Friendly fraud

Chargeback fraud, also known as friendly fraud, occurs when a consumer makes an online shopping purchase with their own credit card, and then requests a chargeback from the issuing bank after receiving the purchased goods or services. Once approved, the chargeback cancels the financial transaction, and the consumer receives a refund of the money they spent. When a chargeback occurs, the merchant is accountable, regardless of whatever measures they took to verify the transaction.

Friendly fraud has been widespread on the Internet, affecting both the sale of physical products and digital transactions. To combat digital transaction fraud, prepaid cards have been offered as an effective alternative to ensure customer payment. South Korean software developers such as Nexon implemented a prepaid system in 2007 to combat friendly fraud, selling prepaid cards in stores such as Target.

MasterCard was sued in 2003 by an Internet vendor for having credit card policies and fees that have made Internet vendors especially vulnerable targets of friendly fraud. Internet vendors typically have to pay much of the losses when a fraudulent transaction like friendly fraud occurs.

In recent years, a new variant of friendly fraud, involving bank transfers as opposed to credit card payments, has been documented in Europe. SEPA credit transfers can be recalled within 10 working days of settlement by the payer's bank on grounds such as alleged fraud.

The online merchant that sells physical products cannot fully protect itself. The only way to have concrete protection is to take an imprint of the card (and even with card readers/makers this can easily be duped), along with photo ID. That signature, in addition to information gathered online, can help in the resolution of chargeback disputes but contractually is no guarantee. Also, the merchant can request the card security code on the credit card to fight "Card absent environment" chargebacks. These are the three digit codes on the backs of Visa, MasterCard, and Discover cards, and the four digit code on the front of American Express cards.

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Wikipedia