on behalf of clients. AcroCharge uses semi-automated, smart technology alongside expert human know-how to fight payment disputes in a variety of industries, including eCommerce, fintech, EdTech and cryptocurrency.  

The demand for services like AcroCharge will continue to be pronounced over the next few years if one uses white-collar crime figures as a proxy for forecasting the volume of friendly fraud. Identity theft in particular boomed 42 percent to $712 billion in 2020, according to the Boston-based consultancy Aite Group. Identity theft losses are expected to peak at $720 billion in 2021 before edging down to $623 billion in 2022 and $635 billion in 2023. However, it is not expected to return to the pre-pandemic level of $503 billion.

One can assume that friendly fraud will likely follow a similar path as some people continue to commit friendly fraud even after their economic situation improves. A commonly quoted industry statistic is that two out of five people who successfully commit friendly fraud will do so again within 60 days.

The tough unemployment situation that pushes people to financial crime is also expected to fester. Currently, the unemployment rate in the U.S. is 6.2 percent – 77 percent higher than it was a year ago. The higher unemployment rate is expected to linger due to a phenomenon known as hysteresis.

With hysteresis, a recession-driven increase in unemployment is prolonged by a variety of factors, including a loss of job skills by the long-term unemployed and decreased motivation to participate in the labor force. A pool of unemployed workers can serve as a breeding ground for all sorts of fraudulent behavior, including friendly fraud. That is what happened during the global financial crisis in 2007-2008, which witnessed the popularization of the behavior that became known as friendly fraud.

In this respect, macro level national policies that affect the unemployment rate such as unemployment benefits eligibility and stimulus payments will have some impact on the prevalence of friendly fraud. However, a return to pre-pandemic fraud levels should not be expected.