Friendly fraud now accounts for most card fraud claims – but it’s merchants, not criminals, who are punished. The system needs urgent reform.
In the modern payments ecosystem, merchants operate under strict compliance standards, anti-fraud protocols, and operational transparency.
In addition to dealing with these issues constantly, they’re also facing a growing and deeply frustrating phenomenon: friendly fraud.
It’s a term that sounds almost benign, but is one that’s masking a serious, systemic flaw in card payments.
The real fraudster? Often the cardholder
Friendly fraud occurs when a cardholder makes a legitimate transaction—often verified, fulfilled, and delivered—only to report it as fraud to their bank later. Sometimes this is due to forgetfulness. But too often, it’s deliberate. It’s a consumer exploiting the protections designed for real victims of fraud.
And it happens all too easily. With just a single tap of the “fraud” button in their banking app—without presenting any evidence, without filing a police report, and without any scrutiny—the cardholder can instantly recast themselves as the victim.
These are everyday users who dispute recurring subscriptions they never cancelled, or purchases they regret. And instead of contacting the merchant for a resolution, they go straight to their banking app and tap the “fraud” button. With that single action, they trigger a chain of consequences that the merchant cannot stop.
This is not a fringe issue. According to major card schemes, 50-75% of all registered card fraud is actually friendly fraud. That’s a systemic issue. When the majority of reported fraud stems from legitimate cardholders disputing their own purchases, it demands urgent attention.
Importantly, this type of “fraud” as classified by card schemes does not reflect real criminal fraud, which by definition involves criminal intent and should result in prosecution. In friendly fraud, it is the cardholder who commits the fraudulent act, and it is they—not the merchant—who should be held accountable and liable under law.
Not just about authentication
Unlike broader discussions on payment security and liability shift, which focus heavily on strong customer authentication (SCA), this article centres specifically on the misuse of consumer power within the chargeback framework. While SCA provides a valuable safeguard by verifying the cardholder’s identity during the transaction, it becomes irrelevant when the same cardholder can later override the process with a simple fraud claim. In effect, the safeguards become meaningless if the consumer can later weaponise the system against the merchant without challenge.
This distinction is crucial: the abuse here happens after authentication, not in the absence of it.
A system that enables abuse
The problem is not just the cardholder’s behaviour. It’s the system that enables it.
Issuing banks are incentivised to side with their customers, and they rarely question fraud claims. Card schemes then categorise the transaction as fraud, even when it was clearly authorised. The merchant doesn’t just lose the payment—they suffer the reputational impact of increased fraud ratios, triggering monitoring programs, penalty fees, and potential business restrictions.
Most damaging of all, the merchant is instantly defined as a fraudster. Within the financial services ecosystem, that label equates to a criminal reputation, even when the reality is simply a dispute. This automatic presumption of guilt strips merchants of procedural fairness and stains their record in ways that can harm them far beyond a single transaction.
Even if the merchant is willing to refund the customer or resolve the complaint, the label of “fraud” is already stamped on the record. It sticks. There is no right to appeal or correct the designation. No room for negotiation.
The imbalance of power
This situation creates a stunning imbalance:
- The cardholder, verified and known, misuses their position to escape payment.
- The issuer facilitates the fraud claim.
- The merchant loses the money, pays the penalties, and gains a reputation for fraud.
- The schemes provide no procedural fairness for the accused.
And yet, the actual fraudulent action came from the cardholder.
Merchants are not asking for privilege—they’re asking for due process. The ability to contest a fraud classification. The ability to offer remediation. The right to not be treated as guilty without a hearing.
A better way forward
There is a path to improvement:
- Transactions disputed under these circumstances should not be labelled as fraud. They should be classified as cardholder disputes.
- Merchants should be able to respond, refund, or resolve issues directly with the cardholder before penalties are applied.
- If a merchant refunds a transaction in good faith, that transaction should not count against their fraud ratios.
Above all, the payments industry must stop equating these disputes with criminal fraud. By misclassifying them, the system unfairly criminalises merchants while allowing cardholders to exploit protections without accountability.
This small change in terminology and process would go a long way to protect businesses from unfair reputational damage and financial penalties, while still preserving consumer rights.
Let’s stop calling it friendly fraud. It’s abuse. And it’s time for the payments ecosystem to take it seriously.
