If you’ve been reading up on chargebacks, you may find yourself confused by the plethora of terms, some of which can sound rather contradictory and/or confusingly similar to one another. One of the fundamental definitions you should familiarize yourself with is first-party fraud, which is closely related to yet another important term friendly fraud. Let’s take a closer look at first-party fraud and contrast it with friendly fraud.
First-Party Fraud Defined
First-party fraud refers to when a cardholder uses their card to defraud a merchant. Some unscrupulous cardholders have realized that they can file a chargeback to potentially score free services and products. This amounts to abusing the chargeback process, which is designed to protect cardholders, but sadly, is frequently used to rip off merchants.
Often, when people think of fraud, they first think of “third-party” fraud, which occurs when someone besides the cardholder and business perpetuates fraud. For example, a pickpocket might steal someone’s wallet, and then use the victim’s credit cards to make an unauthorized purchase. Once the cardholder realizes their card has been misused, they may file a chargeback.
Unfortunately, in the above case, the merchant will probably have to pick up the tab, refunding the cardholder for the fraudulent purchase and paying chargeback fees and other penalties. As a result, the merchant, like the cardholder, is getting defrauded.
Third-party fraud is common and a major source of chargebacks. That said, first-party fraud may actually be more of a common source of chargebacks. Mastercard reports that roughly 75% of chargebacks stemming from digital card-not-present (CNP) purchases result from first-party fraud. Mastercard also notes that roughly half of Gen Z shoppers admit to engaging in first-party fraud.
First-Party Fraud Vs. Friendly Fraud
For a long time, first-party fraud was commonly referred to as “friendly” fraud, since it was a legitimate and seemingly “friendly” cardholder who was perpetuating the fraud. However, when you step back to think about it, there’s nothing really friendly about fraud, is there?
Some people use first-party fraud as a synonym for friendly fraud, meaning they’re interchangeable. However, sometimes the term first-party fraud is restricted to intentional fraud and unintentional fraud may not be included. Friendly fraud, on the other hand, still includes unintentional fraud. Thus, you could argue that first-party fraud is a type of friendly fraud, but not all friendly fraud is first-party fraud.
Crucially, a fair number of chargebacks aren’t malicious, and in many cases, the merchant fell short in some way. For example, if a merchant uses unclear billing descriptors, a cardholder may not recognize a purchase and think it’s fraudulent. The cardholder may then file a chargeback. The purchase was, in fact, legitimate, and this dispute could be classified as “friendly fraud.”
If we wanted to split hairs further, we could debate whether unintentional misunderstandings, like seemingly lost shipments or confusion, actually count as “fraud.” In criminal cases involving fraud, “intent” is usually a major component, and if there was no intent, the courts may find that there was no criminal act.
For merchants, however, unintentional fraud can be quite costly. A merchant may win a chargeback dispute involving unintentional fraud, but even if so, they will still be on the hook for chargeback fees and other penalties.
Ultimately, it’s crucial for merchants to reduce both friendly fraud and first-party fraud. Doing so is easier said than done, but the Chargeback Help team can assist you.